The Third Pillar. Raghuram Rajan

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      Recognizing the importance of local institutions, in 2013 the Resurrection Project helped rescue a failing community bank, Second Federal. At that time, 29 percent of the bank’s mortgages were delinquent, and many local borrowers would have faced eviction if the bank had been closed or sold outside the community. Vacancies would have depressed house prices and brought back crime. Second Federal’s delinquencies are now down to 4 percent of its mortgage portfolio, because it worked with its borrowers and nursed the loans back to health. People continue to use its branch as a community center, meeting there to chat with neighbors, or bringing their mail to have it translated by tellers.

      The Resurrection Project has itself built affordable housing that it rents to needy families, nudging them to move out when they can afford market rents. One of its developments, Casa Queretaro, looks sleek and welcoming, seeming more luxury housing than “affordable”—in management’s view, there is no reason why so much affordable housing should look run down.

      There is much more to community revival, but the picture should be clear. Pilsen is by no means a rich or prosperous community but it now has hope. It has built on its Mexican connections—it has a National Museum of Mexican Art—though it is proudly American. Cinco de Mayo, a Mexican festival, is celebrated with great gusto, but over two hundred fifty thousand people join the Fourth of July parade in Pilsen. Raul Raymundo’s aim is to welcome people of every ethnicity into Pilsen while building on the core stability of the existing community. As he tells people when they buy a house, “You are not buying a piece of property, you are buying a piece of the community.”

      final preliminaries

      Who am I and why do I write this book? I am a professor at the University of Chicago, and I have spent time as the Chief Economist and head of Research at the International Monetary Fund, where we gave advice to a variety of industrial and developing countries. I also was the Governor of India’s central bank, where we undertook reforms to improve India’s financial system. I have experience working in both the international financial system and in an emerging market. In my adult life, I have never been more concerned about the direction our leaders are taking us than I am today.

      In my book Fault Lines: How Hidden Fractures Still Threaten the World Economy, published in 2010, I worried about the consequences of rising inequality, arguing that easy housing credit before the Global Financial Crisis was, in part, a way for politicians to deflect people’s attention from their stagnant paychecks. I was concerned that instead of drawing the right lesson from the crisis—that we need to fix the deep fault lines in developed societies and the global order—we would search for scapegoats. I wrote:

      “The first victims of a political search for scapegoats are those who are visible, easily demonized, but powerless to defend themselves. The illegal immigrant or the foreign worker do not vote, but they are essential to the economy—the former because they often do jobs no one else will touch in normal times, and the latter because they are the source of the cheap imports that have raised the standard of living for all, but especially those with low incomes. There has to be a better way . . .”9

      The search for scapegoats is well and truly on. I write this book because I see an increasingly polarized world that risks turning its back on seventy years of widespread peace and prosperity. It threatens to forget what has worked, even while ignoring what needs to change. The populist nationalists and the radical Left understand the need for reform, but they resort to the politics of anger and envy. The mainstream establishment parties do not even admit to the need for change. There is much to do, and the challenges are mounting—population aging and climate change need to be addressed without delay. We must start now to bring the state, markets, and the community into a much better balance within our countries, so that we can come together as confident healthy nations to address looming global problems.

      The rest of this book is as follows. I start by describing the third pillar, the community. To some, the community stands for warmth and support. To others, it represents narrow-mindedness and traditionalism. Both descriptions can be true, sometimes simultaneously, and we will see why. The challenge for the modern community is to get more of the good while minimizing the bad. We will see how this can be obtained through the balancing influence of the other two pillars—the state and markets. To continue our exploration, we must understand how these pillars emerged historically. In Part I, I trace how the state and markets in today’s advanced countries grew out of the feudal community, taking over some of its activities. I explain how a vibrant market helped create independent sources of power that limited the arbitrary powers of the state. As the state became constitutionally limited, markets got the upper hand, sometimes to the detriment of communities. The extension of suffrage reempowered communities and they used it to press the state to impose regulatory limits on the market. People also demanded reliable social protections that would buffer them against market volatility. All these influences came together in the liberal market democracies, which emerged across the developed world in the early twentieth century. However, market downturns, especially following technological revolutions, were, and are, disruptive. The Great Depression, followed by the Second World War, seemed to sound the death knell of liberal market democracies in much of the world, and the ascent of the state. The balance was seriously disturbed.

      In Part II, I describe how the United States shaped the postwar liberal order, and how both the state and markets grew once again to re-create a new balance. Democracy’s roots became stronger. The thirty years of strong postwar growth, however, were followed by years of relative stagnation as developed countries struggled for new ways of reviving growth. In response, the Anglo-American countries empowered the markets at the expense of the state, while continental European reforms favored the superstate and the integrated market. Both sets of reforms came at the expense of the community. I discuss how these different choices left countries differently positioned for the ICT revolution, the subsequent Global Financial Crisis, the backlash against the global order, and the rise of populism.

      I turn to possible solutions in Part III. To strengthen the chances that society will stay liberal and democratic, we need profound changes that rebalance the three pillars in the face of technological change. We need more localism to empower the community while drawing on the state and markets to make society more inclusive.

      Finally, some caveats. I intend this book to be comprehensive, but not exhaustive. Therefore, I illustrate the course of history with examples from prominent countries, but it would tax the reader’s patience (as well as my editor’s) if I substantiated points with the detail that specialists require. This book offers a broad thesis of its own, and draws on much academic work, but it is aimed at a wide audience. I also offer policy proposals, not as the final word but to provoke debate. We face enormous challenges, to which we need not just the right solutions but also ones that inspire us to act. It is worth recalling the words of Chicago architect Daniel Burnham, “Make no little plans; they have no magic to stir men’s blood and probably themselves will not be realized.”10 I hope this book stirs you to big plans.

       INTRODUCTION

       THE THIRD PILLAR

      Why do our neighbors matter when we can reach people across the world with a click? What role do proximate communities play today in an advanced country that has both a well-functioning state and vibrant markets? The proximate community still helps define who we are. It gives us a sense of empowerment, an ability to shape our own futures in the face of global forces. It also offers us help in times of adversity when no one else will. Of course, the traditional community can also be narrow-minded and resistant to change. A modern community should support its members even while being open, inclusive, and dynamic. It is a product of delicate balances. It is also necessary to address the problems we face.

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