The esteemed economist and former Governor of the Reserve Bank of India talks community, COVID, and inequality.
Raghuram Rajan is the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. Between 2003 and 2006 he was Chief Economist and Director of Research at the International Monetary Fund. From September 2013 through September 2016 he was the 23rd Governor of the Reserve Bank of India; in 2015, during his tenure at the RBI, he became the Vice-Chairman of the Bank for International Settlements. He’s also notable as one of very few economists or public figures to have predicted the 2008 financial crisis.
Alex 0:03
Thank you, I really appreciate you making the time. So there's, I'd say about 1,000,001 questions anyone might have for someone as well established as yourself. But I'd like to take a moment to start at the beginning, you've had this incredibly illustrious career. But I'd love to hear a little bit about some of the key steps that led you there was-- was economist the dream job from childhood?
Ragu 0:23
[Laughs] I'd be a very boring chap, if I wanted to become an economist from a very young age. No, I wanted to be a fighter pilot. And you can imagine what a distance I have come from there. I started getting interested in economics sometime around, I would say high school when I was interested in math, but I also liked history, I liked some of the social sciences. And a friend told me, hey, economics is the area that you should be looking at. And it's got all these funky ways of predicting human behavior. And you know, you read Asimov's Foundation, and you say, well, maybe there's something to this, let's explore. And so I started reading very, very crude economics textbooks, read a lot about Keynes. He was my hero, as he was the guy who actually did something, was also a renaissance man of sorts. So yeah, I got interested in economics. However, in India, what happens is you-- everyone sits for the IIT exam, the Indian Institute of Technology. And you work like a dog for many years. Now, you work for many more years than we used to work then. But if you're successful, it's very hard to turn it down. It's one of those sunk cost fallacies. You work so hard, you think it might be worth something, and you take it up-- it was a great experience, but it was very far from economics. And eventually I came back.
Alex 1:48
Definitely. So was it the behavioral side that intrigued you would you say?
Ragu 1:53
Yeah, I mean, you know, around my third year at IIT, I was in electrical engineering, somehow, it was one course, which always stuck as the point where I said, not for me, and it was fields and waves. It's, you know, Maxwell's equations and stuff like that. And I'm sure if I'd understood it better, but just seemed to me a little ethereal, stuff happening out there. I couldn't touch a field and a wave. And I understood the equations, but I didn't really understand what was going on behind it. I said, No, no, I want to deal with real people. And that's when I said I'd move back into something which was more human behavior.
Alex 2:32
Absolutely. So I mean, among lots and lots of other things, you've become quite well known for your work in economic development, and more recently, for your message of empowering communities in The Third Pillar, your latest book, is there anywhere in the world do you think is doing community particularly well today?
Ragu 2:49
It depends a lot on the structure of the country. Take for example, India, India at independence, had this great debate, should we emphasize the village which was what Gandhi wanted, he thought India lived in its villages, and therefore, was very much about strengthening the village community and giving it a lot more governance powers. And of course, the Indian village has endured through many different powers at the center, many different conquerors over time, the Indian village has endured. So Gandhi was very much about strengthening the village economy. opposed to him was the thinker, economists, political scientists, who actually developed a constitution, Dr. Ambedkar. Ambedkar came from what is known as the backward caste, so the sheduled caste, because they, they are listed in the shedule in the Constitution, and he was perhaps rightly appalled at the idea that you'd give the village power, because he saw the, I think the phrase he used was den of inequity, that the village was a place of oppression, while he saw modernization as a way for the backward caste to liberalize themselves from the traditional. And to some extent, that has always been the rap against communities that they are overly traditional, immune to new ideas, and therefore, quite oppressive for some people. Now, they may not be that way. And part of what I'm trying to say is, is we need to rethink the community of old. But in the battle between Gandhi and a Ambedkar, Ambedkar won out, which then meant that India became much more centralized. The federal system worked through the state governments with the state governments themselves. They're the size of a small country, the states, and it was very centralized at that level. Also, it was only in the late 1980s in India got a third level of government, a strong local government, and even that the states have been very reluctant to give it power. So India doesn't have base strong local government. It has a lot of informal communities, of course, various caste groups, various social groups, but not strong local government. On the other hand, if you look at Germany, what happened in Germany post World War Two was essentially the US administration, the postwar administration wanted to break the power of the strong agglomerations didn't want another sort of concentrated fascist regime to emerge. And so it tried to break up the commercial banks, it tried to break up the industrial houses. And it tried to break up the states to have much more decentralization and Germany, therefore has, over time become much more decentralized. Switzerland is a classic example of the use of the principle of subsidiarity, push all powers down to the level that can exercise them reasonably. So if you go for your immigration interview, I saw you actually have the local Canton official do that, as opposed buddy from some central immigration agency. So it's a lot more decentralized in Germany and Switzerland, but can be a lot more centralized in other places, its accidents of history.
Alex 6:14
I'd definitely like to touch on decentralization in a moment. But I think it'd be wrong not to sort of point out a lot of the current day things going on, especially as they relate to community. So COVID, obviously, has had quite the influence on communities over the last year we're seeing, I suppose a decent number of companies moving or opting for remote work well into the future schools are operating online, and of course, much more. But with that in mind, do you see the pandemic having lasting impacts on community into the future?
Ragu 6:42
I think, yes, for one, it certainly has highlighted the value of social interaction, right, we can certainly do a lot online. But at some point, we hunger for human relationships for the ability to sit and talk with somebody across the table, or next to somebody having coffee, rather than talk at a distance. But more I mean, you see communities coming together to help people who have been hurt badly. You see a lot of communities certainly in the initial phase of the pandemic coming together to provide shopping services for the elderly who couldn't go out. You've seen obviously, lots of food banks reaching out to people who have been hit, when the official system sort of fails, it's the unofficial local stuff, which sort of kicks in and you're seeing some of that, I think you're also seeing and this is an important facet, the ability to work at a distance has become so much more strengthened, we've learned to do it, and some of the stigma associated with it, such as it used to be you can't call somebody up cold and have a conversation with them. That was rude. You had to travel 3000 miles to their office, and have that same one hour conversation, but you are paying respect to them. So you created business relationships, not online, but through physical contact now, hopefully post pandemic it will be okay not to burn the 3000 miles worth of carbon to get there. But you can actually have that conversation through a zoom call. If that is the case, then it becomes much easier to have people working at a distance. But working on a distance means now you can work in places which are cheaper, which you historically have been there because you like that place. But you left because you had to go to the big city, it gives many more communities a chance to actually get economic activity there. And that's really what I think the pandemic has done, apart from the tragic effects, of course, is that it has forced us to rethink economic activity. And now it is possible to have more distributed economic activity, which for places that have lost incomes, lost people, it's actually a positive, they may get those people back, because now those people feel well, most will stay close to home, where I actually have clean air. I have people that I've grown up with and I know. So it gives an opportunity to provide that.
Alex 9:16
Definitely. And I'd say just very much on the same topic, you know, the the internet having acted largely as a substitute for these more physically localized communities. And I would ask like, as a professor, do you have any strong thoughts or opinions on how this might impact education in the future? Given your own experiences here?
Ragu 9:34
It certainly is the case that there is a lot of value to direct interaction in the classroom. Technology is good, but it's not that good. It is still, it detracts from spontaneity, it detracts from serendipitous encounters with a student with a colleague. This is 85% of the experience, not 100% and on the social side of course, it's 0% of the experience, a lot of organizations like universities are also on the social front, you, you meet people over coffee, you chat, you go for a walk, and some bright, brilliant thought thought comes out. So it certainly highlights the need for that to have the complete experience. However, it says you can get 85%, and 85% of a great university can be available to a lot more people then used to be the case. And so that does suggest that as we rethink university education, perhaps we can do a fair number of things, we can touch a lot more people by these new technologies, it may actually be for the greater good if we can do that. Because it's not as simple as putting on a zoom call, you must have seen already that it's very easy to tune off when somebody drones on and on on the other side of lecture, right? So my kids who are still in various stages of university, emphasize that there's the temptation to multitask, you don't have the eye of the professor on you, you don't get cold, called, and so the tendency is to drift off unless you're really disciplined. I understand that. So there is some mix of the online and the human interaction, which probably maximizes the value, you know, that these, these massive MOOCs, the these really large courses with lots of participants. The problem with them is a very high dropout rate, people start full of enthusiasm. They think they're getting an MIT lecture on cybersecurity or whatever, then the lecture just is very good. But it's very hard to keep paying attention and do the hard work of the homework. So you need some combination of somebody to keep you on your toes. Essentially, the professor who looks at you and says sees you you're not paying attention. And cold calls you just to wake you up, and maybe your TA or something who checks that you're doing your homework, you need all that to have the pressure on you to actually learn. Very few people are fully motivated enough to just to pick up the big lectures, do the homework themselves, and do well. So that has to be rethought. But there's lots of potential to move away from the classroom of old.
Alex 12:19
And again, on the topic of community, so I'd say at the individual or grassroots level, what would you say are some practical steps people can take now to sort of help revitalize these local communities?
Ragu 12:31
I mean, certainly strong communities we see around us, right, which have withstood the effects of information technology, where people still get together and talk, I was watching the plot against America yesterday, a Jewish neighborhood in the United States in the 1940s it's supposed to depict. But what strikes you is how many people are out on the street talking, that looks a lot like India today, in some neighborhoods, where people just come out, it's hot staying inside the house, you don't have air conditioning in every house in some of these neighborhoods, and just sitting out and, and chatting is an occupation used to be with the front porches, in many American communities. And so to some extent, I think the issue is, how can we bring that to the communities that are falling behind, because their problems are such that nobody actually wants to come out high levels of crime, high levels of substance abuse, a lot of this is driven by the lack of economic opportunity. And you can see it, I mean, not just in the historically disadvantaged communities, for example, on site, Southside of Chicago, where you and I work, but certainly in many of these small towns that now have lost their big employer, whether it's in the US or in North England, or in East Germany, you see similar phenomenon across the world. And so the point there is how do you A: get economic activity back and we just talked about a possibility with with the working at a distance, B: How do you get the community to engage? And for that, you need a leadership, which will engage them. It does make sense to go to the community center, so we're going to get a community center, but we also got to make sure we go there rather than sit at home and watch TV or whatever. And we're going to engage the kids in doing stuff. The parents are going to be at school, trying to see if their kids are doing okay, talking to the teachers, supporting the teachers, with in some cases, funds, but in some cases, helping take the kids to a museum or whatever. The point is, there's a lot of engagement in strong healthy communities, there is leadership, there is infrastructure, we need to do all that. So how do you do that? And this is, in many ways, not a problem of stimulus or money. It's a problem of development. Here we have kind of, different levels of development. In many cases, you need that secret sauce, that combination of a strong leadership a committed population. And then as that sort of moves, local institutions get better. Sometimes we say first get the local institutions. It seems to me this is all a process by which there's sort of virtuous cycle. And sometimes it builds with a few people saying, we need to turn this around, and they make a huge difference. Sometimes it is some new organization goes into that particular neighborhood, and then things start developing around it. But we need to think about how we activate these various forces, to revive communities that are falling behind, because community institutions often what set you on the right track, your primary school, your middle school, community colleges, these are what give people a chance of doing reasonably well, in this world. If you go to a lousy primary school to begin with you're almost always scarred for life. If you go to-- you're in a neighborhood where reasonable values on how to behave don't get developed early on, the risk of you straying and being unable to cope with a more disciplined work, increase. So there's a lot that the community can provide. And we need to figure out how to bring that everywhere.
Alex 16:16
So zooming out, and turning again to the future, but in the same vein, technology, I think, has played this kind of exacerbating role in inequality, as you point out in your book. Now, with technological advancements happening more and more quickly. But you have these concepts like UBI, and more progressive taxation policies being more widely discussed, do you see this as an issue that should be getting more attention or less?
Ragu 16:41
Well, technology is certainly has been part of the problem. But it can also be part of the solution. And the idea is how to make it part of the solution, I often find we have a certain degree of technological despair, which makes us give up too quickly, right? We sort of say, it's really impossible to bring these good jobs to this place that people with reasonable education can do. And so we're gonna have effectively wide scale unemployment, let's prepare for that. Let's create a distributive society. Think about universal basic income, there's that... we're talking about all this, but each one of these has its own problems, right? I mean, a lot of people see value in work, not every kind of work, but a lot of work can be quite sort of self fulfilling, and also reaffirm your status as a productive member of society. So suddenly, telling a whole lot of people you're not capable of work, and here's a check every month to keep you at home, can have devastating social consequences. And we need to think about that. And I'm talking about social consequences for the person receiving the check. Now, of course, we have in mind, oh, these guys will go out and do fine art, they will do plays, they will do this, they will do that. And yes, some portion of them will do it. But it's not clear that it will act as effectively in others. And we need to think about what happens when a large portion of the population is paid to do nothing. It also makes the possibility of them actually retooling to join the workforce at some point much harder, right? If you're being paid to do nothing, why bother to get the skills to do something else? So I think we jumped too quickly, the universal basic income has been talked to off as an antidote to technology, right? I mean, the earliest I found a description of it was in the 1960s, a commission set up under President Johnson, clearly we're almost 60 years away. And we still haven't got the conditions which merit that. But we still keep talking about it. I would say, let's focus on trying to give everybody a chance first. And yeah, everybody says, Oh, we've tried, we've tried improving education hasn't happened. Well, we've, we've done it the same way again, and again, the centralized, let's put some more money into education, let's see what happens. Maybe we need to try something different. Maybe we need to embrace more technology, maybe we need to embrace a different organizational structure for doing it, be more confident of the local. After all, there are many places across the world that have really good schools. There are many places across the world, which train their workers and retrain them all the time-- take the Scandinavian countries, their job, sort of job support processes are fantastic. So it's not as if we should give up. We haven't even done what is necessary in some of the large countries. So we need to think about re structuring. And this is why I'm sometimes perturbed, that we act as if the problem is not a problem of development. The problem is of just fueling more stimulus. Put more money, spend more from the government reduce interest rates even more. And somehow magically, all these fantastic jobs will come up? Well, those jobs are gone. They're not there, they're not going to come back, unless you have a different workforce. And that requires a different kind of investment, not just more stimulus. And so I do think we need to wake up a little bit to the fact the world has changed.
Alex 20:25
Now, sort of very much in the same vein there, what do you see the role of regulation in this with regard to fixing social or economic issues?
Ragu 20:35
Well, regulation is less central. I mean, in a sense, think of the production opportunities that we wanted as to be as big as possible. That means an appropriate level of regulation, not too little, not too much. Clearly, there are issues where we need to think about what regulations are needed, for example, climate change. I don't think that voluntary effort on the part of corporations is going to get us anywhere near. So we do need to think about what governments need to be doing, what the larger public needs to be doing, plus what kinds of regulatory forces we impose on corporations to get us closer to that outcome. It has to be something which is as user friendly as possible. But it's not something that we rely on the corporate social responsibility of corporations. To get us there. I would think our attempt to rely on the goodwill of corporations in, for example, dealing with information and content, for example, on on the internet, it hasn't worked out well. That's probably a place where most corporations will be quite happy if the government came out with sensible rules. Now, of course, we could debate back and forth what those rules might be, but some set of regulations are needed. So I would say on the production side, what we need is a proper regulation to maximize the productive potential, taking into account some of the challenges we have such as climate change. But I think the effort has to be more on the capability building side that we need to distribute the capabilities that people should have better in our population. And the system of acquiring capabilities has become very skewed. And I go back like an older record back to the issue of community, which is that if you grew up in Winnetka, you have a much better chance of doing really well because your capability building institutions are much stronger there, then if you grow up in the south side of Chicago. And so what we need to do is, as best as we can, in an attempt to equalize opportunity, equalize the effects of locality, because that would make a huge difference in how your outcomes turn out.
Alex 22:56
On the topic of equality of opportunity, you point this out again, in your book, that sort of power of markets, having eroded communities to an extent, and the state being increasingly identified with the sort of out of touch establishment can often breed populism. And inclusive localism. And this decentralization of power is one way you think this can be counteracted. What does that look like practically in your eyes?
Ragu 23:21
I think the important point to recognize is that governments and markets grow together, they expand together, and powers get elevated together, because a integrated market wants common regulation, common sort of dispensations, and therefore demands, in a sense, common governance, you can see this most clearly in the European Union, where the union tries to govern a lot, and not leave it to the specific countries to decide A or B, because it wants uniformity. It wants a sense of homogeneity. But homogeneity is a killer of individuality or specificity. And often democracy, to have any sense of democratic power, you have to have the ability to be different, to have local rules different from the National rules, to have local structures that don't have to obey a common template that respond to local needs. So that's why I think it's quite important at this point, to try and think of how we allocate power. The temptation is for power to continually rise to the national government to international organizations, because markets, integrated markets demand that we want common patent rules across the world, even though it might be better for every country to have a different road protecting patents depending on how much R&D it does and how much it wants to protect that. So I would argue that some of that creates the pressure against globalization. People are seeing themselves disempowered and want to get back a sense of control over their lives. And that means pushing down power rather than keeping on sucking it up. And pushing down means you need a principle, you're not going to let every locality determine how it's going to respond to climate change. But at the same time, you need them to be involved in the discussions. So how do you get that democratization of the process, and typically, it requires this principle of subsidiarity: push down every power to the lowest level at which it can be exercised effectively. If you can do that, I think we get more democracy, we get more decentralization, and we get more effective countries, more effective government more effective markets. And you get at this point more checks and balances against an excessive determination of things at the center.
Alex 25:50
Now, before we wrap up, because I know you have places to be you're quite well known for, among many other things, having predicted the financial crisis that started in 2008. Are there any red flags you're seeing today that you think people should be paying more attention to?
Ragu 26:06
Well, you know, there are! We are seeing really frothy markets, there are places where you question How on earth can these valuations be so high? Any economist would say Bitcoin is the classic bubble. Classic, not in the financial sense of bubble. But in the classic sense of the bubble here is an object which has no value whatsoever. In fact, it's a prax value-- to make a transaction on Bitcoin costs you $20. And it also consumes a fair amount of energy. And so it's a very energy inefficient way of transacting, of maintaining an asset. And yet, every Bitcoin today is worth $52,000. Right? And asset managers are jumping over each other to say this is the new source of value, I have to believe that even if some kind of a crypto asset is a source of value down the line, you would imagine with the pressure against energy inefficiency, that something as energy inefficient as Bitcoin and as hard to transact, without any of the wanted secrecy, or much of the wanted secrecy associated with it, you would think that there would be, over time a realization that this is not the asset. Maybe it's a curiosity, but now worth over a trillion? That seems to me something that seems temporary. But of course, if it comes down to earth, comes back to let's say, 100 billion, then there's some people who have lost 900 billion along the way, who might those be? And how does it play out? But that's sort of a microcosm of the bigger point, that is asset prices are hugely, hugely elevated. And it makes sense only in a world where interest rates are going to stay really low for a long time. But also, you also need them those assets to produce value. What we have in some cases is assets that produce no value, but are hugely valued. And a lot of things have to go right. I'm not saying it's impossible, a lot of things have to go right for them to really retain that value. And that's why I think at this point, when you look around the worry becomes a crisis when levered institutions have a lot of assets. But it can become a political crisis, when ordinary people hold assets which plunge in value. I mean, you saw it with the GameStop problem, a whole bunch of people punted on it, and I'm sure a whole bunch of people lost their shirt. But now those people are angry people who are saying this somehow was rigged against me. And if that happens at a much larger scale, you can imagine the amount of anger in society. I mean, some people, I know some of my colleagues in the profession have written about how the hyperinflation in Germany, which killed asset values, essentially ruin the middle class, and set the stage for the emergence of Adolf Hitler. I don't want to be so dramatic, but I think even if we don't have a crisis caused by the effects of asset price, volatility on leverage, even just plain asset price volatility, things going up, and then things collapsing, and a lot of people holding some of that in their asset portfolios can create a fair amount of anger. And we already have enough anger to spread around.
Alex 29:28
I suppose time will tell. Professor Rajan, this has really been great. Thank you so much for doing this.
Ragu 29:33
Thank you and good luck.
Alex 29:34
Thank you so much. Appreciate it.
Ragu 29:35
Bye!