Raghuram Rajan | The Future of Capitalism and the Global Economy

Raghuram Rajan | The Future of Capitalism and the Global Economy


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and join our amazing community. With that, please enjoy this week’s episode. What’s up everybody, I’m Demetri Kofinas and
you’re listening to Hidden Forces where each week I speak with experts in the fields of
technology, science, finance, and culture to help you gain the tools to better navigate
an increasingly complex world so that you’re less surprised by tomorrow and better able
to predict what happens next. My guest this week was named by Euromoney
magazine as Central Banker of the Year in 2014, while serving as the 23rd governor of
the Reserve Bank of India. Dr. Raghu Rajan has also held the position
of chief economist at the IMF and is currently a professor of finance at the University of
Chicago Booth School of Business. He is the author of several books including
his most recent, ‘The Third Pillar: How Markets and the State Leave the Community Behind’. In this conversation, I engage Dr. Rajan on
a wide-range of issues from central banking and interest rate policies to geopolitics,
populism, and the systemic risks facing the global economy, including a discussion about
leverage loans, junk bonds, and emerging markets. We talk about the demographic challenges confronting
countries around the world, particularly developed nations with large, unfunded liabilities and
debt levels that exceed, in many cases, 100% of gross domestic product. We go into great detail about the Chinese
political economy and the challenges it faces with the prospect of slower growth, while
simultaneously exploring the challenges it creates for the United States amid a disintegrating
global order that was responsible for much of the growth seen in international trade
and commerce since the end of World War II. I ask Dr. Rajan if he thinks the market’s
confidence in central banks’ abilities to stem inflation in the event of another downturn
is misplaced or if extraordinary measures, including the outright monetization of government
deficits and bailouts of non-financial companies will come into play during the next downturn. I also ask the former governor’s opinion on
MMT, regulations, immigration, and how to reform education for the 21st century. With that, let’s get right into this week’s
episode. Dr. Raghu Rajan, welcome to Hidden Forces. Thank you for having me. It’s my pleasure having you on the program. I read your book, as I told you, all of it,
loved it, in particular, the first part. I liked the solutions that you proffered as
well. I thought they were very interesting, this
idea of localism. We’ll get into it, but I really appreciated
the historical narrative, the line you drew from the Medieval manor. Yeah, the book attempts to do a number of
things, wants to tell … It’s a love story, in a sense, of why capitalism worked. To put that love story together, you need
to pick up the pieces that make up capitalism. That’s where the historical part comes in. It’s telling you that capitalism is not just
about markets. It’s about a whole lot of pieces that fit
together and it’s come a long way from, as you said, the Medieval manor, which was all
about the community doing everything internally with no markets, with no real state. You said outright in the book that you intended
the book to be comprehensive, but not exhaustive. I think that you nailed that exactly. What was your intention in writing the book? Well, it was to tell the audience, the reader,
what was good about capitalism, why it’s not working anymore, and then here are some thoughts
on how to fix it. Now, I’m not preaching revolution. I think there are fixes that can help us get
back to the system that really works for everyone. The real problem is that policy makers are
just moving us in the wrong direction. Well, before we get into all of that, let’s
take the time to at least discuss the emergence of these three pillars, really the two, the
state and the market, from the community the way you describe it. Why did you pick classical feudalism? Why did you pick that period to focus on? Well, that was a period when the community
was really everything. All activity happened within the feudal manor. The feudal lord was essentially a lord of
all that he saw and was law. Markets and the state, for all practical purposes,
were in that community. There were so-called nations, but they weren’t
really integrated markets or with an integrated government. Each manor with its high walls was essentially
its own little mini-state, was very inefficient, didn’t trade a lot, but it had a very strong
community. That is there were lots of mutual obligations. If I remember correctly, or at least my interpretation
was, there were two primary forces that drove the beginning of the growth of the market. One was the consolidation of manors, which
expanded the size of the economies, right, because they were closed systems. Another one, and I want to ask you about this
more specifically, was the creation of a secondary market for trading third-party debt. Right. How significant was that? Well, I think the most important was the breaking
down of the manor walls, so to speak. The walls were blown up by gun powder and
that made the nation-state much more feasible because somebody who had a lot of power, a
lot of money, could buy the cannons and break down those walls. Once you had an integrated market, it also
implied integrated governance. Those were very important, of course, in making
the market economy possible. I think to some extent the ability to raise
money was critical here and that’s where first, the ability of governments to issue debt and
for investors to know they would get paid back, because a lot of the time, kings defaulted
on their creditors. To enable that to be possible, you needed
constitutionally limited government, which emerged in the United Kingdom. You had to trust the government to repay you. That was number one. Of course, once you trusted the government
to repay you, others could also trust and debt became more liquid. You could sell it to others. That helped in the process, but I think the
biggest part of this was to limit the government. Is it fair to say that the market was the
driving force because of its potential to grow the pie? That that was putting the pressure of creative
destruction in the … I think one of the themes in the book is how
markets and governments are symbiotic. We usually think of them as being opposed. More government, less markets. More markets, less government. These were the battles of the 20th century. Before that, they typically grew together. As the market expanded, the need to govern
the area over which there was a common market expanded. We can see some of that even today. Think about the European Union. It’s an attempt to create a Europe-wide market,
but which also means Europe-wide governance, which is the EU. That’s the sense in which both of them work
together. That’s interesting. I’m looking forward to discussing integration
in Europe as an approach towards creating efficiencies or unlocking potential growth,
which was the model the that Europeans went down, as opposed to the Americans who chose
deregulation, particularly financial deregulation. Just for those that haven’t read the book
to understand, the way I took it … As I said, the market ends and the state emerged
from the community. The market seemed to be the driving energy,
the creative energy. The state, its primary role was to protect
the gains, to enable, of course, an environment, rules of the road so to speak, for optimal
growth, but to protect those gains and eventually to protect certain rights of the community. The role of the community was ultimately as
the axiomatic holder of legitimacy and as arbiter of conflict and dispute. That’s the dynamic between the three pillars? That is the dynamic. I think the state to govern the markets and
the community to ensure broadly justice and opportunity. Of course, this was not as explicit as we
emerged from feudalism. The community gained power over time only. As we saw the emergence of democracy, as a
broader segment of people got the vote, then a group of people outside the narrow elite
who dominated the markets, dominated the state, got the chance to express their opinions. That created a sort of control. Although, the process of capitalism and made
sure that it didn’t coalesce into the cronyism, which even Adam Smith was very worried about
in his ‘Wealth of Nations’, that there was always this pressure towards limiting opportunity
for the others by limiting competition. There was a constant negotiation. It was an evolution over time, over the centuries. Right. It’s how we went from Hobbesian view to something
more along the lines of a Thomas Paine or John Stuart Mill. Right. In a sense, you have to see that the evolution,
why the process took place, it was when the government promised you that they won’t steal
your property that it became possible for the market to become more competitive. Why? Before that, you needed concentrated power
in markets to stand up to the government. You had guilds, for example, as a protection
of business rights. As the government could limit itself and promise
that it wouldn’t steal your property, then I became possible for individuals to become
more competitive. You had this laissez-faire philosophy come
in. Let’s free the markets. Let us do what we can. Don’t interrupt that process. This is clear in the book and I think it’s
clear today. In fact, today it’s a perfect example because
of the multi-polar world we live in. In this period of question, it was the ultimate
multi-polar world, right? Classical feudalism. There were the forces that were at work internally
within the dismemberment of the manor, but then there were also the multi-polar dynamics
outside. Those were all working symbiotically to create
this evolution. Exactly. Underlying all this is a common theme that
is in Europe, which was many of these developments took place, a competition for power. Power, even in those days, meant greater economic
strength. Which country had greater economic strength? A country which could have more dynamic markets. How do you get more dynamic markets? How do you get more productive efficiency
in the markets? You have to convince them that, in a sense,
what they make is going to be their own. You’re not going to seize it as a state. So, countries that could get to constitutionally
limited governments typically had a greater possibility of a stronger army and therefore
more prowess in the competition amongst European states. Along those lines, one of the things that
you discuss in the book has to do with balance, balancing the negotiation process, striking
that balance. What would be a good example historically
where that balance was struck? Would it be maybe the post World War II order? Before that I would say one of the biggest
places where you can see this, because there are parallels today, it’s interesting, is
the populous movement in the late 19th century in the United States. What was happening then is a growing sense,
certainly amongst the farmers, that corporate America was discriminating against them. The big banks were charging them excessive
interest rates. The money trust. The money trust, as you say. And, the big railways … there were railway
trusts … were also charging them extortionate prices to transport their grain. They had especially lots of anger against
the railways. Because of the opening up of the West as a
result of the railways, they bought the land. Now, they couldn’t fund the land in a profitable
way with the high interest rates and the high cost of transportation of grain. They were angry and they protested. This was the first populous movement. Amongst the consequences of this, you can
say were antitrust acts, the Sherman Antitrust Act, more direct elections. Senators were directly elected after this. You also had a lot of regulation coming through
the successor to the populous movement, the progressive movement. The FDA, for example, the Food and Drug Administration,
was set up at that time. Essentially, people were saying capitalism
doesn’t work for us anymore. It’s too concentrated. Let’s make it less concentrated, give more
opportunity to people. Here are the things we need to do. That’s a restoration of the balance. This is the point about the tendency of capitalism
is for the state and markets to coalesce. What the third pillar, the community, does
is rise up and protest and prevent that coalition. That was the community that did that in that
case, right? Many communities getting together through
democratic protest. But, it isn’t always the communities. Sometimes it’s the market. Does the state ever act as a rebalancer? The market certainly does. Well, the state does. If you think about the New Deal during the
Great Depression, what happened was communities were overwhelmed. The size of the calamity was really beyond
what any small community could bear. Of course, what the state could do is it could
bring its tremendous resources to the problem and say, “Okay, we’re going to do works projects
to put people back into employment. We’re going to do social security.” In fact, President Roosevelt basically said,
“This calamity is beyond the capacity of any community to handle and that is why the state
is moving in to provide support.” Is populism, like the community, doing a manual
override of the controls that they’ve handed over to the state? Is it going over the top? That’s a great way of putting it. I think, in some sense, it is. The danger with populism is that it could
go any which way. When it asks for greater opportunity, it could
restore a balance to capitalism, make it work for all. But, when it is saying, “Look, it’s those
other guys who are the problem,” it shrinks opportunity to the privileged. In this case, not so much the elite, but the
privileged majority that didn’t grow up in the country. That becomes problematic because that makes
capitalism less effective. When populism turns protectionist, once again,
it makes capitalism less effective. You actually draw a distinction in the book
between left-wing and right-wing populism. What is that distinction? Well, we see that today. The left-wing populists … These are all,
in a sense, caricatures, but left-wing populists basically see the elite as the enemy, as do
all populists. But, left-wing sees the value of redistribution. Let’s take from the rich and give to everybody. That’s going to be the source of salvation. The right-wing populists are not so much about
fingering the rich as the enemy. Again, the elite that they’re more worried
about is the professional class, the East Coast bankers. Those are the elite that they’re worried about. Really want they want to do is keep out all
those interlopers, the immigrants, the minorities who are excessively privileged by the elite. Now, these are all caricatures, so reality
is- One is more conservative in its approach in
terms of wanting to protect. The other one is more progressive in terms
of wanting to take. That’s the right description. Absolutely. Right. What does the rise of populism today, in the
United States and Europe, imply to you? Well, on the one hand, it is a source of … As
populism movements everywhere, it’s a signal. It’s saying that things are wrong. Do something. It’s in that sense that it could be a corrective. The worry, of course, is when it takes the
populist nationalist form or the majoritarian populist form that is there is an in-group
in the country which deserves what it gets and there’s an out-group in the country and
also enemies outside the country who are trying to take from us. When it becomes that sort of populist nationalism,
the danger is it moves us towards conflict, conflict within countries, between communities,
conflict across countries, between nations. Internally, there is the nativist aspect of
this right-wing populism. It’s seen in terms of ‘build that wall’ or
the anti-immigrant sentiment. And, then externally there is the nationalist
aspect character of it. We’ve seen that, for example, with the United
States vis-à-vis China. Interestingly enough, also with Russia, though
with Russia, it’s the left that’s been driving that discord within the country, which I think
is very interesting. That suggests to me that there is a consensus
around that in the country perhaps. Well, yeah. Historically, the right has driven the push
against Russia and now the left has joined in. I agree, there might be more of a consensus
on that. I want to ask you about this … I bought
it up a few times … the change in the international order. Yes. It seems to me it’s really picked up. Recently, Italy became the first member of
the group of seven major economies to officially sign up to China’s One Belt, One Road initiative. Russia has given open support and, I think,
has sent troops to Venezuela. That is a disregard of the Monroe Doctrine,
a complete affront to the U.S. foreign policy right in their backyard. You could say that the United States did it
to the Ukraine as well. Just simply in terms of precedence, I don’t
think we’ve seen anything like this since Cuba. Yeah. Of course, France and Germany, the relationships
between the United States and these countries, Brexit. India’s recent anti-satellite missile test,
very concerning. Of course, North Korea. Do you feel that we’re hitting a new inflection
point in terms of the disintegration of the world order that was created by the allies,
led by the United States, after World War II? Well, as I describe in the book, the post-war
World War II order was created with a benevolent hegemon, using what is sometimes a Marxist
term. The U.S. was by far the most productive economy
at that time. Of course, the USSR was a competition in military
power but was no match in terms of economic power at that time. Because of its dominance, the U.S. could afford
to be benevolent. The rules of the game were created in such
a way that it favored the United States, but the United States never actually exercised
its power significantly in these organizations. A fair amount of democracy built in, and the
general sense was not so much it’s me versus you, but we grow together. Your growth is going to help my growth. The Marshall Plan was one big factor, for
example, in showing that the U.S. would put its money where its mouth was. Again and again, when we look at the system
the United States created, it was a system which emphasized common benefit. What’s happened, I think, is a couple of things. First, of course, challengers have risen to
the United States’ pole position in terms of economic might. China’s the biggest example. Second, the U.S. had European allies who were
always closely knit, but now a number of countries are becoming bigger than these European allies. There’s a very real question about whether
these European allies should continue to hold their place in these various organizations
or whether they should be substituted. That means a very different mix at the table,
if you will, to call the big powers to a conference. Certainly, it would be the United States. It would be China. But then amongst the European powers, if you
took them by themselves, probably Germany would be the only one that would qualify and
Japan. If you increase the table size a little bit,
the UK, France, but then India and Brazil also. So, it’s no longer the G7. Right. That’s creating tension. Just to hammer that point home about the United
States, it was truly, I think, an unprecedented reaction to the end of World War II because
the U.S. played both the role of protector, a father figure, with the nuclear umbrella
and just the commitments to Europe, but then also mother, progenitor, fostering, helping
growth, being an open market and allowing these other countries to erect tariffs on
their goods to help grow their local economies. It was a supreme act of benevolence. It was taking ownership of the global order. It was taking ownership. It was being the resident claimant. When problems arose, the United States was
willing to either send its military power or its economic power to help. Now, not every country took this as benevolence
and there were frictions no doubt. There were Cuba. You raised the issue of Cuba, which has been
a pariah for a long time. But by and large, the world benefited from
this. What’s changed, of course, is other countries
now coming to the table and saying, “We want a place. More than that, we didn’t make this order. We want an ability to change the rules if
need be.” Interestingly, at this point, it’s not so
much the clamor to change the rules from the other side which is important, it’s that the
United States itself is backing off from the rule-based system it created. It’s really interesting. The United States, I think you would agree,
it tried to do … What it did for Europe, it tried to do that for China. It tried to play that role, in a sense. It opened up its markets with the expectation
that China would evolve, would become the biggest economy in the world, and that they
could fold it into the global order, that the United States would be able to maintain
its global dominance. This did not work and I think the real turning
point for the international order was the invasion of Iraq and then, of course, cemented,
I think, in the global financial crisis. Also, arguably, there was a period over which
the hope in the United States was that China would become more democratic. Yeah. That the party itself would democratize and
over time, like the PRI in Mexico, the party would give way to a multi-party system. It may well be that China’s future prosperity
lies in making that transition. However, I think since 2013, with the advent
of President Xi, the democratization in the Chinese party has seemingly turned around,
that it is powers becoming more concentrated, there are fewer rivals to top positions and
so on. That’s been a big source of worry because
Xi is moving away from the more private-sector led, more democratic structure to a more state-led,
perhaps more concentrated power in one leader. I think that rings alarms bells in Washington
because how do we know that the AI that they’re developing will not be used against us? Right, and that’s the concern. Not just specifically with China, but as you
get more players in the international order, the dangers increase exponentially. Because the levels of bilateral complications
increase. It does. My sense is that democracy can be a unifying
factor only to the extent that democracies are potentially more transparent, swing less
on the whim on an individual. To that extent, there has to be a more open
process of building up hostilities, which allows action and reaction. It allows people to have time. They know that things are not going to turn
on a dime and therefore there is a little more ability to build trust and to react to
situations of conflict. It’s very hard to envisage, for example, a
serious conflict between the United States and Western Europe. My sense is that over time, given the right
circumstances, China will find that it needs to democratize. Not just for reasons that this is going to
prompt more innovation, et cetera, but that system will work better especially closer
to the frontier of growth when it doesn’t have dominance by one party. But, we have to wait and see. Well, you spend some time in the book, and
we’ve done it on this show in a number of episodes, discussing the history of China
from Deng Xiaoping through Tiananmen to today. Initially, the opening of China also led to
calls for reform and more democratization. Then, the government clamped down and the
deal was, we’ll give you growth in return for remaining in power. The danger, of course, is that if growth drops
in China or if they cannot keep this up indefinitely, will this result in people asking for, as
you say, the community, the community pillar, in this case, asking for greater democratization
and what will the government do in response? Will it clamp down like it did in 1989 or
will it open up? I don’t know the answer to that question. It sounds like you’re saying you’re hopeful
that it will lead to more democratization. Well, my sense is that when the party dominates
and it wants to hold onto power, without excessively course of practices, what it has to do is
give people a sense that they’re going the right direction. The point you made about growth being what
it promised people. But, as you get closer to the frontier, the
kind of blockbuster growth they had, the 10, 12%, becomes harder and harder. You really have to let people figure out what
the new pathways for growth are because you can’t build bridges anymore. You’ve built all the bridges there are and
all the railroads. The bridges that needed to be built, you need
more sophisticated forms of growth. That’s when the party’s less able to direct. But still, if people are holding the party
responsible, that means the party has a great incentive to intervene every time things turn
down as we saw the party intervene in the stock market in 2015, as you see the party
now trying to open up the spigots for growth, open up credit so that growth takes place. Party control of a market economy can become
disastrous. Right. That’s my sense that so long as the party
believes it has a responsibility to deliver growth, people will rely a lot on the party
and the party will be forced to do things that, in fact, compromise long-run growth. Right, and a fear of what happens if they
don’t act. Also, the culture doesn’t exist. How important is a market culture to foster
a market economy? It isn’t just simply the government loosening
up capital controls. I think the Chinese, as you see Chinese diaspora
across the world to the extent that it reflects any element of culture, are very entrepreneurial. Sure. Even within China, I think you can see that. The real issue is are they allowed the freedom
to do what they need to do? They’ve built fantastic firms, Ali Baba, Tencent,
but now the government is getting into them and the question is, is that going to crimp
their growth? I want to come back to the rest of the world
because I think one of my thesis has been that whereas domestic issues were the primary
cause of economic dislocation in the United States or financial crises in 2008, I think
there are greater risks, geopolitical risks, that could drive market actions in the future. So, I think it’s important to focus on that,
but I want to come back domestically here in the United States and I want to talk about
some issues that you brought up in the book, which I think are super important. Right at the very top is debt demographics
and unfunded liabilities. How important is the current debt landscape
in the United States specifically, but also globally? What the United States does with the dollar
impacts the rest of the world and that impacts U.S. financial markets. Are you concerned about the total levels of
debt in the United States including unfunded liabilities given the demographic challenges
and the need for more growth? Oh, yes. It is a source of concern, of course. Perhaps less so than some other industrial
countries, but overall, we’ve seen a build up in debt over the last so many years. We have significant unfunded entitlements
set in place when growth was much stronger and the population looked a lot younger. But, populations are aging rapidly. Less so in the United States than, for example,
Germany, but aging populations mean those entitlements will have to be paid sooner rather
than later. And, if you’re not having kids, it also means
it will have to be paid by fewer people. That’s the big concern in the West. How do we deal with this? Now, Japan, for a long time, has been facing
this because it’s the most rapidly aging country at this point. But, there is an aversion to any kind of immigration
because there’s a sense that we’re a homogenous culture and they believe they will make it
up by greater participation by women and the elderly. They’ll stay longer working and will draw
more women in, but will also use robots. Now, that is becoming harder to contemplate
at this point. Yes, Japan uses a lot of robots, but using
them in a way to substitute people is going to be harder for all. Robots don’t consume. You know what’s fascinating, Doctor Rajan,
it just came to me now. In an effort to protect their culture from
the culture of other people, they are allowing somehow their culture to be invaded by automative
culture and robotic culture because the use of robots and automation has impacted the
Japanese culture. It isn’t that they have not been impacted
culturally. They have. You’re absolutely right. It is trading off one for the other. Their belief, I presume, is that they can
control the robotic culture while they can’t control people. But my sense is they lose a certain amount
of vibrancy. They still, however, have that choice. Countries that are already mixed because they’ve
got a fair amount of immigration in the past but are aging rapidly, it’s harder for them
to say, “We will maintain homogeneity,” because what is happening is the immigrant populations
are growing faster than the “native” population. One of the advantages of the United States
is that we do have a lot of immigration. We haven’t fallen victim to the same types
of demographic issues that the Japanese have or that the Chinese are going to have due
to the one-child policy. But, I wonder, is there not an argument to
be made for actually wanting less population growth? Granted, if you were to take the debt off
the table and if you were to take this obsession with gross domestic product off the table,
given some of the environmental issues we have and the issues around resource availability,
wouldn’t there be an argument to be made? Simply, you brought up the Bubonic Plague
in your book. The Bubonic Plague played an important role
in freeing up the market in Medieval Europe and enabling the growth. Would there not be an advantage to actually
seeing a drop in global population if we could resolve some of our liabilities issues? Well, yes, but how do you want to achieve
that? Do you want to achieve that through a plague
which will have enormous adverse consequences or through a war, the Malthusian ways of achieving
a population a decline? Or, as has sometimes been put, through prosperity
which often tends to be the best contraceptive. As people get wealthier, they have fewer kids. Now, we already see a lot of that in the West. In fact, in Japan, the problem is filling
the villages which are emptying out as the elderly die out. But, we have to focus on more, in a sense,
sustainable growth. We have to focus on better consumption. Sometimes that means reducing consumption. Sometimes that means moving it towards more
environmentally friendly consumption. But, I think the world can sustain greater
populations. It would be nice if, by magic, we could stabilize
and not have this significant aging stabilized at a certain level. I think that will take time. How important of a role as the debt overhang
in Japan played in driving down growth and fertility in the country over the last two
or three decades? Well, there are a variety of explanations. Some people argue it is the dominance of men
in Japan which makes women reluctant once they have economic freedom to essentially
give some of that up and go back into the household and have more children. That’s one argument I’ve heard. But, it’s hard to say what has resulted in
this very rapid decline in population growth in Japan. Apparently, also, younger generations are
disinterested in sex. This is also something that I saw a recent
article in The Atlantic magazine for the United States. There seems to be increasing studies coming
out showing that younger generations are less interested in sex than older generations,
which I think is very interesting. Yeah, well, that exceeds my expertise. I don’t know why or how that would be the
case. Are you familiar with any of these studies
and articles? I certainly know that government attempts
to enhance procreation, by and large, have been failures. We pay you to have more kids. Nothing sexy about that. But, the cost of bringing up a kid looms large
in the eyes of a developed country family. All right, staying on this point about population,
but switching to the immigration side … Now, we’re going to start to play with some of
the solutions that you put forward. One of the things that we’re seeing in the
United States is that people are self-segregating. This has been largely seen as problematic
in the media, but you actually point to it as being a possible way of empowering the
community. Well, let me put it this way. I’m not for segregation and I worry very much
about economic segregation where the rich leave a community because they want better
schools for their kids and they move into communities of their own leaving the poor
behind. This economic segregation has been rife in
the United States over the last 20, 25 years, which makes the people left behind, gives
them much less opportunity. They can’t really come back into the economy
because having good schooling is extremely important. I’m not for economic segregation. At the same time, it seems to me that when
you think about community identity, when you think about cultural continuity et cetera,
people naturally want a vehicle to express that. They want their culture to continue. It seems to me that the right vehicle for
that is at the community level rather than the national level. That is, if you do want to spread Mexican-American
culture, for example, let that be within the community so long as you also understand you’re
American. There’s a hyphenated part to it. And, that American part ties with the Mexican
part. You’re really part of both worlds. That, to my mind, is less dangerous than perhaps
an insistence that everybody across the nation subscribe to one dominant culture at the detriment
of their own culture. I’m talking about diverse countries. Right. Well, you talk about the point about people,
the advantages that are gained. I think you refer to it as hereditary meritocracy
where it turns out that, and I think you cited some studies as well, people change their
behavior dramatically once they have children. That that’s one of the driving forces for- Substantive segregation, no. Absolutely. What is happening is technology has made the
returns to good education much higher than in the past. It didn’t matter in the past whether you had
a … You could start a car dealership and make a ton of money that way. But today, you need really a strong education
to become that top lawyer, to get those top incomes. When a professional parent who’s looking at
their kids, they’re basically saying, “Where can I get the best education for my kids?” Typically, it’s no longer a middle-class community
school. It’s either in a private school or it’s in
one of those rich suburbs where plenty of money and plenty of support is available and
there are plenty of well-brought-up kids in class to surround your own kid. That’s the segregation of the successful that
I’m talking about, which leaves others behind. Who’s segregating? Well, the people who are already part of the
meritocracy. So, we have an increasing meritocracy because
technology has made that, but also that meritocracy’s become hereditary because only my children
can succeed not the children of those workers or those people who are less successful today. Do you think our approach to education in
the United States is outdated or even broken? Well, it certainly needs fixing. You see complaints. One of the recent news events was about the
Stuyvesant School in New York, about the low-level of minorities. That’s right. Now, it is a meritocracy. There is an entrance exam, but people who
haven’t had the training up to then do much less well than, for example, people from groups
that have much better professionalism early on and have better training. I think the majority of the students are Asian
descent. I think I look at- Are Asian-Americans, absolutely. Remarkable. Absolutely. That’s the worry that, in a sense, it’s no
longer a level playing field and a lot depends on who you’re born to and which community
you’re born in. You talk a little bit about, or maybe a lot
about, solutions to education. We did an episode with a gentleman named Fred
Swaniker, who is the founder of the African Leadership University and also a series of
other institutions in Africa, and we discussed something that I think you alluded to which
is this idea of … Because in Africa, they have a problem. They have lots of students, not many teachers. So, what is the role of a teacher in such
a society and he talked about the role of a teacher being that analogous to a coach. I think you talk about something similar and
it really resonated with me. Have you thought extensively about what the
future of education looks like? Well, I think the problems in some classes,
especially when you have students from way different backgrounds, is what level do you
teach at? Do you teach at the average level? Do you teach at the smartest kids or do you
teach at the least prepared kids? Whatever level you pick at, you lose some. You teach to the smartest, nobody else understands. You teach to the least prepared, everybody
else gets bored. How do you keep everybody engaged? That’s where a new philosophy and, of course,
philosophies come and go, but a new philosophy is move the lecture to home. Let people listen to what the class is about
at home, but in the class, they work on specific problems where the teacher moves around helping
each student address problems that are suitable for their level of competence. Over time, the less well-prepared get better
and move more towards the average. Of course, the smartest will still be ahead
of the class, but you get a more even class because people are really being tackled at
their level of competence. This inversion of the classroom, no longer
lecture in the classroom homework at home, but lecture at home … you listen to it on
tape, listen to it online … and come to the classroom to do homework, is something
that’s catching on. In some of the poorest areas in India, I’ve
seen this work. It seems to me that in mixed classrooms, something
like this may be the wave of the future. Well, a lot of people in developing countries
and also in Europe take advantage of the free content that’s on the internet. A lot of people learn that way. Right. That’s part of what I’m talking about. Technology has created problems, this segregation
of the successful is because the market demands so much higher skills. But it also creates solutions and we should
use technology to, in fact, embed those solutions. I think we also have an antiquated view of
technology that was created for a different time and for the purposes of staffing bureaucracies
and corporations and isn’t really taking advantage of the tools afforded to us by modern technologies. Right. No, and it seems to me that … These solutions
seem incremental, but this is actually a revolution in education. Right. Oh, huge. I don’t think that what we need to do is throw
away capitalism. It’s work, but we have to recognize the rich
supports that are there around capitalism, the role of the community, the role of the
pre-market support like schooling, the role of the safety net. And, we have to think about what is broken. How do we rebuild it? That, to me, seems you need to go to these
specifics and fix them rather than say, “We’re going to have a socialist revolution or we’re
going to throw out all the immigrants.” Those seem to me … Well, they’re drastic
and they sound as if they’ll do something, but they forget the balance. It’s very hard to have a socialist revolution
and still have democracy. Right. Yeah, your approach of inclusive localism,
as you call it I believe, is much more decentralized. It’s decentralized. It’s let’s fix 50 different things in order
to make this work. It’s not soak the rich, tax the rich. More taxation maybe on the cards at some point. Point is you don’t know. We don’t know. The whole point of your model … It’s funny
’cause we’re talking about this before we turned on the microphones. I’ve heard other interviews that you did or
one specifically where you kept being asked for specifics, but I think that goes against
the point of your argument which is the idea of giving up control, giving up more power,
giving up more control. I wonder how much of that is because you’re
Indian. Well, I think it’s part Chicago, part Indian. I’ve seen the damage that central governments
can do but also it’s actually also from my international experience. When you look at why and how countries grow,
it’s never because in Washington we decided we have this development strategy, we’re going
to send aid into that country, it’s going to grow. Often the countries that grow are not the
countries you thought were most likely to grow. At one point in the 60s, South Korea looked
like India and the view was India will grow much faster. All the development economists went to Indian. Nobody went to South Korea. They developed faster and now they’re a rich
country. I think growth comes spontaneously. It comes from within and that’s why I’m saying
decentralization, empowering the community, helps communities pick up. Even devastated communities like the Pilsen
community I talk about in the book, which had very high rates of crime, murder rates
which were extraordinary, but still managed to pick itself up. You can’t look at a community and say, “How
can they do it?” I think also it’s going to be very difficult. Let’s assume that the Democrats win in 2020. They’re more likely to win if the economy
goes into a recession or if financial markets drop by another 20 or 30 or 50%. But then it’s going to be very difficult to
raise taxes, right? Well, it is, but there’s no consensus on these
issues. We can get a consensus for tax cuts if the
Republicans are a majority. You can probably get a consensus for some
tax increases, but not beyond a certain point, if the Democrats in the majority. The reason I ask is because one of the schools
of economics that’s become very popular recently among some of the more Socialist Democrats
like Bernie Sanders or Ocasio-Cortez, is Modern Monetary Theory, MMT, particularly it’s view
around public debt as a constraining source on state action and that really all that matters
is inflation. If, again, the Democrats were to be elected
in 2020 and we were in a recession say, or the markets were taking a downturn, they could
turn to these tools and monetary expansion instead of raising taxes and this could be
an entirely new paradigm of operation for the American economy. Look, I believe Modern Monetary Theory takes
what is a set of circumstances and extrapolates it ad absurdum to some extent. At low interest rates, printing money is like
printing debt. They’re very equivalent. There’s only some level of debt that a country
can issue without, at some point, a concern about whether they can repay it. A lot depends on what’s done with the money
that’s issued. If it goes immediately in funding consumption,
in redistribution to people to spend as opposed to investing either in the human capital or
in long-run assets, there is a very real question of who’s going to repay it? At some point, the markets turn against you
and no longer accept it. With currency, the view that you’ll default
shows up in inflation. You get higher rates of inflation. Yeah, well, for a little while- Which is non-linear, inflation. Which is non-linear. Non-linear. The idea that we can simply look at inflation
as an indicator to decide when we can stop printing- Right, it just takes off at some point. Look at Venezuela today. The point is, you have some room, but you
are not divorced from having to think about whether, in fact, what you use it for is really
productive and whether it will generate the returns over a long time. It is possible for the markets to lose confidence
on a dime. Every emerging market has faced that including
India, which meets the conditions for MMT. It issues debt in its own currency. But, trust me. We do know if we issue more than a certain
amount of debt to finance stuff we will have problems. It’s also funny because it feels like we’ve
gotten to the place where no one actually expects us to pay the debt back. It’s an odd thing. The national debt no longer really is … It’s
not something based on people’s expectation that it will … At some point, there’s going
to be either a soft or hard default on … Well, at some point … There is, in a sense, as
you print money, but there’s no expectation. We’ve gone way past the debates that we had
in the early 90s around the national debt when it was at $4 trillion dollars. Well, it is to some extent a confidence game,
right? At this point, you can issue a lot of debt
because there is appetite for it across the world. People are looking for relatively safe assets
and the U.S. looks relatively safe compared to other countries. That doesn’t mean if you go out on a limb
beyond a certain point people will still have trust. In a sense, this is one of those equilibria
where you have to be dependent and reliable in order to enjoy trust. If you are seen as unreliable, at some point,
that trust will break and then it will be impossible to issue any more. We’ve seen this play out in other countries. There’s no reason if circumstances change
that the United States’ position will remain as solid. Dr. Rajan, I want to go into more details
with you on that and I also want to specifically talk about the Fed and interest rates, and,
in the context of what we just discussed, this prospect of reentering this paradigm
of inflation versus deflation, and also what your concerns are for this market going forward
and what areas in particular you might be concerned about, like leveraged loans or the
corporate bond market or emerging markets. But, we’re going to do that in the overtime. For our regular subscribers, you know the
drill. If you’re new to this show or you’ve been
a long-time listener but are not subscribed, you can do that directly at patreon.com/hiddenforces
and gain access to the overtime segment through the Audiophile subscription. Or, if you want access to the transcript or
the 21-page rundown to this week’s episode which is full of links and charts and additional
material related to my preparation for my conversation with Doctor Rajan, you can subscribe
to that as well. All of that through Patreon. Again, patreon.com/hiddenforces. Dr. Rajan, thank you so much for coming on
the show. Thank you very much for having me. That was my episode with Dr. Raghu Rajan. I want to thank Dr. Rajan for being on my
program. Today’s episode of Hidden Forces was recorded
at CMD Design Studio in New York City. For more information about this week’s episode
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6 thoughts on “Raghuram Rajan | The Future of Capitalism and the Global Economy

  1. Yes, Americans care about the wellbeing of the Chinese more than Chinese do themselves. If China can be democratized, China will be stronger, Chinese will have even better life… that's why America wants China to be democratized.

  2. Appreciate the fact you are shedding some light on MMT.

    People should have been doing that five years ago before its mainstream popularity. With the exception of Robert Murphy, the Mises Institute spent more time pretending Mises was an ethno attracting Trump supporters than dealing with the inconsistencies of MMT.

    The ulitmate constraint, of course, isn't resources but malinvestment, which may not show up until later, as productive projects don't come to fruition.

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