Thursday, November 13, 2008

Grim economic forecast reinforces need for "big bang" response from Obama

"Beware of those who say we've hit the bottom," says Nouriel Roubini, the New York University economics professor who saw a recession coming back in 2006 when so many other experts were still cheerily optimistic.

The recession will last through 2009, he says, and it will be "U-shaped," with a slight possibility it could be worse -- "L-shaped," like Japan's stubbornly long economic downturn in the 1990s.

Even if Roubini is only three-quarters right (a Wall Street Journal survey of economist sees growth resuming in the second half of 2009), the U.S. better get moving on a strong response. Treasury Secretary Paulson did the right thing in deciding the U.S., instead of using the $700 million in bailout money to buy "troubled assets" would inject funds directly into financial institutions to keep them solvent, and also aid consumers more directly.

But Paulson and the Bush administration should back off from the opposition to using bailout money to save General Motors from bankruptcy. There's a lot of talk about a "pre-packaged bankruptcy," but however it's wrapped and be-ribboned, bankruptcy for the giant automaker would be devastating -- to the entire U.S. economy. As I argued last week, GM has already taken major steps to cut its production costs. What it needs is a bridge loan to get to 2010 -- when the cost cutting takes effect and lowers the private of each GM vehicle by about $3,000. The fragile economy doesn't need a body blow like GM bankruptcy, which would threaten several million auto-related jobs and, possibly worse, imperil the company's ability to create its share of the 5 million "green collar" jobs that is President-elect Obama's 10-year goal. A GM bailout can be tied to conditions that the company be required to meet to become competitive with international automakers.

The U.S. response to a deep recession should also include President-elect Obama's "big bang" reform package, as reported in the Financial Times and flagged on Brad DeLong's blog. That package would push a short-term stimulus to aid consumers and long-term investments for neglected infrastructure, and defer budget-deficit reductions till the economy was beyond the U- and possibly L-shaped recession.

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