TIME Federal Reserve

Even If Janet Yellen Is Wrong About the Economy, She Is Right About Fed Policy

Janet Yellen makes her first appearance before Congress as the chair of the Federal Reserve
J.M. Eddin—MCT/Getty Images

Janet Yellen’s first testimony on Capitol Hill was a resounding success. She was poised, confident in her decisions, and clear about her intentions at the Federal Reserve. But it was not so much what she said as what was behind it that makes it a tour-de-force performance and shows us that our monetary policy is in the hands of a capable leader.

After some initial tumult, the market has come to accept the scaling back of the Fed’s bond-buying program and can even see the many benefits of a taper: higher interest rates will discourage excessive borrowing, prevent the formation of new asset bubbles, and stabilize our economic growth at a realistic level that is fueled by real value creation and not the availability of cheap money.

Of course, if the economy really is weaker than anticipated – as the recent jobs report, which showed that only 113,000 jobs were added to the US economy in January, might indicate, then the contraction of money supply could slow down the recovery and reverse the trend of declining unemployment. In her testimony, Yellen expressed confidence about the economy but acknowledged that unemployment is still high and that a large number of people have been unemployed for an extended period of time.

And yet she opted to stick with the taper. There are two very good reasons for this.

What Yellen recognizes is that the most powerful tool in the Fed’s toolbox is its credibility. In order for monetary policy to work at all, it is imperative that the markets believe what the Chairman of the Fed says, and be able to rely on the guidance that the Fed gives to price securities. Any wavering by the Fed can lead to mispricing of both stocks and bonds and create volatility. That is precisely what happened late last year when Yellen’s predecessor, Ben Bernanke, flip-flopped on the taper. He first indicated that he would and then, after the markets plummeted, changed his mind. It led to immense confusion, which was probably good for day traders and arbitrageurs, but a disaster for regular investors, who require visibility and reliability.

Yellen knows that even if she has to reverse course later this year, she is better off doing it in response to undeniable market conditions (when a reversal will be expected anyway) than doing it on a whim now, which would damage the Fed’s credibility in the eyes of investors and make its future guidance ineffective.

A sudden easing of monetary policy now would also cause over-exuberance in the stock market as the anticipation of cheaper capital fuels a buying spree, and create a bubble. Moreover, a drop in interest rates will not automatically spur lending by banks, who were hesitant to lend even in 2013 when the Fed stimulus was in full swing. This casts serious doubt on whether our economy, and consequently the job market, would actually benefit from a reversal of the Fed’s taper at all.

Only time will tell whether Yellen’s assessment of the current state of our economy is correct, but she is definitely right about policy.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator, and has an MBA from Columbia Business School. He is also the author of two thriller novels.

TIME Economy

America’s Gargantuan Share of Global Wealth, in One Map

How the wealth of 50 US states measures up to 50 nations

How does the U.S. economy measure up to the rest of the world? You could find out by poring over a table of GDP figures, or you could get a snap perspective from this map, which renames every U.S. state according to a country with a matching GDP.

One million Rhode Islanders have as much wealth as 15 million Guatemalans. Texas has an economy the size of Australia’s. And New York has met its match, Mexico.

The map from economist Mark J. Perry at the American Enterprise Institute puts America’s $16 trillion GDP in perspective. “The map and these statistics help remind us of the enormity of the economic powerhouse we live in,” Perry writes, at least to the 4% of the world’s population that lives there.

[AEI]

TIME Economy

What Gene Sperling Learned in the White House

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The outgoing director of the White House National Economic Council, Gene Sperling, waits to speak during an event on the White House grounds Jan. 16, 2014 in Washington. Brendan SmialowskiI—AFP/Getty Images

Veteran economic adviser looks back on 20 years

A departing top Obama administration economic adviser reflected on 20 years in the trenches of Washington policy on Tuesday, wringing his hands over the changing nature of Republican opposition.

Gene Sperling, the outgoing director of the White House National Economic Council who served in both the Obama and Clinton White Houses, said he preferred the unified, stronger GOP opposition of the Clinton era, and that today’s Republican leadership isn’t strong enough to seal bipartisan agreement.

“I think that in the Clinton administration what was often the most difficult was having a unified and strong opposition,” he told reporters at a breakfast hosted by the Christian Science Monitor. “And I think this time around, we learned the challenges of having a divided opposition when you want to get things done. So that even where there is a strong desire from parts of the leadership to get a budget agreement it’s hard for them to stay at the table, because they are not unified enough to stay at the table to finish an agreement.

“They’re not unified enough to move forward on in important issues, such as passing immigration reform,” Sperling said.

“The challenges in the Clinton administration were the strength and unity of the opposition,” he continued. “But we did see that when there was a desire to get an agreement like the 1997 balanced budget agreement, there was a path that would allow you to get this done. … That division has been to me the number one obstacle to completing some of our more important legislation, such as some of the budget negotiations.”

Sperling, who is scheduled to leave the White House in the next few weeks to rejoin his family in California, reflected on his toughest moment in government service.

“I would say that I wasn’t technically in the White House, but I would say there was never a more difficult period in my government service than my first six months at Treasury: the speed and breakneck pace of the financial crisis,” he said. “I remember the president asked me in the first couple of months, ‘you were in the Clinton administration was it always like this? Is it always like this?’ And I said well you know I used to consult with The West Wing and they used to ask me ‘is it realistic,’ and I’d say well it’s kind of realistic, it’s just that they condensed six months into one hour. And I think when you are in the middle of the financial crisis, you feel like you’re condensed six months into a day or a week. I think that most of use involved there we are proud of how things worked out.”

TIME Economy

Jobs Grew at Sluggish Pace in January

Job applicants wait for the opening of a job fair held by National Career Fairs in Fort Lauderdale, Fla., Sept. 17, 2012.
Job applicants wait for the opening of a job fair held by National Career Fairs in Fort Lauderdale, Fla., Sept. 17, 2012. Lynne Sladky—AP

Unemployment rate still fell to five-year low

The economy added only 113,000 new jobs in January, the government said Friday, a number that fell short of expectations even as the unemployment rate dipped to its lowest level in five years.

The slow pace of growth underscored the continuing fragility of the economic recovery more than five years after the financial crisis. The 113,000 new jobs on nonfarm payrolls were considerably less than the 180,000 analysts had expected. The unemployment rate still fell to 6.6 percent in January from 6.7 percent in December, the Bureau of Labor Statistics said in its monthly jobs report.

December’s disappointing report of just 74,000 jobs added was revised upward only slightly, to 75,000. Even as millions of jobs have been added since the worst of the recession in late 2008 and early 2009, the pace of the recovery has slowed in recent months. Average job gains the last three months have averaged just 154,000 each month, down from 201,000 in the previous three months, the Associated Press reports. Winter weather took a toll on construction and other industries. But there 232,000 fewer long-term jobless in January than in December, giving hope that some Americans who have long been out of work are clawing their way back.

Markets were mostly flat on the news, with futures on U.S. stock exchanges up slightly before trading opened.

TIME Jobs

Early Unemployment Data Lifts Hope for Job Growth

Prospective job applicants wait in line to learn about job openings at the Kentucky Kingdom Amusement Park during a job fair at the nearby Crowne Plaza Hotel in Louisville, Ky., Jan. 4, 2013.
Prospective job applicants wait in line to learn about job openings at the Kentucky Kingdom Amusement Park during a job fair at the nearby Crowne Plaza Hotel in Louisville, Ky., Jan. 4, 2013. Luke Sharett —Bloomberg/Getty Images

Fewer unemployment claims than expected

The number of newly-unemployed workers seeking unemployment benefits fell last week by 20,000 to a seasonally-adjusted 331,000, the Labor Department said Thursday. That was below economists’ expectations of 335,000 and lifted hopes that Friday’s jobs report will show strong growth.

Last month’s job’s report was disappointing, showing that the economy added just 74,000 jobs in December. Employment data, however, can be highly volatile, and many economists predict that last month’s numbers will be revised upwards as other economic data—like GDP growth figures—point to a stronger economy.

“The sharp slowing in payrolls in the December employment report was not due to a weaker trend,” Jim O’Sullivan, Chief U.S. Economist at Hi Frequency Economics, wrote in a note to clients Thursday morning. O’Sullivan predicted Friday’s jobs report will show the economy added a healthy 220,000 new jobs in January.

TIME Asia

China’s Booming Economy Is Nothing to Fear

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Crowd of people and buildings on Beale Street in Memphis Getty Images/Tetra images RF / Getty Images/Tetra images RF

America isn't great because it's the biggest, but because it's the best place to live, work, and innovate

Last week, during his State of the Union address, President Obama announced, “the United States is better-positioned for the 21st century than any other nation on Earth.” While it isn’t quite clear what indicators he was using to make that statement, we know one measure he wasn’t using: size. It’s only a matter of time before China overtakes the U.S. as the world’s largest economy, thanks to economic growth that has been four or five times faster than the U.S. over the last couple decades.

For all the last few years have been grim economic times for America, the U.S. still ranks sixth out of 175 countries in average income. But Americans have already lost bragging rights as the world’s largest trading nation, and China may have overtaken the U.S. as world’s largest economy as well, according to former International Monetary Fund economist Arvind Subramanian. Even the more pessimistic of China-watchers appear to agree the U.S. will drop to second place by decade’s end at the latest. Will this doom the U.S. to a penurious future of lower average incomes, as it slowly sinks into the stagnant backwaters of the global economy?

No. Being biggest was never the real secret to American riches. And the tiny size of the economies that we know are richer than America today (Macao, Qatar, Luxembourg, Singapore, Norway, and Brunei) also suggests there’s probably more to average income than absolute scale. Five of them are effective city-states, and they have a combined population of about 14 million, or about one-twentieth of America’s.

So if simple scale doesn’t explain why the U.S. is one of the richest countries in the world, what does?

America’s advantage is based on being an incredible place to live and work. We can learn something from our thriving cities: Attract the best people and the most investment. Cities with more bars, restaurants, and theatres attract more college-educated residents and see faster employment and productivity growth, according to work by Harvard’s Ed Glaeser and the University of Chicago’s Jesse Shapiro. Be a nicer place to live, and your productivity will increase.

The same applies at the national level. It’s because America is a better place to live, work, and innovate than almost anywhere else that all six Chinese-born Nobel-prize-winning scientists now reside in the U.S., for example. And the benefits to the U.S. are huge: fully one-quarter of all U.S. patent applications had foreign nationals residing in the U.S. as inventors or co-inventors. Sixty percent of software engineers in the U.S. are migrants, along with more than one-half of all medical scientists. It is because America is a great place to make money that Chinese investment in the U.S. is forecasted to top $200 billion and employ 400,000 Americans by 2020.

Of course it’s not just about the new arrivals, it’s also about those born from previous generations of immigrants. America is a country made great—and productive—by the realization of its founding principles. It was a pioneer of broad-based democracy, universal education, and civil rights. Even middle-class people can buy a large house that’s a reasonably short drive to work in a safe neighborhood with good public schools. A bonus: They’re often near incredibly beautiful state and federal parks. The legal system, for all of the ambulance chasing and patent-thicketing, is reasonably un-capricious. You are secure in what you say, and you have considerable opportunity to say or do something else somewhere else in the country.

Compare the nation about to replace the U.S. atop the global output rankings: For all the fancy new airports and fast trains connecting major cities, people in China do not have freedom to move without government permission, nor freedom to speak without risk of disappearance. The smog in big cities is bad enough to be a major cause of death, and the poverty in parts of the country is severe enough that around a quarter of the country’s population subsists on less than $2 income each day. Being biggest is very different from being best.

If America wants to benefit from a growing global economy over the next century, it needs to ensure it retains its edge in quality of life. That means improving the country’s schools, colleges, and hospitals so they remain some of the best in the world. It means that physical and cultural infrastructure is strengthened, and that opportunity really is open to all of ability and drive—not only the lucky few. And it means opening the doors wide to innovators, entrepreneurs, and investors who understand that what makes America great has nothing to do with its GDP ranking or having the world’s biggest military.

What made and makes America a wonderful place are its opportunities and the creed “life, liberty, and the pursuit of happiness.” Ensuring all here at home can participate in that pursuit will perfectly position America for the opportunities of the 21st century.

Charles Kenny is a Senior Fellow at the Center for Global Development. This article is adapted from his book, The Upside of Down: Why the Rise of the Rest is Great for the West (Basic Books).

TIME Inequality

Time to Talk About Inequality

U.S. President Barack Obama delivers his State of the Union speech on Capitol Hill in Washington
U.S. President Barack Obama delivers his State of the Union speech on Capitol Hill in Washington January 28, 2014. Larry Downing / Reuters

It isn't just a social issue—it's putting the future of the U.S. economy in peril

Economic growth is up. Unemployment is down. The housing market is in recovery. So why didn’t President Obama’s State of the Union speech strike a more economically triumphant tone? In a word, inequality. It’s bad, and it’s going to get worse. The forces of globalization and technology tend to wipe out middle-income jobs and favor those at the very top of the socioeconomic ladder. A new McKinsey Global Institute study found that 230 million white collar jobs, representing some $9 trillion in income, will be transformed or even eliminated by computers in the next decade. As Eric Schmidt, the former CEO of Google, put it recently at the World Economic Forum in Davos, “We’re in a race between computers and people–and we need to make sure the people win.”

Inequality matters for lots of reasons: It makes countries less economically and financially stable, it dampens growth by keeping wages and spending low, and it reduces social mobility. It also just makes us feel bad. Behavioral economics tells us that our sense of well-being isn’t absolute but rather is pegged to how the Joneses are doing. That’s why it’s no surprise that a new Pew study found that fewer and fewer Americans identify themselves as middle class. Yes, we have a recovery, but it’s a bifurcated one. There are jobs for Ph.D.s and burger flippers but not much in between. The rich are indeed getting richer: the top 1% took 95% of all new wealth created in the U.S. from 2009 to 2012. Six of the top 10 fastest-growing job categories are $15-an-hour service gigs. And median income has fallen not since the crisis and recovery but since 1999–that was the last time the American family got a raise.

While the President talked a lot about the middle class, he used the word inequality only three times in his hour-plus address (as opposed to 26 times in a similar talk last December; his message people had clearly decided it was too negative). But it was the subtext of the speech, which was almost entirely devoted to policy ideas designed to bridge the wealth gap. Their efficacy, assuming he can see them through, will vary. Yes, raising the minimum wage is a good idea, but mainly at the margins; it increases spending power and seems fair, but it doesn’t create the sort of middle-class jobs we need. Sure, free trade helps U.S. exports, but again, it doesn’t necessarily create more jobs. Indeed, as Nobel laureate Michael Spence has shown, net job creation in areas of the American economy most open to trade has been basically nil since the 1980s. Immigration could bring in more skilled labor. But that’s also a marginal change, not a structural shift in our economy.

The most economically promising part of the President’s speech centered on education, in particular transforming secondary education by bolstering science, math and technology skills and linking educators with job creators. In last year’s SOTU, the President pushed ideas like the six-year high school model rolling out in New York City and Chicago, which allows companies such as IBM, Microsoft and others to help design the curriculum that kids need in order to become employable. Students also graduate not just with a high school diploma but also an associate’s degree. This year, it’s clear Obama wants to take that idea national, which makes sense in a world in which the majority of the 14 million jobs created in the next decade will require at least two years of college, if not more.

Getting businesses, which are more flush than ever, to play a greater role in what have traditionally been public-sector arenas like education is absolutely essential. But education is a long-term proposition. As Warren Buffett once told me, “We can’t educate ourselves out” of the inequality problem in the short term; that’s why we’re going to need some wealth redistribution in order to buffer the next few years of job destruction and evolution. While the President called for the closing of some corporate loopholes, we need to have a serious conversation about raising the capital gains tax, ending deductions that favor debt over equity and disproportionately reward the rich, and increasing incentives for firms that put more money into R&D and less into share buybacks or overseas bank accounts.

I also wish the President had talked more about long-term entitlement reform. The truth is that businesses in the U.S. are investing, but only in short-term assets (meaning those that mature over 15 years or less). After that, corporate investment drops off a cliff, which many experts take as proof that business doesn’t believe in the country’s ability to come up with a realistic budget and growth plan after that point. It’s a telling metric–and one Obama only scratched the surface of in his SOTU speech.

TIME Economy

Economy Growing at Fastest Pace in 2 Years

Getty Images

The U.S. economy grew at an annualized rate of 3.2 percent in the fourth quarter of last year, the government estimated Thursday.

The Department of Commerce estimate was in line with economists’ expectations, and when combined with third-quarter growth of 4.1%, it represents the best six-month stretch of economic growth in two years. Growth for all of 2013, however, was only 1.9%, a decrease from 2012 that was brought down by slow growth during the first half of the year.

Nearly all sectors of the economy contributed to the healthy growth, from consumer spending to business investment and state and local government spending. The one big drag on growth was reductions in federal government spending, which decreased by 12.6% in the fourth quarter.

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