[Applause] [Music] [Applause] [Music] conversations with Tyler is produced by the mercada center at George Mason University Bridging the Gap between academic ideas and real world problems learn more at arcades.in conversations withth tyler.com [Music] today we're here with raguram Rajan who is professor at University of Chicago Ragu has a new book out the third pillar how markets in the state leave the community behind Ragu welcome thank you
for having me first question should we really be trying to empower local communities if we think nimi is a big problem and strong localism just means tighter zoning regulations well you need a a new kind of structure uh going going forward uh certainly you need more empowerment locally but you have to make sure that that empowerment is not total that it's not about building walls around the community but making the
community able to take advantage of a global economy as well as a large country so walls prevent that so how do you get people to have a sense of agency while at the same time there are flows across the borders of the community that's really what I'm trying to if we had stronger local communities do you think we would have stronger restrictions on building in s Manhattan San Francisco the American suburbs well
I think you have to worry about that and so we might if the local communities abilities to enact um sort of zoning laws were not tempered in some way by the other two pillars that I talk about in the book The State and markets so to some extent we need to keep the borders of the community low and po for us while giving the community greater decision-making power the decision- making power is not about the borders
per se but about how it will encourage economic activity in some sense attuned to the needs and the capabilities of the community if I think say about China which is done pretty well in terms of economic growth didn't they in some sense trash localism and they said we're going to do the state really well we're going to do Market somewhat well we're not going to try for balance the United States has a somewhat dysfunctional
government but we have great markets we're not trying for balance isn't it better to have a cultural specialization in either state or Market than to try to balance all three of the things well first I I would disagree a little about your characterization of China I think one of the things they've done very well is had have pretty strong in fact impenetrable business regulation around that's not a recommended path but what
they've done is empowered the local government officials to essentially work with those regulations and open them up for local businesses so in some sense they've incentivized the local officials by giving them uh strong rewards for growth they get promoted faster up the Communist party and allowed them in a sense to build the local community around their abilities so Chinese growth a lot of it is not because China has the
best business regulation in the world but it because it has empowered Communist Party officials who know how to break the rules selectively now is that a recommended mode certainly not but it's worked if you were to side a particular place in India that right now is doing community especially well what would it be I I think the villages by and large are self-governing have been self-governing for many many decades but I think what
you really need is over and above that you need the funding that accumulates at the center or at the state level to come down to the community level so they can decide IDE what kinds of irrigation projects for example that they need a lot of it is local it's not these Mega gigantic projects which create a whole lot of problems it's about local tanks local Wells and there are many areas where once the local people take it up
and have the funding associated with it they actually do a great job of uh you know do doing the right things as far as irrigation as far as the environment as far as everything the local community needs but if people are leaving villages in India or for that matter in America isn't that a sign they're rejecting community in some sense they find it too stifling they prefer the anonymous impersonal existence of the big city
well there is some of that there there are some people who prefer the anonymous existence of the city and there are some people who come back from the city back to their Community because they like the sense of identity that it provides we are with people we've known for many years they are who we are in some sense you're defined by the people around you so I think there's room for both in fact the book is about saying look let's
create the possibility for for all kinds of communities to coexist within a country how much of the decline of community do you think is actually the decline of religion take this country the United States well some of it is but you you might argue that when Community declines people reach out to measures of identity that they can lock on to and sometimes you know religion is something that they grasp at because that at least
gives them some sense of who they are because the local community is collapsing social uh dysfunctionality is setting in families are breaking down teenage pregnancies are up when that doesn't satisfy you're looking for other symbols nationalism is one religion is another it seems the secularization thesis is finally coming to this country that is fewer people are going to church after a long period of stability do you
think the same is likely to happen in India as per capita income grows because it's happened in just about every other country and now finally also the US well in the majority religion in India Hinduism you really don't have a strong concept of church that is going to assemblies and so on and there are festivals and deities there are ways you participate what you see is again that in reaction to modernity uh there are
there is sometimes an increasing emphasis on these older symbols uh for example the Ganesh Festival Festival of the elephant god is uh celebrated with full gusto in Maharashtra and a lot of young kids are participating in that they like the the symbolism they like the festivities they like being with other people but they've converted it into something new they dance on the streets you know a lot of western dance
as opposed to traditional Indian dance they've they've adapted uh it to their needs what's your favorite Indian festival Diwali is uh is pretty up there it's the most important uh Hindu festival uh it's again a time of coming
together of family of of recognizing uh you know your community do you think the European Union is a substitute for Community or an enabler of it on net well I I think that at least in the way that it has grown it has actually
created more reaction than a greater sense of community and and I'll be very very specific about that what it's done is it's taken pows up into the Union which traditionally used to belong at the country level and within the country level at the regional level and as those pars migrate up people in the country feel disempowered we can't determine everything everything's determined by those bureaucrats in Brussels when that
happens there's a reaction against the European Union to some extent the local politicians play into that uh all the good stuff is because of them all the bad stuff is because of those bureaucrats in the union so there is no political consensus behind the union itself though if you ask uh what is the political consensus be behind Europe as a concept I think it's still pretty strong should the existence of the
internet make us super optimistic about Community or super pessimistic I think that it actually helps in many ways we often we worry about the internet people spending so much time away I mean the traditional picture of a family of four eating and each one on their on their cell phones uh communicating with somebody outside but in fact when you look at the evidence it seems like it can also help bring together people so my kids for example
uh you know they are so much more in touch with their college friends through Facebook and and and so on in a way that we never were there's an example in the book of this community netville where they actually overlay internet on half a community this EX exactly what an economist wants a randomized experiment half the community linked the other half not which segment does better in maintaining social ties it's the one
that's linked because they can Traverse locked doors they can communicate with each other they can do social events together and it works a lot better I think the internet offers a lot of possibilities not all of them good absolutely but it offers a way to stay together which uh which we didn't have in the past and offers new ways of getting together again which we didn't have in the past why doesn't online education work better then what's
special about face to face I think you need both I mean look face to face in my class when I look at a student and they're not prepared they feel a sense of embarrassment it's hard to get that sense of embarrassment across the net at least in full measure you could text them an insult uh you could text them an insult it's not as powerful I would think up the quality of the insult it might be this goes to the point of of
online is less Eng engagement it allows you to opt in and opt out allows you more choice but the depth of Engagement I would argue is much less than when you have a local real Community I have a few questions about India and again I remind our listeners this is the conversation I want to have with Ragu not the conversation they want to have a lot of observers have suggested to me that the notion of a kind of anglo-american
liberalism as ascendant in India is now a dead idea that ideologically India has some have shifted and the main currents of thought including on the the so-called right are just really not liberalism anymore do you have a take on that view I'm I'm not sure I would agree I would say that we've had a government over the last year five years which has uh elements of the majoritarian Hindu nationalist uh group in it but I would
argue the country as a whole is uh still firmly secular liberal in the narian ideal which is that we need a country which is open to different religions to different ethnicities to different beliefs if we are to stay together and and democracy plays an important role here because it allows some of the pressures which build up in each Community to essentially get expressed and therefore diffuses some of the pressure so I I think India's ideal is
still a a polyglot coming together uh in this country but someone like ramachandra guha what he symbolizes intellectually do you think that will be a growing part of India's future or that will dwindle as Colonial ties become smaller the United States less important in global Affairs I I think that an open liberal tolerant country is really what we need for the next stage of growth we are now reaching middle income we could
go a little faster we should go a little faster there once we reach middle income to grow further I think we need an intellectual ual openness which only the kind the kind of democracy we have the open dialogue respectful dialogue uh will generate the kinds of innovative forces that will take us more to the frontier so I I I keep saying and I say this in the book we very well positioned for the next stage of growth from middle
to high income but we first have to reach middle income do you worry much about premature deindustrialization for India so the percentage of jobs in manufacturing has been declining for some while but India is not yet quite a middle-income country I I mean it is a concern but I would argue that I think there's enough room for growth in India doing the old traditional things I wouldn't worry about it right now I
think in the longer run we have to worry we certainly have to upgrade the quality of Education in India significantly more people have to be better prepared for the global economy they're not we have many of the same problems that we talk about in industrial countries too few people educated at the levels that the economy needs but that s I would say there are very low hanging fruit in India which if we pluck we can generate
9 10% growth for the next 10 15 years that would get us firmly into middle income and I don't think we necessarily need to go the Chinese way of manufacturing lead growth maybe that option is already closed out but just simply building out the infrastructure in India connecting people getting internal trade up you don't need to go the external trade manufacturing road to get stronger growth for some time oil producing countries aside are there
countries or even regions that have done 9% growth without a lot of manufacturing and exports isn't there a kind of cost disease that so many of the service sectors even in wealthier countries they just don't increase in productivity very much well we have to think more cleverly about doing that but it's not primarily going to be the financial services or Consulting and so on it's actually construction if India can construct what
it needs in terms of housing in terms of infrastructure in terms of ports railroads etc for the next 15 years that's where a lot of the jobs will be not just around the roads we build but the restaurants the motels the the service sector which builds around those roads and of course there will be some manufacturing me India still has very cheap labor so manufacturing will increase what Vietnam is doing now India
will also do but we need to build out that infrastructure so I would say construction then manufacturing and around all this a significant increase in services one belt one road emanating from China is it even a real thing is it just public relations what's your prediction what's your take it is a real thing but like any country doing something so gigantic I think they're learning that there are lots of unintended consequences some of the debt
traps that countries have got into as they've built out some of these some of the infrastructure associated with one belt one road I don't think that was necessarily inter intentional on the part of the Chinese but they do real realiz that it creates a tremendous amount of resentment so you think people are happy because you've essentially financed this infrastructure for them but nobody's using it and the people on
the other side say look why did we build this this is a white elephant so I think there are aspects of one belt one road which are going that way there are also successes longer run I think as a an important thrust an important International responsibility of the Chinese this is an important step forward the Chinese I think have grown internally and now are saying what do we do for the world and I think we should
look at what they're doing and see how it can be sort of pushed in the right direction why does China have such a bad record at cultivating allies maybe Cambodia maybe North Korea Pakistan perhaps but China has remarkably few allies relative to its GDP well I mean some of that may have to do with the nature of the government that it is a one party system system there isn't an enormous scope for internal dialogue and
debate and I I would suspect that one of the reasons people felt more comfortable with the United States post-war hegemony was the inter internal debate in the United States not so much that everybody trusted the US government but they realized that there were checks and balances internally and that every once in a while especially in the 70s and the ' 80s and the '90s the the public would start pointing at some of the actions of
the US government and and restrain some of the worse worse actions so I think there was greater confidence I would say right from Jimmy Carter I think the and Carter is not a popular president in the United States but the kind of introspection that he did in public I think was useful for the rest of the world to know that the United States was actually morally sort of on the right path if we look at Spain today many
catalonians wish to leave and to Outsiders the difference between a Spaniard and a catalonian appears relatively small compared to say the differences in India I see no serious signs of India breaking up whatsoever what is it that accounts for this extreme stability of India that maybe is not so visible to Outsiders I I would say that to some extent the structure we created has stood us well and this is where I go back to the Democracy yes
people question how illiterate people can have a sensible vote but again and again you see that you know our voters make what seems like sensible decisions but Spain has democracy Belgium has democracy they might be splitting apart well I think there is a reasonable we found a balance and I I think every country has to find that balance between Regional power and Central Power and it goes back and forth I I think
increasingly what we find is in India the states are demanding more power and more is being decentralized to them I think this is something that every country has to work out how much do you allow a state like C Bonia the freedom to express itself within the larger nation and you know sometimes repression has the wrong consequences I mean we in India know that we have had uh a number of states uh which uh where there has
been repression and there has been push back Jeff saaks wrote a famous review of Asim moglu and Robinson and he pointed out that if you go back in time and try to predict which countries will do well on the basis of their institutions it's very hard to predict using institutions which countries will be the high growth winners now to most economists that sounds counterintuitive we feel in our bones institutions have to matter are we
mismeasuring institutions are we not looking at the right ones how do you account for this Paradox well I I think what happens is more than institutions is the political environment in which the institutions are created that matters the the dispens the political dispensation and that's a lot lot of what the book is trying to say that you need the right political structures uh to emerge so take for example the US
Constitution which Liberia adopted you would not say that the checks and balances we have in the US the distribution of power in the US uh transferred to Liberia so the institution that is the Constitution being imposed in Liberia didn't necessarily mean that they inherited the same sort of structure and I would say that's true of country after country the same institution can function very differently if the distribution of poers
is different which is why in this book I emphasize it that distribution in which markets play a very important role that we need to think about to have stable functioning democracies what do you think will prove enduring from Indian fiction from Indian fiction well arundati Roy wrote a Stella book uh the god of small things I I think uh there was uh she hasn't followed it up uh uh unfortunately thus far but you know
every once in a while we have a a great author who comes out like that is there anything that I I particularly like nowadays um amitab amitab go is uh has written a nice Trilogy uh on immigration which I think is is very sensible and
very interesting you know one of the problems this goes to your earlier question is we don't see much of the vernacular literature coming out in English and there are depths there which are very very interesting and and they
deserve more airing Shiri has argued that when you read her books about a kind of indian-american experience does that relate to your personal life do you feel at home in those books or do you feel your experience is so different from hers no I I I think we all have some commonalities in that experience uh for example I mean she writes uh in her books about you know parents coming from India and and wondering why this is an
entirely different world I mean the temptation to hang your washing outside and and uh the knowledge that that's a no no in some community ities here so I mean some of those experiences translate very well uh to what each one of us uh experiences what something say from Indian culture music or Bollywood that maybe our listeners who are mostly Western I think wouldn't know about that they should appreciate better than they
do H that's that's a tough one what's your favorite Bollywood movie well uh if you want the standard Bollywood movie CH is is uh is the all-time favorite right um it's a story about deits and revenge love etc etc has the whole song and dance sequence and goes on forever so uh it's it's the it's the Bollywood movie we all grew up with let's say I'm an educated person I've been to maybe 20 countries but I've never been to India
and I'm going for two weeks and you're designing a trip for me where should I go well I mean I certainly think you should see some some of the uh traditional sites that every every tourist goes and sees the Palaces in Rajasthan the tajal ETC but there are lots of interesting parts of India which tourists don't go to the wildlife parks the bird sanctuaries I mean tremendous variety of uh of uh of animals and birds
uh and there are really very interesting places in India that nobody really knows of or goes to I mean certainly the temples in South India are very worth visiting some of the um towns in Kerala very quaint very interesting India is many countries in one so uh if you go to the south in one trip uh you go to the North in another trip you you're in a different country why does India have the best food in the world it's not
obvious that it should well uh far be it for me to say it has the best food but but I like Indian food but it's much better in India than in the United States is it the the lower wage rate vegetable vegetables are so fresh but so much food rots on the way to Market that to me seems counterintuitive that the country with the freshest vegetables would have one of the highest rates of rotting on the highway well there's less
use of fertilizer and the highest rate of rotting is because we don't have that infrastructure which we talked about earlier we need to build that infrastructure to take those vegetables to Market because cities want that those vegetables they'd fetch a much higher price that's development for you based on make the food worse and well it would make the food better because it would get faster to the city where more on refrigeration right so it's a
double-edged some on refrigeration absolutely so you wouldn't grow your own food but I'm sure over time you would have these Urban Farmers setting up Little Farms outside the city to produce exactly what they produce here I have a few questions on monetary economics and again feel free to pass on these how is it even that money matters at all and is that different in the United States versus India well we we have learned it
does matter in India yes because we just had a massive experiment where it 87 half% of the currency was taken out and turns out that actually people use the money for transactions and not everybody had a credit card not everybody could use a check and so overnight you found activity in these areas dropping significantly even though much of that activity we don't measure because it's informal activity so people have used
fancy ways of getting at that activity by looking at for example the intensity of Lights in that area at night to see if activity went down and they conclude yes Money Matters in yeah but will that show up in per capita income levels 10 years from now so there's a one-time shock it's like an investment you move to a higher technology you adjust there's catch-up growth and maybe 13 years from now you're glad you have the
new technology uh maybe I think there are less harsh ways of creating that new technology a number of people died standing in lines a number of people uh their firms closed down their livelihoods uh went away I think we can find smoother ways of uh of actually um getting people to use new p systems than just eliminating the money overnight but take say the US money mattering how much do you think is sticky nominal prices
and how much is credit Channel or how much is something else I think we're going to be debating this thing for years to come right how much is each one of these and of course we have now new theories which say nothing matters you can print all the money we know those are wrong right I hope they're wrong because otherwise we have to throw all our our knowledge out of the window well it would make life easy if they were
right it would make life very easy yes money as debt let's print as much as we want and nothing actually happens what's the most underrated idea in monetary Theory let me tell you what is the most difficult concept instead so I answered a different question uh it is how people's expectations form see modern textbooks are full of you say this and people will think that and therefore we will have an effect I mean how many
people actually think about infl how many people actually know what inflation is out there uh in India we found that in our surveys the median inflation rate that people said was going on was about 10% ponds higher than the highest rate had been for the last 10 years so it people don't really have a good sense of what those numbers are yet we focus on them because ultimately we think changing those expectations matters and
by the way this is true even of industrial countries the expectation of inflation is typically higher than what it actually is measured to be so why is there this you know very strong link to expectations that we have in our theories but in practice how they formed is is really a mystery how do people on the street actually gauge inflation because they don't read the financial papers they don't pay attention to the
inflation numbers that appear on Bloomberg or whatever how do they actually um react if people don't don't know what inflation means should we then move to NDP targeting well that's precisely the point we're getting more and more esoteric in how we uh sort of implement inflation targeting now price level targeting nominal GDP targeting but the poor guy on the street doesn't even understand what inflation is so why
are we getting uh more and more um sort of esoteric here let's first figure out how we communicate what inflation is but if we think sticky nominal wages are a problem and we then want the flow of nominal payments to grow at some
pre-ordained rate each year so that stickiness doesn't cause output losses why isn't nominal GDP targeting necessarily better than say inflation targeting no I'm not saying that it's better or worse I'm just saying that for
me it's a mystery how these Concepts translate to the common person whose expectations we care about unless you think they don't matter and who we are communicating to are largely the union bosses are largely the analysts on the street these are the people who determine uh how the economy moves and shakes not the ordinary person who's making consumption decisions but some of our theories require that person to also
internalize our model of whether it's inflation targeting or normal GDP targeting and my sense is it would be uh very useful for us to know how that transmission takes place if citizens don't understand what the rate of price inflation is Am I Wrong to think that the American public has become much more inflation averse compared to say the 1980s so in the rean recovery you have rates of price inflation 5% I'm not sure
people like it but it's not a big issue whereas today you creep a bit over 2% people flip out and go crazy like why has that change happened well let me throw that back to you who's flipping out on on 2% I I think this this smaller crowd is flipping out so people get very angry when uh the FED says we're going to run a little hot but I'm not sure it's the it's the common man who's saying I I hate 2.25% uh I don't think they're the guys
who are flipping out and and that's that's also leads to the question of whether we're getting a disconnect between the broader population and some of the ways policies are Set uh one of the sort of uh bastions of elite policy making in any economy is a central bank and increasingly I think the public is basically asking what on Earth are you doing and is what you're doing in my benefit but say you have a lot of
bureaucratically set wages which is the case in most countries so there's real stickiness in wages so when the rate of price inflation is higher a lot of people are taking real wage cuts and at least some of them notice yeah so I guess my theory is Congress flips out not that they think people understand what's happening but people will understand they have less to spend in some way and they'll take it out on
Congress so Congress pressures the central bank and we're maybe today way too inflation averse and we'd be better off if we could tolerate 4.63 inflation rates during a recovery may may may well be I mean the difficulty Tyler as you know is moving away from whatever the central bank has been saying 2% is our Target sure and if you hit 4 and a half% people start worrying that if if you're tolerating 4 and A2 well why not 6 and a
half you're sort of become you become a prisoner of the Target that you've set and so the flexibility that you have been moving away or even moving the target which Olivia blard as you know has suggested becomes much more difficult a lot of your early research is on business firms corporations a few questions there what's the biggest crisis to in American corporate governance well I would say that the there are two big issues one of course
is the domination of Industry after industry by a few firms many of these firms are well-managed many of these firms uh provide efficient Services provide a service that people want but it does raise the question going forward how are they maintaining their dominance and is it possible that they might chill Innovation and competition going forward that certainly is a concern I don't think we know know the answer but it is
a concern which America has addressed time and again in the past what's a sector where you have that worry well certainly uh you know right now the focus is on big Tech so Facebook Google Etc what do they know how do they know it and are they able to maintain a hold over their clientele because of that how do we make the uh area more comparative one of the worries is we don't fully understand the extent to which the
possession of a network can keep out the competition and how long it can do that our theories are well you will find this wonderful Innovative company which will demolish the opposition by producing such a bet and mouse strap that everybody will migrate to that but with the the kinds of structures we have today it's it's Theory still we don't know if that will work yes people say you know before Facebook there was what
was that make Myspace or Myspace and so on uh and Facebook came in but yeah yeah Facebook came in and it's gobbled up everybody else who was anywhere near a threat so will Facebook face the appropriate amount of competition remains to be seen But if there's a lot of innovation and there's zero price and obviously no coercion I can network with people by texting I can use email I can use Twitter I can use my blog I can
still use the telephone believe it or not though I don't why isn't that actually a pretty contestable Market it's unclear I the the question is whether whether the sort of network itself that one of these say let's take Facebook for the sake of discussion whether that Network itself is strong enough and their ability to acquire anybody who poses anything of a of a threat is uh is is strong enough to keep out competition as you know many Venture
capitalists now talk about a Kill Zone if we Finance somebody within this Zone they will not grow to be full adults they will be bought out early or forced out of business and that's not going to make enough returns for us now there's stuff here which needs to be unpacked what I'm saying is we need to watch this in in a careful way because this is the future and we have to be careful that it doesn't become an uncompetitive future
are you worried that there are so few public corporations in America these days compared to the Past well so long as the private corporations are reasonably well governed and that there is you know many of these private corporations have public funds as investors so that the returns for investment are also uh broadly U distributed I I don't think whether it's public or private is is a big issue I'm more worried about excessive corporate
Market power are CEOs paid too much that's the question of the ages right I I'd say that there are examples of CEOs that are paid too much of course but on average is it just that they're managing larger firms with global reach and the job is harder to do and in essence they deserve the money I think my my colleague Steve Kaplan would say that I I think he has some some uh arguments in his in his favor I think
that at the same time you can point to corporations in other countries where the disparity in in in income between the um you know guy at the bottom and the guy at top is not so great are they doing as well I think that's what we're we have a big debate about that whether us corporations are in fact managed better than corporations in other countries many years ago you wrote an article with your colleague Luigi
zingales on the concept of power in industrial organization do you feel that that piece explains anything we're seeing in the world today or what has come of that in your mind well I I do think that uh increasing the notion of Corporations as being a variety of fixed claim holders and the the shareholders as the residual claimants which is what led fredman to propose shareholder value maximization as the principle I think
that's being challenged increasingly corporations aerations of a variety of entities that essentially benefit from the corporation and share in the corporations rent so to speak so essentially the nature of the corporations is moving more towards Partnerships rather than manager worker and so I think the the nature of the corporation has to actually reflect that and more and more corporations are doing that and what that means is that
increasingly long-term workers are part of the stakeholders of the cooporation and seeing them as part of the value maximization process I think is both politically uh reasonable but also economically the right thing to do how fragile is a free Society with respect to the behavior of its own corporations can crony capitalism bring the system down or is it just a dead weight loss we'd like to minimize and as long as we
have some economic growth we can pay off the interest groups and get on with our business and live to fight another day I I sort of believe very much that crony capitalism is really the danger for any economy uh because it it not only uh constrains economic growth but I also think it limits political uh Freedom that to some extent a comparative independent private sector is extremely important to keep government in check
that when the private sector gets compromised and depends on tariffs to protect itself or depends on uh you know uh cartels government sanctioned cartels as we had post depression I think that's when we find that the private sector is no longer independent when it is no longer independent it becomes a pawn of the government and that's when we get authoritarianism so to some extent Hayek's uh road to serom I think
essentially uh one way of looking at that in the current context is it's when the private sector is coopted by the government that we get both political unfreedom as well as an uncompetitive economy if I look at the federal budget don't I see a problem being that too much of it is controlled by voters not that too much is controlled by corporations and tariffs even under Trump they're still quite low well I mean when you say they're controlled by
voters certainly the representatives of the people have an ability to opine on it and and certainly over time certain kinds of spending have picked up now I'm not saying that necessarily what we need is more redistributional spending I think we have a constant interplay between the two but I would argue that it's not so much how the budget is controlled but how profits are allocated in the economy what kinds of special
dispensations do you have what kinds of tariff protections do you have those are the kinds of things that limit the competitiveness of the economy as you know you're quite well known for among other things having predicted the financial crisis that started in in 2008 now we've all been upda dating our views ever since then but if you were to say just in the last say three or four years how have you even further revised your
view of what happened during the financial crisis well I I would say that this 30-year process of technological change that we've been talking about of increasing automation The Disappearance of the middle-income jobs that you've talked about in your in your books that stagnation uh for at least certain groups in society certain communities we try to remedy through um you know making credit easy didn't work we ended up with
a whole lot of people with underwater houses and even angrier because uh you know for a while they enjoyed home equity loans which allowed them to consume but now they were deeply underwater I think that we're getting into that trap once again where easy money is the answer when in fact we need structural change in the economy we need to find ways for people to get the skills that they need for sustainable employment and you know if you look
around one of the problems during the runup to the Great Recession was the enormous increase in construction jobs which pulled people out of high school into a well-paying construction job only for that job to disappear and to leave this person with a family and a kid but no no real skills I think we are seeing some of that again in for example the enormous increase in Uber drivers is a great way to make a little bit of money
but in terms of sustainability you have to ask yourself how long is this going to be sustainable and this all relates to your new book on community going back to some of your earliest research what's your opinion now how well does Financial development predict economic growth rates It's associated with it it's one of those institutions you talked about when everything is going well uh a good Financial Market also helps it's it's a
lubricant to growth is it the underpinning of growth I don't think so but some people argue that past a certain level of per capita income there's no relationship between Financial deepening and economic growth rates do you agree or no I I I think that Beyond a certain level once you have adequate access to finance and the ability to channel it into savings uh the real problem is to prevent the other
side the adverse side of the financial sector of it going haywire and taking you taking your GDP down by 10 20% Which really sets you back for a decade or two so to my mind uh you know beyond a certain is managing Financial risks while ensuring that the financial sector allocates resources appropriately in a world with so much information technology do you think there's still a Synergy between loan making and deposits
can you borrow from a bank more cheaply if you have an account there well I mean banks have been resilient for the last uh what 3,000 years but why what's the what's the nature of their informational Advantage how do we model it how do we think about it I I I think it's not so much on the lending side they they have some ability there but it's it's just the fact on the depositor side that uh it doesn't require genius to keep
testing the bank if you want your money go and say I want it back today that is a disciplinary mechanism on the bank which has to the test of time is it still still necessary today even today when you see what forces the bank uh into distress it's the run on the banks by the large depositors that's an enormous disciplinary device on the banks keeps them from going off the street and all we prevented the small deposit from running through Deposit
Insurance but even today what closes the bank down is when the large guys say these guys are not good for our money we're going to take it out and that's when it closes I think that basically forces a bank to stay on the straight and narrow to the extent possible of course it creates the downside of financial sector risk but it is a fairly strong governance mechanism much better than the equit holders in the bank who
have no clue as to what it's doing but say if there's Deposit Insurance especially in the US where resolution occurs quite quickly why should that discipline be much of a force so if I have $100,000 in a bank and they screw up I still have my money I don't really have to wait why should the bank have some kind of comparative advantage well you you will not do anything because you're insured and and Deposit Insurance
has been very successful in putting the small depositor uh to rest their anxieties to rest what closes the bank is when the large guys the guy guys who have 5 10 million in the bank uh who are monitoring the bank on a daily basis because they operate in the commercial paper markets the hedge funds the big uh mutual funds they are the guys who take start taking their money out quickly as soon as there is a whiff of trouble uh
about the bank and I think they perform an enormously important role which is why you know as you said the bank gets shut down in a day or two but that preserves the money uh Leman when it's shut down down was essentially when you
looked at the overall value it was pretty close to the value owed to the depositors it was shut down before it lost even that money in the United States are Current financial and lending connections too relationship based again
going back to your earlier work uh I well my co-author Luigi zingales would say there's a lot more connections at work today than is is healthy I would say that uh you know modern business operates on a mix of both arms contract S as well as relationships that fill the gaps in these contracts I don't think relationships are necessarily bad if there are a way of enforcing Trust of uh of adhering to terms that are not
precisely written in the cont contract you do business with somebody else because broadly you think they will do the right thing they won't haul you to court anytime there's any sense of of discrepancy I think that's how business works and I think that's that's usually a good thing it's when those relationships become the only way of actually functioning that you restrict access to a narrow circle of friends and relatives that's when it becomes
problematic can narrow banking proposals work not really for the reasons we just discussed narrow banking basically requires all the deposits to be invested essentially in safe treasuries right and no lending and uh I well but you're lending to the government and then other private Capital can do the private lending well that's the that's the part right so all the deposits first go to the government and if the government has
an excess of f funding it has to find a way of recycling it back to the private sector it's that part that people don't talk about what is the way the government is going to recycle it back is it's going to start buying corporate bonds which bonds is it going to buy what's the kind of uh worry about cronyism that takes place at that point I think those are the kinds of issues we don't talk about in narrow Banking and
and I think they deserve to be opened up the the other point is of course is there virtue for banks to be financed with shorter term debt while lending longer term and that's that's part of what what I've been trying to talk about well current payments companies end up as competitors to Banks or compliments to the banking system or are they Free Riders on the banking system I I think they're trying to figure out their space
as of now sometimes they substituting for uh I mean certainly my my daughter uses her payment system uh completely separate from her from her bank account uh but I think uh longer term we'll find ways of meshing these in and reduce the costs of making payments those costs are really too high at this point and reducing those costs makes a lot of sense will Banks ever be truly excellent at doing software I think we will have a
combination of the guys who are truly good at software the fintech companies uh merging with banks who know how to do the financial side they'll bring each of the talents together I've seen a lot of fintech people who have no clue as to what Finance is really about and I've seen a lot of banks who have no clue as to what tech is about and I think some merger will happen over time how much has the US actually fixed its Financial
system post 2008 some I think the recapitalization of the banks and increasing the capital requirements was generally a good thing however I think uh the banks have reduce the risk that they take a lot of the risks have migrated into what we call the shadow Financial system and the worry is we don't fully understand that are they managing their risk appropriately we have the same questions we had before the global
financial crisis when everybody said don't worry uh these are the smartest guys in the universe they know how to manage their risks well there's a lot of trust that the shadow Financial system knows how to manage his risk and I'm not sure we can be confident so what do we need to do to address that I think we need to keep exploring what's really going on and uh trying to understand for example we've seen a big explosion in
leverage loans in recent years so are they being placed in the right places when they dry up will the entities that borrow that way have enough liquidity those are the kinds of questions we got to keep asking increasingly liquidity becomes the source of both leverage and eventually credit risk and that's that's unfortunately the problem when liquidity dries up a lot of people both the lenders as well as borrowers are left
high and dry which is why you get pressure on the central banks to come in to the rescue of the system Infuse the system with liquidity start lending to anybody who needs it and that becomes a problem you become too reliant on public liquidity say I'm just a naive citizen maybe even with a leftwing band and I say look why should Banks even have off balance sheet risk to begin with why shouldn't we force almost everything on
the balance sheet there's otherwise no ways of handling this uh we're completely on the wrong track in terms of Bank regulation do you agree or disagree I I think you have to be a little careful every time you stop something it'll show up somewhere else if there's a need for it and is it better that it be entity that you regulate and you you monitor reasonably closely or in an entity that you don't regulate well to the extent you the
entity you don't regulate can absorb those losses that's not a bad thing but to the extent that it cannot and it all comes back into the system why are these interconnected markets you're no better off in fact you're worse off because you're blindsided by the risk migrating to places you don't look at given China's own Landing initiatives and also Fishers in the international order is there now a coherent way of integrating
China into the IMF and World Bank the way we used to talk about five years ago I I think uh we have to figure out not just how to integrate them but how these organizations have to change for a multi-polar world when the US was determining the shots which it still does there was a sense that there was one entity and it had pole position in many of of these organizations increasingly China is becoming bigger in certain markets than
the United States and probably in the next 5 to 10 years will become bigger in terms of overall GDP would the US still have that pole position and if not what kind of uh structure do we have in which there's not one single sort of equity holder but there are multiple Equity holders some of which whom have very different incentives the structure of the organization has to change to accommodate these interest to make sure
they work together so I think this change especially given that China doesn't have that liberal Market democracy structure that the US has will be painful but it's something we need to do if we are to essentially get better multilateral institutions for this more integrated world have we actually learned the proper lessons from the East Asian financial crisis of the late 90s or is that just falling down a memory
hle I think we learned some we learned for example at the international monetary fund that it's not primarily or always a fiscal problem that sometimes the financial sector has a problem and mandating significant austerity at that point sometimes can backfire and I think think that lesson has been used in the global financial crisis also however I do think there is a very real uh ongoing problem which is how to deal with
capital flows abundant Capital flows because when they come in it's hard to say no to them but they don't stay that long and uh they can leave when uh you know uh on a whim again and again countries like now Argentina turkey get into trouble because they borrow in the good times and don't know how to deal with the bad times our final section of this chat of course is about you I call this the Ragu Rajan production function
just a few questions about your life your parents were diplomats you lived all over is it good for kids to live abroad and where did you go well yeah I think it's uh we had a a fantastic time I grew up initially in Indonesia and uh in Jakarta in Jakarta um in the Year of Living Dangerously we were there I remember um uh and my father coporates this because I was really very young gunfire in the streets as the suaro coup
was getting rid of the Communist sympathizers of the previous government 250,000 people at a low estimate died in that uh I I remember some of that I I don't know if it's a figment of my imagination we went to Sri Lanka when uh again they had uh an Insurgency uh we had student terrorists uh who used to blow up government vehicles by embracing people human bombs we had a year with no school we loved it uh my parents didn't
like it so much we then went to uh Belgium which was uh appropriately sober and boring uh it it was a fun place uh in in its um in the in the early '70s and then back to India which was enormously interesting India was still very poor and and where in India uh Delhi New Delhi and you had early training in engineering is that correct I am an electrical engineer how you become an economist well I I at some point in my third year I think I had
enough of fields and waves uh I could we do fields and waves in economics well I could touch and feel fields and waves and I wanted to uh do something where I felt uh more connected and I'd always been a fan of Believe It or Not John manard canes not in terms of I didn't know anything about what he uh his his work but I didn't know that he was such a Renaissance figure I said that's the kind of guy who's who's really impressive so you
need these these sort of superstars in a profession to attract people in not that anybody in there ever has a chance of getting there but it's a way of bringing people into the profession so I owe my economics to kanes in one interview I think you mentioned Marx as one of your favorite economists though of course you're not a Marxist but what aspects of marks do you find important or interesting for today oh I think he was
uh deeply sensitive of the importance of technology and I think I I sort of am more and more convinced that it's these technological revolutions which create the impetus for society to change and you know this book is really about how this technological Revolution has created the disruption but we still haven't seen the societal change and I think we will need to see that in order to adapt to it now you and Luigi's Z
Galas you've written so many pieces together dozens I think why has that particular partnership been so productive how does that work well uh Luigi comes from Italy I come from India we we both have uh maybe some cultural sympathy uh but we're also to some extent we we started with a very healthy skep skepticism of how industrial countries functioned I mean him from his View From Italy and I from the from from
India and and I think over time our skepticism has been born out unfortunately more uh than we would like it to be and to close last question but what general message would you like to leave us with concerning your new book the third pillar how markets in the state leave Community behind well in many ways this book is my view of why capitalism worked and why it's not working as much anymore and I think central to this this view is how
important democracy is uh democracy working through the community the community pushing its ideas up uh and and to some extent that we need to regain that ability for capitalism to work for all uh that's the effective capitalism that took us in the west over the last 70 years to where we are uh it's where I think we could go in the East but we need that that spreading of capital capitalism's um uh benefits
and there I think uh democracy in opening up capitalism and keeping it open is extremely important that's why I focus in this book on the community because it seems to me that the community is a basic building block of democracy and it's the guy at the bottom who has no influence who's essentially saying I want capitalism to work for me and that's when capitalism actually works it's uh when everything is determined at the top that it stops
working and we get the crony States whether they be socialist crony States or fascist crony States or even some versions of capitalist crony States Ragu thank you very much thanks for listening to conversation with Tyler you can subscribe to the podcast in iTunes Stitcher or your favorite podcast app and if you like this podcast please consider rating it on iTunes and leaving a review this helps other people find the [Music] show