|(1) The answer to #1, I think, should be fairly obvious: the auto industry represents the heart of US manufacturing. If it goes, millions of jobs go with it, and the geographic distribution of those jobs means that entire communities will be wiped out. Avoiding a true depression under this scenario could well be impossible, though I would suppose that Krugman himself will dispute this.
However, I can't really see how this can be true. The US is a huge auto market, and someone is going to be selling cars here for a very long time to come. The problems faced by US car makers are not, so far as I can tell, inherently tied solely to the sort of analysis that Krugman is getting his Nobel Prize for. The carrying of health care costs as private-sector costs is the first thing that comes to mind here. More under #3 below.
Therefore, the demise of the US auto industry, if it should come, would not be an economic event, but a political decision. And it is virtually impossible to conceive how the Democratic Party could possibly survive such a decision. Have just now come to power, this would be an unforgivable blunder.
(2) Why would Krugman say this? Who knows? But one can say something about the other side of the coin--what can we rule out thinking about Krugman, in light of the fact that he apparently did say this?
Well, for one thing, we can stop believing in him as the Messiah. This should have already been quite obvious, from his various acts of waffling over the bailout. Is he far, far better than most? Indubitably. Is he a very smart economist? Are you kidding? But is he a true, cutting edge progressive leaders? No. And I don't think he ever claimed to be.
In fact, I still think it's quite possible that if such leadership showed up, Krugman would move farther left to support it. But I don't expect him to be the one leading the charge.
Don't forget, he was hired by the NYT as pretty much a middle-of-the-road expert on the economics of globalization. That's not a slot that one expects to find progressive leadership coming from. He stepped up admirably when he saw the Bush Administration lying outrageously about its tax cut proposals in 2001, and the rest of the media treating those lies like unquestionable holy writ. And he continued speaking out as he saw more and more of the same pattern of behavior across the board. He has been an exemplary citizen in one of our nation's darkest of times. But none of that, per se, makes him necessarily a pro-active progressive leader.
We have to become much more sophisticated as consumers of expert opinion in the field of economics, and above all, we need to become more sophisticted in separating expert economic analysis from informed political opinion. I have always trusted Krugman far, far more for the former, as opposed to the latter. And this merely serves to underscore why.
(3) It seems to me that Kreugman is clearly not thinking outside the box here. This applies in at least three potentially interrelated ways that I can think of, right off the top of my head.
The first is the possibility of transferring health care costs to the federal government, as part of modified Obama health care plan that shifts significant more toward getting us to single-payer sooner, rather than later.
The second is the possibility of transforming the auto industry into a more generalized infrastructure industry, primarily focused on transportation in general--building high-speed rail, for exmple, in addition to cars/trucks/buses--and renewable energy infrastructure.
The third is the possibility of nationalizing the industry, which looks to be cheaper than continuing to try to bail it out, and which could make it much easier to accopmlish further adaptations to meet shifting national priorities.
I don't pretend to be an economist, much less one of anywhere near Krugman's stature. But, like him, I, too, am an engaged citizen. And I cannot ignore the fact that he has not engaged with these further possibilities that increasingly are no longer optional for us to be considering and discussing. Indeed, if anything, I have probably only begun to scratch the surface here, of the more imaginative and critical thinking that need to be done.