The Third Pillar

by Raghuram Rajan

  AN AGENDA FOR SUPPORT

  Today, in the richest large country in the world, the United States, there is no explicit basic level of public support at the federal level, except for temporary assistance for families with children and assistance for the disabled. For everyone else who falls on hard times, there are a variety of programs—such as soup kitchens and homeless shelters—which are strung together with the help of the state government, the local government, private efforts, and charitable funds. These provide an informal and inadequate alternative to basic public support. Of course, people very rarely die from hunger or cold, and even then more because they are unwilling to seek out help or are incapable of doing so, rather than because help is not forthcoming. Nevertheless, too many go hungry and shelter is often insecure.

  It would not be much costlier to replace informal support with formal Beveridge-level support since it would indeed be at a basic level. For the same reason, such support would not raise significant public concerns about “undeserving” others getting help. Nevertheless, it would constitute a reliable safety net, a necessity for a civilized society in the possibly volatile days ahead, especially if it has not fostered basic capabilities in all. No rich country should create uncertainty among its people about whether they will have enough to live.

  If there were political appetite for more support, it could be delivered through the community to those who have resided in the community for a while (and to preserve mobility, the community would bear responsibility for a while for those who move out, with any conditionality porting to the beneficiary’s new location). Community support should be relatively equal across proximate communities—else beneficiaries could swamp communities where the benefits and conditions are most favorable. Communities should bear a share of the cost of benefits so that they have skin in the game, with the share increasing in average community incomes. Who would pay the rest? Ideally it would be regional or state governments, who are close to the communities and can monitor performance. In countries where regional or state governments tend to discriminate against certain communities, the federal government would have to monitor flows or take over.

  Finally, could community benefits be a fount of local corruption? Could local government abuse the system, picking their favorites for benefits, and denying them to those they do not like? Yes, but these are problems with any government plan. The more discretion local government has, the more programs can be tailored to local conditions, but also the more abuse is possible. Some rules will be necessary to limit abuse, but importantly, the community needs to be engaged and informed. The people in a number of countries are apathetic about local government today. As local government gains more power and funding, though, community members will increase their engagement and oversight. Not only do locals have the awareness that stems from proximity, they have an incentive to be involved because some of their own tax payments are at stake. As we have discussed, the ICT revolution also allows for a greater flow of information to the state, which can offer a second line of defense against corruption.

  A MORE COMPREHENSIVE GOVERNMENT SUPPORT PLAN?

  Some want to go much further in providing support. One proposal has been gaining currency as societies anticipate massive joblessness from technological change. It is to give every adult in the country a universal basic income (UBI), which will be enough to live a decent life, with no questions asked. The difference from the basic support we discussed above is that UBI would be set at much higher levels, and paid to everyone regardless of need. There is an ongoing debate about whether those who fear technological unemployment are too pessimistic, underestimating the ability of markets and human ingenuity to find productive uses for unemployed humans. History suggests the optimists have been right thus far, but this time could be different.

  UBI, in principle, is extremely simple. Each adult would get a monthly check for themselves and their dependents. If, let us say, it takes $20,000 net of taxes for a single person to live a modest but not difficult life in the United States, then a total of about $6.5 trillion will have to be distributed to the US population of about 328 million persons. Assuming (very crudely) that the 140 million taxpayers bear the burden of paying for the transfers they get (which are therefore a wash), as well as the amount transferred to the rest of the 188 million who do not pay taxes. In that case, taxes for the payers, net of UBI transfers, will have to go up by $3.76 trillion. This is approximately the size of all US federal revenues today. Even if UBI substitutes for other transfers like food stamps, disability, and unemployment payments, it will not reduce interest payments, defense expenditures, health care, and social security spending, the biggest elements of expenditure today. More modest proposals (I have assumed the same transfers per child as per adult, and some may argue $20,000 per person is too much) will require lower tax revenues, but in general any worthwhile UBI will require a significant rise in tax rates. Indeed, if it does not provide a reasonable living, it is easy to imagine journalists interviewing people living in squalor despite the intent of UBI, and fueling agitations for an increased UBI.

  There are other problems than just the political acceptability of a significant rise in taxes. UBI is an all-or-nothing scheme, and as such, suffers from the traditional difficulties associated with such a scheme. UBI essentially assumes that most people will not have a job, and there will be no point in them searching for one or attempting to retrain themselves since no new jobs will be possible. It is a counsel of despair not just for job seekers but also for job creators, because after UBI is implemented, any new job will have to be more attractive in pay and responsibilities than paid leisure, a difficult hurdle for any job to cross. Put differently, in the years to come it is quite likely that trucks become self-driving. If we do introduce UBI at that time, will we not prevent truck drivers from retraining as medical diagnostic practitioners (those who interview patients to elicit symptoms) or tax preparation assistants? These jobs do not pay enormous amounts, but they need to be done by humans, supported by computer algorithms. However, if the pay required to draw a person on UBI back into the labor force is high (yes, the income from the new job will be supplementary, but it will be taxed, and the erstwhile truck driver may already be fairly comfortable at home), then these new jobs will not be created, and the associated services will not be produced. Society will be poorer for it.

  Alternatively, we could wait till we reach a point where it is clear that no new jobs will be created. It will be impossible to be certain, for future new technologies may require ordinary human involvement again, so it will be tempting to wait a really long time, until it is a near certainty that there are really no jobs for ordinary labor. If we wait, though, what happens to the truck drivers who really cannot adapt?

  The proposal of community-based assistance, with attached conditions, could serve as an alternative, flexible way of achieving some of the aims of UBI. For those with poorly paying jobs or no job and large responsibilities, the community could offer a monetary top-up to basic income in exchange for the beneficiary performing some community services. This would not discourage the recipient from taking a better-paying job if one materialized. The community would be in a much better place than the federal government to identify local work opportunities, and could also nudge beneficiaries into private-sector jobs as they materialize. In a generalized deep downturn, or if there is actually widespread technological employment, the community would be overwhelmed. In such situations, the state would have to step up with innovative solutions, but for a range of lesser eventualities, community-based assistance should be effective.

  HOW WILL WE PAY?

  Ever since the 1970s, government debt in developed countries has been rising. With the population aging, the government’s pension and health-care obligations have also been rising. In the United States, the Congressional Budget Office projects that government debt will hit 100 percent of GDP by 2028, from around 80 percent today. The trust funds for Medica
re run out in 2029, and for Social Security in 2035, meaning that after those dates, spending under those heads will have to be financed entirely from the premiums paid each year as well as budgetary resources. Since the number of workers relative to retirees will continue falling with population aging, we should expect future workers will not just pay premiums for their own retirement benefits, but also make up the shortfalls in our retirement benefits. And the United States is far from the most indebted country among developed countries.

  Think, then, about some of the legacies we leave our children. Debt—that we have built up by spending more than our means, even in normal times, on grounds that growth is too slow for our taste. No saved funds to pay for our retirement and certainly none to help them with theirs. Political paralysis. Climate change, which we have done precious little to reverse. Automation, which by causing great fear of the future, has unleashed the beast in many of us . . .

  We can hope that the positive aspects of technological progress will enable us to offset these legacies; it will enhance productivity growth and overall growth without eliminating jobs on net; allow us to pay down debt and support entitlements; and give us new tools to fight poverty, disease, and reverse climate change. We cannot, however, place all our eggs in the technological basket.

  For a start, we cannot continue to run up debt, hoping the future will take care of it. We have to be more careful about spending borrowed money to boost growth, especially if growth is tepid for reasons other than weak demand. We also have to look closely at all the unfunded promises we have made to ourselves, and reset them in such a way that they do not exceed what is fair to ask future generations to pay, given the world we will leave them. The sooner we act to renegotiate promises—for instance, extending retirement ages, increasing social security insurance premium payments, and reducing cost-of-living adjustments—the more cohorts can share the cost of giving up some benefits. The longer we delay because politicians fear the political cost of touching the “third rail” of entitlements, the more the burdens will be felt by our children’s generation, and the more likely that instead of a smooth renegotiation, they will simply default on supporting us.

  The changes proposed in this chapter and the previous one are intended to help our system stay intact, to allow for trade, innovation, and reasonable levels of immigration through an inclusive national framework, even while skilling the workforce and creating a better safety net. They focus on preserving widespread access—to markets, to jobs, to capabilities, and to the safety net—while decentralizing power to the community so that people feel empowered. For these reasons, an apt description of the agenda is inclusive localism. Some of these proposals will save money, others will require spending. Undoubtedly, we will have to choose carefully, given overall scarce resources. We must remember, though, that worse than unfunded liabilities is to hand our children a broken system.

  CONCLUSION

  In this chapter, I have argued for a devolvement in powers from federal government through the regional government to the community. This will be an important step in rebalancing. Much as many small- and medium-sized companies help to distribute economic power and keep the unholy coalition of behemoth and leviathan from forming, the empowerment of many small communities helps distribute political power and creates another independent check on the unholy coalition. Vibrant communities also help build a sense of identity and purpose in a world where global markets and distant government are sucking out the air from social relationships. They also help diffuse the allure of divisive majoritarian national identities, which tend to also increase frictions between nations. Unfortunately, many communities are dysfunctional across the world, primarily because their old economic basis has disappeared. In the next chapter, we will examine how dysfunctional communities can be repaired.

  11

  REINVIGORATING THE THIRD PILLAR

  In the last chapter, we discussed the importance of inclusive localism—of an inclusive nation that decentralizes many decisions to the local, physically proximate community. However, most people identify with a variety of communities and belong to a number of virtual communities. Why do we care about the local, physically proximate community?

  The benefits of a vigorous physically proximate community include less divisiveness in nations with diverse populations when ethnic identities are expressed in communities rather than at the national level; greater social engagement in community institutions; a greater sense of self-determination for ordinary citizens, as power is decentralized back to the community; stronger local bonds that allow neighbors to fill in the gaps in formal structures of support; more room for political and economic experimentation, as well as political influence; and a structure to create meaningful local work that is not remunerated by the market. Let me elaborate on some of these.

  The community can be a particularly useful way to preserve specific identities or affiliations in a country with a diverse population. While many communities will be thoroughly mixed, with people of all hues and affiliations living together, some people may choose to live with others they identify with, so as to preserve a particular religious or cultural identity. The hopeful future of many a diverse nation may lie in a variety of communities, both mixed as well as concentrated ethnic ones, all living peaceably side by side, governed by the common law of the land, and coming together in the national market, in national endeavors, as well as national celebrations. It certainly offers a less oppressive and divisive alternative than one where a dominant monoculture, fearful of being swamped, imposes itself on all other cultures, generating permanent divisiveness and conflict.

  When members are in close physical proximity and work together for the community, they build a stronger community. As people run into one another, as they have to work with one another for local projects, social capital—as embodied in mutual understanding, empathy, and reservoirs of goodwill—accumulates. Social capital can be useful in building community institutions, overcoming ethnic divisions, as well as in filling in the holes left by more formal structures such as market contracts or social safety nets. Friendship will be what holds the communities of the future together when the older bonds of economic necessity weaken.

  Communities also allow a multiplicity of venues to experiment with economic and political governance within a country—a thousand different solutions can be attempted to a problem. Experimentation allows for learning. Not only will some solutions turn out to be more effective than others, different communities will choose different mixes of solutions given their greater knowledge of their specific problems. So long as there is a single market for goods and services, the country obtains the benefits of a common market but also gets some resilience from the variety of chosen strategies—one common economic strategy does not dominate the country, leaving the country vulnerable to its weaknesses.

  The community offers a venue to debate political positions, and when there is sufficient consensus, it provides the numbers to have political influence. Thus the community constitutes a ready-made mechanism for democratic political engagement. In many countries, local politics also becomes a learning ground and a stepping stone to national politics.

  Finally, the jobs of the future, as goods production and certain services are automated, will have a much greater social, perhaps even nonmarket, component. In the really long run, any profitable production of goods or services may well be done by machines, with humans needed only to innovate and to fill some gaps. Many people will live on incomes generated by government redistribution. Rather than many becoming employees of a national government, which could lead to the potential for authoritarian governance, far better that governmental powers and revenues be distributed to local governments in communities. Not only will these be a check on national government, they can also identify nonmarket local jobs that will allow those being paid by the local government to retain a sense of self-worth.

  What about the downsides of community? Every
community generates competition for social prestige. Such competition is not always bad—it can incentivize activities such as neighborliness that are not rewarded by the market. Nevertheless, it can also incentivize wasteful one-upmanship—a recent study suggests that bankruptcy filings for neighbors go up if a household wins a lottery, presumably as the neighbors try to keep up with the Joneses.1 Also, a community breeds jealousies, and even hatreds. It fosters conservatism. While we cannot presume that the good outweighs the bad in every community, members of a modern community have the option of leaving it if it turns out to be too oppressive. In general, communities will have to offer enough benefits to everyone so that they want to stay. That limits how bad communities can get.

  In this chapter, we will start by examining why virtual communities, professional associations, religious associations, and other such structures will allow for some of these functions of the physically proximate community but not all. We need vibrant physically proximate communities, and central to their existence is the presence of viable economic activity—nothing erodes a person’s self-worth faster than a sense that they have nothing productive to contribute. Despair, combined with alcohol, drugs, or violence, can erode the social fabric significantly. Even those who continue to hope may leave rather than succumb to the melancholy that surrounds them. In much of the rest of this chapter, we will discuss how weak communities in developed countries can recover from economic adversity. In many ways, their challenges resemble the developmental challenges that poor countries face, though there are important differences.