According to economist Kevin O’Rourke, who has been doing a running comparison between the Great Depression that began in 1929 and the Great Recession that began almost eight years ago, the world just passed a sad landmark. While the initial
According to economist Kevin O’Rourke, who has been doing a running comparison between the Great Depression that began in 1929 and the Great Recession that began almost eight years ago, the world just passed a sad landmark. While the initial slump this time around wasn’t nearly as bad as the collapse from 1929-33, the recovery has been much weaker — and at this point world industrial production is doing worse than it did at the same point in the 1930s.
But the bad news is unevenly distributed. In particular, Europe has done very badly, while America has done relatively well. True, U.S. performance looks good only if you grade on a curve. Still, unemployment has been cut in half, and the Federal Reserve is getting ready to raise interest rates at a time when its counterpart, the European Central Bank, still is desperately seeking ways to boost spending.
Now, I think the Fed is making a mistake. But the fact hiking rates is even halfway defensible is a sign the U.S. economy isn’t doing too badly.
So, what did we do right?
The answer, basically, is the Fed and White House mostly have worried about the right things. (Congress, not so much.) Their actions fell far short of what should have been done; unemployment should have come down much faster. But at least they avoided taking destructive steps to fight phantoms.
Start with the Fed.
In his recent book, “The Courage to Act,” former Fed chairman Ben Bernanke celebrates his institution’s willingness to step in and rescue the financial system, which was indeed the right thing to do. …
Meanwhile, on the other side of the Atlantic, the European Central Bank gave in to inflation panic, raising interest rates twice in 2011 — and in so doing helped push the euro area into a double-dip recession.
What about the White House? Some of us warned from the beginning that the 2009 stimulus was too small and would fade out too fast, a warning vindicated by events. But it was much better than nothing, and was enacted despite scorched-earth opposition from Republicans claiming it would cause soaring interest rates and a fiscal crisis. …
The result of these not-so-bad policies is today’s not-so-bad economy. It’s not a great economy, by any measure: Unemployment is low, but that has a lot to do with a decline in the fraction of the population looking for work, and the weakness of wages ensures that it doesn’t feel like prosperity.
Still, things could be worse. And they might, which is why the Fed’s likely rate hike will be a mistake.
Fed officials think the solid job growth of the past couple of years — which happened, by the way, as Obamacare, which conservatives assured us would be a job killer, went into full effect — will continue even if rates go up. I’m among those who think America is facing growing drag from the weakness of other economies, especially because a rising dollar is making U.S. manufacturing less competitive. But those officials could be right, in which case waiting to raise rates could mean some acceleration of inflation.
On the other hand, they could be wrong, in which case a rate hike could end the run of good economic news. And this would be much more serious than a modest uptick in inflation because it’s not at all clear what the Fed could do to fix its mistake.
I’m not sure why this argument isn’t getting much traction at the Fed. I suspect, however, that officials have been worn down by incessant criticism of their policies, and want to throw the critics a bone.
But those critics have been wrong every step of the way. Why start taking them seriously now?
Paul Krugman is a syndicated columnist who writes for the New York Times News Service.
