Friday, November 14, 2008

Krugman urges $600 billion stimulus, maybe GM should be saved

Now is not the time for shilly-shallying, says Krugman:

Finally, in normal times modesty and prudence in policy goals are good things. Under current conditions, however, it’s much better to err on the side of doing too much than on the side of doing too little. The risk, if the stimulus plan turns out to be more than needed, is that the economy might overheat, leading to inflation — but the Federal Reserve can always head off that threat by raising interest rates. On the other hand, if the stimulus plan is too small there’s nothing the Fed can do to make up for the shortfall. So when depression economics prevails, prudence is folly.

What does all this say about economic policy in the near future? The Obama administration will almost certainly take office in the face of an economy looking even worse than it does now. Indeed, Goldman Sachs predicts that the unemployment rate, currently at 6.5 percent, will reach 8.5 percent by the end of next year.

All indications are that the new administration will offer a major stimulus package. My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion.
And here's an argument from Ezra Klein for bailing out General Motors:
Cohn's article argues, also, that this crisis is not just the latest coughing fit in the American automotive industry's decades-long decline. Rather, Cohn says that his reporting showed the industry has actually implemented many of the reforms folks would want, but that amidst their transformation, they were hit with an "unexpected trifecta of high gas prices, vanishing credit, and a deep recession." Cohn says that the difference between them and the Japanese automakers is, at this moment, cash reserves more than business practices or car quality. Indeed, Ford is now about as reliable as Toyota and Honda, while Chrysler's factories match Toyota's in productivity. All of this would make the auto industry a fairly good candidate for a conditional bailout, and given the harm that 3 million lost jobs would inflict on an already-sagging economy, it may be a good fiscal move, too. In any case, read the whole thing.

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