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 has just passed a sad landmark.

While the initial slump this time around wasn’t nearly as bad as the collapse from 1929 to 1933, the recovery has been much weaker – at this point world industrial production is doing worse than at the same point in the 1930s. A remarkable achievement!

But the bad news is unevenly distributed. In particular, Europe has done very badly, while America has done relatively well. True, the US 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 (ECB), is still seeking ways to boost spending.

Phantoms

Now, I believe the Fed is making a mistake. But the fact that hiking rates is even halfway defensible is a sign that the US economy isn’t doing too badly. So what did we do right?

The answer, basically, is that the Fed and the White House have mostly worried about the right things. Their actions fell far short of what should have been done; unemployment should have come down much faster than it did. But at least they avoided taking destructive steps to fight phantoms.

Start with the Fed. In his recent book The Courage to Act Ben Bernanke, the former Fed chairman, celebrates his institution's willingness to step in and rescue the financial system, which was indeed the right thing to do. But everyone did that. The real profile in courage was the Fed's behaviour in 2010-11, when it stood fast in the face of demands that it tighten policy despite high unemployment. The pressure was intense, with leading Republicans including Paul Ryan, now the speaker of the House, accusing Bernanke of "debasing" the dollar and suggesting that he was corruptly aiding the president Barack Obama.

Hard-money advocates seized on a rise in headline consumer prices, claiming it was a harbinger of high inflation to come.

But the Fed stuck to its, um, printing presses, arguing that the rise in inflation was a one-time blip driven mainly by oil prices – and it was proved right. Meanwhile the ECB 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 over scorched-earth opposition from Republicans claiming that it would cause soaring interest rates and a fiscal crisis. Again, this is in strong contrast to Europe, which never did much stimulus and turned quickly to savage austerity in debtor nations.

Unfortunately, the US ended up doing a fair bit of austerity too, partly driven by conservative state governments, partly imposed by Republicans in Congress via blackmail over the federal debt ceiling. But Obama at least tried to limit the damage.

The result of these not-so-bad policies is today’s not-so-bad economy. It’s not a great economy by any measure and the weakness of wages ensures it doesn’t feel like prosperity. Still, things could be worse.

Mistake

And they may indeed get worse, which is why the Fed’s likely rate hike will be a mistake.

Fed officials believe that the solid job growth of the past couple of years will continue even if rates go up. I’m among those who believe that America is facing growing drag from the weakness of other economies, especially because a rising dollar is making US 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, which a number of economists are making, 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? – (New York Times service)