Krugman: Bailout plan troublesome

Krugman responded to reporters’ questions about the failing economy in advance of the Group of 20 summit last weekend.

Financial leaders from the 20 industrial and emerging-market nations in the group gathered in Washington, D.C., for a series of emergency meetings about the global recession and the international effort to alleviate its devastating effects.

The summit comes at an unusual time for the United States: the transition of power from the Bush administration to that of President-elect Barack Obama. When asked about his views on the Group of 20 meeting in light of this transition, Krugman expressed skepticism as to what can actually be expected to come of it.

“We’re not going to reach a pact ... this weekend,” Krugman said. “I wouldn’t set the expectations too high right now.”

Krugman later light-heartedly referred to the summit as “a major non-meeting of minds,” provoking laughter among the reporters present.

Nonetheless, the gathering of emerging-market countries — including Brazil, China and India — along with developed nations was a step toward what Krugman described as the need for a “financial rescue put together in addition to what the wealthy countries are doing.”

He added, “We’re all focused on the crisis in the United States and Europe — the wealthy-country crisis — but on top of that, we have this enormous [global] crisis.”

Asked about the highly charged Washington debate over a possible federal bailout for the auto industry, Krugman said the situation is essentially lose-lose for the government and American taxpayers.

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“Both alternatives are really bad,” he explained. “That industry really does not deserve a bailout. A bailout will perpetuate the bad behavior that got them to this point.”

“On the other hand, this is not the moment when you want to do the right thing,” he added, explaining that the auto industry is so central to the American economy that “you don’t want to see auto-makers going down in the middle of this [financial crisis].”

Turning his attention to Obama, Krugman recommended that the president-elect postpone policy ambitions such as universal healthcare and climate-change legislation for one or two years, saying, “The stimulus is going to take all the money this year.”

In terms of what one reporter referred to as the “change in attitude” that the Obama administration might bring to economic policy in January, Krugman described the country’s current atmosphere as “an Alice in Wonderland universe” in which “higher consumer saving is a bad thing [and] wasteful government expenditure is a good thing.”

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With a change in leadership, “we don’t stay there, hopefully,” he said.

Krugman also responded to questions about Treasury Secretary Henry Paulson’s controversial announcement last Wednesday that the federal bailout package will be redirected toward unfreezing the credit market to help consumers.

Krugman said he did not agree with the initial direction of the bailout.

“They started off on the wrong foot, and then they changed,” he explained. “Better than insisting that what you initially proposed was right.”

In addition to being a Nobel laureate and professor in the Wilson School, Krugman is a twice-weekly New York Times columnist and the author of multiple economics books.

He was awarded the Nobel in October for his academic work on “the effects of economies of scale on trade patterns and on the location of economic activity,” according to an announcement by the Royal Swedish Academy of Sciences.