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Cause and effect, Part II

Cause and effect, Part II

Nobel laureate Paul Krugman tells Ian Munroe about the origins of the financial crisis, and how its fallout will change the global economy. Part II.

August 31, 2009 2:20 by

Will the global services sector grow larger than it was before the crisis, or will it shrink?

Ultimately the reason we shifted to a service-based economy is a combination of saturation in the demand for goods … and higher productivity growth of the goods-producing sector that pushes us towards services.

One of the reasons we have so few farmers is that the farmers we do have are so productive. I don’t think that’s going to change. The only big thing is, I don’t think that financial services are going to come back. We went from financial services bringing in 4 percent of GDP to 8 percent of GDP and it’s not clear there was any social gain from that extra 4 percent of GDP, so that sector’s going to shrink.

But in terms of other sectors, healthcare shows no signs of ceasing to grow. I don’t think we’re going to go back to becoming a manufacturing-centered economy, basically because the manufacturing sector we now have worldwide is big enough to supply the goods people want.

A lot of historians blame the stock market crash in 1929 for the rise of radical movements. Could something similar emerge now?

It’s hard to come up with anything on that scale. Fascism as a movement existed before the crash, so there was a kind of ready-made template for the anger to fasten onto. There’s nothing comparable to that in today’s world. None of the great powers, economically or militarily, is unstable in that way. So I don’t think you can envisage something like the rise of Nazism coming back.

But we could have a lot of nasty stuff. I worry, for example, about Ukraine – that it might seek to join with Russia and reconstitute the Soviet Union. This is still not a likely event, but the scale of the economic crisis there makes it more likely. I’m doing my best not to think about Pakistan, but when I do I get very scared, and the economic crisis doesn’t help.

How are human rights and freedom of speech being affected?

So far, we’re not seeing states engage in crackdowns or reductions of civil liberties in response – aside from a couple of places where governments have attempted to prosecute bloggers who said negative things. But they tend to encounter a lot of anger and ridicule when they do. So if there’s something out there, I don’t see it.

Is there anything we can do to minimize these cyclical economic swings?

Remember, this isn’t a run-away, out-of-control financial system. If we regulate it we won’t have this kind of crisis again. My read of this is that there have been three major global economic crises since the Great Depression. The first two were about oil. This is the third, and it’s about finance. If we can get finance under control, then we can probably go another generation before we have anything comparable to this.

First published in Trends magazine.

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