The Third Pillar

by Raghuram Rajan

  OCCUPATIONAL LICENSING

  When manufacturing was dominant, workers protected themselves through union membership, and unionized jobs paid a hefty wage premium. For a variety of reasons, including the decline in manufacturing and the rise of global competition, union membership has declined. Even while manufacturing workers have lost their premium wages, service professionals have built protections for their business. It is well known that doctors and lawyers need a separate license in each state of the United States to practice there, but manicurists and barbers are also licensed in fifty states, and athletic trainers are licensed in forty-six states.66 Licensing grew from covering less than 5 percent of the workforce in the 1950s to nearly 30 percent in 2008, even while union membership declined from over 30 percent to just over 10 percent over the same period.67

  The licensing authority typically consists of, or relies on, the professionals themselves. Much like the guilds of yore, the stated reason for licensing is to ensure adequate quality of practitioners, though a more plausible motivation for licensing seems to be to restrict entry into their professions and limit competition. Specifically, if licensing is so important for quality, it is hard to understand why a licensed security guard requires three years of training in Michigan, but only about two weeks in many other states.68

  Economists Morris Kleiner and Alan Krueger find that occupational licensing elevates wages by about 18 percent. Some occupations seem to enjoy far higher rents.69 Separately, Kleiner finds that the wage boost from licensing is highest for the highest quintile of earners—up to 24 percent, while it is less than 5 percent for the lowest quintile.70 Higher earners seem to be better able to protect themselves against competition, though some of those higher earnings are because of the protection itself. US primary-care doctors, for example, earn $252,000 according to the Bureau of Labor Statistics, while the average for other OECD countries is $130,000.71 We have already seen that the American Medical Association has consistently opposed attempts at universal health care in the United States because of fears that the government would curtail their earnings. The power of the doctor lobby in limiting the entry of new doctors even while protecting its freedom to price is, in part, why the United States spends the most among developed countries on ealth care, despite being one of the very few without universal health care.

  THE PRIVATE SECTOR’S REACTION TO LIBERALIZATION—SUMMARY

  The pushback against state encroachment helped enhance efficiency initially. It also seems to have protected certain forms of incumbency and all manner of property much better in the United States today. This may well have hurt competition and innovation. The little space left for the potential small entrant firm has been further reduced by onerous regulations that only large firms can navigate. This has especially disadvantaged small towns and semi-urban communities, where few large firms are headquartered.

  As islands of privilege have emerged across the United States, there is a growing sense among those who do not have their own protections, or have lost their unionized protections, that the system discriminates. If significant aspects of private profit making are seen as unfair, the taint could spread to all of private profits. Without the support of the people, private-sector independence will be compromised, removing an important check on the power of the state. Conditions are all the more worrisome as large corporations dominate more and more industries. These corporations are indeed very efficient thus far, which reduces their need to depend on the state. There is no guarantee, though, that they will remain independent, especially as they rely on the state rather than continuous innovation to protect their intellectual property, and as ownership of data and networks, where the state has enormous influence in setting policy, is debated. Moreover, a few large corporations are easier to do deals with than many smaller ones of equal aggregate size. The distance between behemoth and leviathan is narrowing again.

  THE EUROPEAN APPROACH

  Europe’s answer to slow growth, as we have seen in the last chapter, was to integrate to create a superstate with the hope that the expanded market would energize competition and growth. There were differences in outcomes, in part because the European Union bureaucracy in Brussels was not so averse to government as the dominant Anglo-American consensus. Nevertheless, global markets spread many practices across countries. Europe had some of the same problems as the Anglo-American economies, but it also had different ones.

  MISTAKES NOT MADE . . .

  The European Union was successful in enhancing competition, especially in manufacturing and finance. The harmonization of rules made it hard for countries to keep out companies from other European countries. Nevertheless, despite a more committed pan-European antitrust structure, the domination of industries within European countries by a few firms, as also of Europe as a whole, appears to have increased, though the evidence is less conclusive than in the United States.72 This suggests technological forces are partly responsible for the increasing concentration across the developed world, though regulatory differences also have influence. The European Union has had a harder time breaking down national barriers in services—licensing rules are probably as complicated and varied between the states of the Union as they are between the states in the United States. Overall, though, Europe today has a market that is more competitive in many sectors than the United States, something that would have been unthinkable a few decades ago.

  At the corporate level, European corporations attempted to avoid the hard decisions taken by US corporations. They were typically less attracted to the idea of corporations maximizing shareholder value, and insisted on a fuzzier notion of enhancing stakeholder value—where stakeholders included everyone from employees to customers to society (and, of course, shareholders). Such a diffused objective essentially gave little direction to CEOs. Perhaps that was the intent. Indeed, the words of the early-twentieth-century German banker Carl Furstenberg still resonate: “Shareholders are stupid and impertinent—stupid because they give their money to somebody else without any effective control over what this person is doing with it, and impertinent because they ask for a dividend as a reward for their stupidity.”73 Most CEOs did not dismiss shareholder interests so rudely, but it was not their prime concern.

  Nevertheless, practices did spread across the Atlantic. For example, there has been convergence in CEO pay levels.74 There were also differences. European corporations were far more protective of employees at the expense of corporate efficiency. Continental Europe was less successful in closing down inefficient firms, or creating jobs for those who were not already in the system, especially its young people. Youth unemployment (for workers between ages fifteen and twenty-four) was 18.3 percent in 2000 across twenty-seven EU countries, 20.9 percent in 2010 following the financial crisis, and 16.8 percent in 2017. The United States treated its young far better, with youth unemployment rates of 9.2 percent, 18.3 percent, and 10 percent respectively.75 Therefore, the better protections for European incumbent workers often came at the expense of outsiders like the youth and immigrants.

  Finally, we should also note that the somewhat more diffused management incentives in Europe relative to the United States have not helped it avoid scandals. Volkswagen doctored emission test results for its diesel cars, while many European banks were also fined for misleading customers. In an integrated world, behavioral norms do spill over between leading firms. The larger difference between the Anglo-American economies and continental Europe is that the former elevated the deregulated profit-maximizing free market onto a pedestal, while the latter has been more skeptical of its behavioral aberrations. Europe has not gotten all the efficiency benefits that it could from the unfettered market, but neither has society been undermined as much by the accompanying ideology.

  AND MISTAKES MADE . . .

  Perhaps the most important mistakes Europe made were where it took the largest steps—on integration. Europe tried to integrate, taking for granted that countries would meet thei
r responsibilities toward one another as “united” states, when in fact there was not enough empathy, solidarity, or trust between the peoples of the countries to warrant this belief. With the local community weakened by the effects of technology and trade, the sovereign powers that the Union attempted to arrogate further put people’s backs up. As they looked for the national community to substitute, in part, for the local community, they found that it too was under threat by the Union. All this came to a head, as we will see, with the immigration crisis in 2015.

  CONCLUSION

  In the United States, the overemphasis on the market resulted in growing economic inequality; some caused by technology, some man-made. The elite-led European project had a crisis of legitimacy, as people had never really been asked to approve it. Both approaches were imbalanced.

  The rise in inequality could have partly been tackled by a renewed emphasis on expanding people’s capabilities, and partly by sensible government regulation. Yet the change in public mood, as countries tried to break from the collectivizing legacies of the Great Depression and Second World War, weakened the public response. When the ICT revolution, transmitted through the global market, exacerbated economic inequality, there was little to offset it.

  Neither traditionally disadvantaged communities like the minorities, concentrated in city ghettos, nor newly disadvantaged workers from the majority community in semirural areas, have been able to take advantage of the liberalized economy. Indeed, across the developed world, as we will see in the next chapter, an elite upper-middle class looked to its own interests while abandoning the economically mixed community. From leading the fight against vested interests, the upper middle class became part of the vested interests. The unfettered market was now in ascendance, with an ideologically and fiscally constrained state and a weakened community offering limited check. The developed world had opened itself to the risk of radical populism once again.

  7

  THE REEMERGENCE OF POPULISM IN THE INDUSTRIAL WEST

  In the last chapter, we saw that the natural and man-made underpinnings of inequality have been increasing as the ICT revolution has raised the importance of human capabilities. In this chapter, we will see that the resentment against the upper-middle-class elite has grown across the United States and Europe as they have insulated themselves from the economic forces they have unleashed, leaving everyone else to deal with them. The abandonment of the elites has hampered the broader community’s ability to adapt to change.

  With incomes stagnating for many people, and with policy makers bereft of new ideas to spread economic growth more widely, governments in the early years of the twenty-first century took a huge gamble—betting that borrowing in liberalized financial markets could be the engine of broad-based sustainable growth. Although it initially enhanced growth and kept the citizenry happy, debt-fueled growth is not sustainable. Eventually, the gamble failed, culminating in the Global Financial Crisis. Instead of a happy consumer, it created an overly indebted one. Instead of fiscally healthy governments, with their debt reduced by economic growth, it created yet more debt for already-strapped governments. Instead of an electorate hopeful that beneficial change was around the corner, it created one that feared change and did not trust the ruling upper-middle-class elite to look beyond their own interests. Populist politicians only needed an issue to fan the smoldering rage into flames. In the United States, it was the Affordable Care Act, also known as Obamacare. In Europe, it was immigration. We will look at all this more closely in this chapter.

  THE MANY FACES OF POPULISM

  A populist movement, as we have seen, is one that believes the ruling elite are corrupt and undemocratic, that the masses have been treated poorly, and that the system ought to be changed because the general will of the people demands it. Populist protest movements, however nativist or racist in parts, can play a valuable role. They have little regard for the elite, and therefore are willing to challenge the elite’s most cherished ideas and their coziest practices. Their criticism, as we have seen in the late nineteenth century, can be very constructive, bringing transparency and democracy to governance, and forcing traditions to be justified beyond the lazy, “this is how we have always done it.” Populist movements, when focused and temporary, can be very healthy. On the other hand, they can also be sectarian, delusional, and dangerous as they point in every direction to the causes of their difficulties except toward themselves. They cannot be ignored, though.

  At the risk of caricature, left-wing populists tend to see everyone other than the dominant elite as the oppressed. Their aim is not to overturn the system, but to get a greater share of the benefits for the masses. They do not seek revolution, only a reorientation of the system, with the government typically doing more and the market less. A left-wing populist leader like Bernie Sanders, who ran for the Democratic Party nomination in the 2016, saw free trade as hurting the American people. He wanted less of it. He also campaigned for universal health care and free public college education, and for more humane treatment of immigrants. Left-wing populists do not distinguish among people in the country; they typically want a better deal for all the oppressed.

  Right-wing populists, on the other hand, are more discriminating in the objects of their ire. For instance, in the United States, right-wing populists do not necessarily target the very rich such as wealthy businesspeople.1 Instead, they reserve their anger for the administrative, professional, and intellectual elites, the upper middle class, whom they believe have tailored public policy to favor themselves as well as their favorites—women, minorities, and immigrants—and elevated these above the native-born non-Hispanic white male. There is both an ethnic and a nationalist component in these views.

  ETHNIC NATIONALISM

  Nationalism, simply put, is a greater preference for what is inside the nation’s borders, such as one’s countrymen or culture, than what is outside the borders.2 At the risk of oversimplifying, nationalism can be unifying by emphasizing the solidarity of the included, stressing common bonds that will allow citizens to accomplish greater deeds together. For example, the nation offers a seamless common market where everyone can work, produce, or trade anywhere. It has a common government budget that gets taxpayers in the richer parts of the country to fund schools, hospitals, industry, and infrastructure in the poorer parts so that everyone can grow together. National solidarity offers people in every corner of the country the expectation of help from elsewhere in the country if they are hit by a natural calamity or a severe localized economic shock. National empathy creates a robust safety net for those who are ill, disabled, elderly, or just unlucky. National pride generates a collective joy when the national team wins, as well as a collective celebration of accomplishments of the past.

  The nation, in a sense, is like a medieval guild, bringing prestige, protection, and some rents to those who belong to a powerful one. For some adrift lonely individuals, it may be the only social group they feel any belonging to. The greater the size of a nation for a given level of homogeneity of its people, the greater are the benefits that can be shared by everyone within it. The more homogenous the population for any given size, the stronger are the natural, even evolutionary, bonds that draw forth mutual empathy and goodwill within the nation.

  The precise traits that represent homogeneity and the “true” native in a nation are a matter of definition. Ethnic nationalists, for example, might focus on race, religion, or a common cultural heritage as the basis for nationalism. In a country with a homogenous population, ethnic nationalism can be unifying. In a country with a diverse population, it will invariably be divisive, with the natives defined more in terms of who is excluded, typically minorities and recent immigrants within the country. Moreover, many of the typical symbols of nationalism in a large civilized diverse nation—such as the national constitution—tend to be inclusive. In such countries, ethnic nationalists constantly fall back to fear or resentment of the excluded to unify their followers.


  POPULIST ETHNIC NATIONALISTS

  Right-wing populists are typically populist ethnic nationalists—that is a mouthful! For simplicity, we will refer to them as populist nationalists. In their view, the native-born from the majority ethnic group are “the people,” those who have an innate sense of the nation’s correct path. They have been betrayed by the elite who, in their own interests, support others such as foreigners, immigrants, and minorities.

  The populist nationalist leader recognizes that people fear that their proximate communities are disintegrating. She knows they are disoriented by the dizzying pace of technological change, even as they struggle to cope with the effects of global integration. She understands why they are resentful, as families and communities, already stressed by economic forces and slipping in social status, are also shamed for not accepting the liberal values of the elite.3 She plays up their fears about weakening social solidarity, as a more open multicultural society brings in outsiders who do not share a common understanding of past cultural legacies. The alternative she proposes is meant to restore respect to her followers. She will anchor her people in an imagined national virtual community of ethnically or culturally homogenous natives, inheriting the warm sepia-tinged monochromatic glories of the past. She will filter out the alarming colors, languages, and prayers that make today’s society so confusing. In contrast to the weak, fractured, and equivocal elite establishment, her leadership will be strong and muscular, emphasizing popular beliefs as obvious truths. Those whose real communities are breaking down will have an alternative, something to believe in, to belong to, and to fight for.