Nobel Prize Winner's Recession Solution

Nobel Prize-winning economist Paul Krugman said the government could borrow up to $5 trillion -- if needed -- to speed up a recovery from the recession.

A stimulus plan of that size is probably not needed, but Krugman said he believes the $775 billion proposal from President-elect Barack Obama isn't big enough.

"We're not in a depression. But we are in a situation where the normal tools don't work and we're back to 1930s-type environment," Krugman said in an interview with ABC News. "Government spending is the only surefire way to create employment."

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"I hope that things will be improving by 2011, but they will still be ugly," Krugman said. "It's nasty. This is nasty, brutish and long. It's really going to go on for an extended period, even with the best policies. And it's not clear if we are going to have the best of policies."

When asked what he would spend the money on, Krugman said it's not up to him to name specific projects but that they should quickly create jobs and create a lasting improvement in the economy.

"I've been impressed with people who are talking about upgrading the rail system for freight," Krugman said. "Freight rail is a success which is hindered by small but extreme bottlenecks. So that's an example of a kind of project that would spend money but also provide a lot of long-term benefits to the economy.

"The fastest and most effective way to spend money is to avoid cutbacks," he added. "And aid to state and local governments looks like a really productive use of funds."

See Krugman and other economists talk about the recession on "World News" Friday at 6:30 p.m.

Krugman, who is a professor of Economics and International Affairs at Princeton University and a columnist for the New York Times, did not say how large the stimulus plan should be, but has said it is better to spend too much than not enough.

"At max, the U.S. government can probably borrow another $5 trillion," Krugman said. "Hard to believe, but we can probably get away with that if we have to. I hope we don't have to spend that much."

Krugman's Analysis of the Economy

Krugman, a well-known liberal, said the situation is at least as difficult technically "as the problems that [President Franklin D. Roosevelt] faced in 1933 in a world moving a lot faster than we had in the 30s."

The massive scale of the problem creates its own kind of political tightrope walking.

"Obama's going to have to deliver some results in a way politically, if not economically," Krugman said. "If he's got a stimulus program that's helping the economy, it will be easier to say: and we also need to help the banks. If nothing seems to be working, the public might just say, 'Hell no, we don't want to do any of this.'"

Krugman said he does not support tax cuts for businesses, saying such an approach would do little to help the overall economy.

One of the most controversial parts of the Bush administration's plans to help the economy to date has been the billions of dollars given to banks and other financial institutions.

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