Recovery in 2010? Krugman sees huge price declines in L.A.

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Catching up on weekend reading: The Fortune magazine interview from last month with economist and columnist Paul Krugman is worth reading for its matter-of-fact pessimism. Highlights:

--Krugman sees housing prices falling by 25% ‘overall’ and worse here: ‘In places like Miami or Los Angeles, you could be looking at 40% or 50% declines.’

--Krugman sees economic recovery, as defined by job growth, coming in summer 2010 -- at the soonest: ‘But I wouldn’t be surprised if it goes longer than that -- maybe into 2011.’

--He sees a good chance the Fed will reduce interest rates to zero. (Not a typo.)

--Lastly, he favors public investments to revive the economy. This is not surprising given Krugman’s general political leanings, but his reasoning is worth noting. ‘... Since this thing is going to go on for a long time, effectiveness is more crucial than speed. I’m actually for public investment now -- repairing bridges, building infrastructure. Normally people say if you try to do any public investment to stimulate the economy, the recession will be over before it can come online. But I don’t think that’s a problem this time.’

Economist Stephen Roach made a similar argument a few weeks ago, and I tend to agree with it. Instead of focusing on ‘putting a floor’ under housing prices, government should focus on public works projects. I know a large city of 10 million people or so that could use a decent public transportation system.

Here’s a prediction: By election day, the economic argument will no longer be focused on how best to help homeowners avoid foreclosure but instead on what kind of major stimulus efforts are needed. Expect the Democratic nominee to embrace Krugman’s logic.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.