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The Roots of Our Discontent

With industrialized countries beset by a political backlash against trade, technology, migration, and other hallmarks of the modern global economy, expert solutions are needed now more than ever. But until the experts themselves can reclaim the public’s trust, populists will continue to dictate the terms of policymaking.

TRENTO – Every spring, the Trento Festival of Economics convenes some of the world’s leading economists to discuss the issues of the day in open dialogue with one another and the public. In the following interview, the festival’s director, Italian economist Tito Boeri of Bocconi University, and Raghuram G. Rajan, former Governor of the Reserve Bank of India and currently Professor of Finance at the University of Chicago Booth School of Business, discuss a wide range of topics relating to this year’s theme: “Globalization, Nationalism, and Representation.”

Decentralized Despair

Tito Boeri: Countries around the world are experiencing a crisis of political representation and a revival of nationalism. Finding remedies to counter the darker impulses of populism is proving difficult. Though the policies being adopted by some populist governments are clearly mistaken, it is not obvious what can be done to address the underlying issues that populists have seized upon.

In medical terms, we have a rather good diagnosis, a debatable prognosis, and no well-defined treatment. The underlying causes include economic shocks – the information and communications technology (ICT) revolution, globalization, financial and refugee crises – as well as cultural factors, some of them related to the loss of ideological anchors following the fall of the Berlin Wall. Analyses of recent European voter behavior by economists Barbara Petrongolo and Josef Zweimüller suggest that the populists have built up majority support in the small towns, villages, and municipalities where many “permanent losers” of the ICT revolution and globalization are concentrated. In the United States, similarly situated voters have supported President Donald Trump in droves.

You’ve just written an enlightening book on this subject, The Third Pillar: How Markets and the State Leave the Community Behind, which outlines a number of ways to cope with populism. What should we do to restore these communities? We could provide them higher fiscal transfers. But if the communities’ institutions are dysfunctional, don’t we run the risk of wasting resources? We could expand infrastructure (such as broadband and transportation). But what if such interventions merely displace other worthwhile projects? Should we support local revival projects like the one in Chicago’s Pilsen neighborhood, which you highlight in the book?

Raghuram G. Rajan: We understand the causes of the problem much better than we did a few years ago, but finding solutions is difficult. From what we’ve seen in the years since the 2008 financial crisis, and from the past 30 years of technological revolution, we should recognize that the problem is not merely cyclical.

Whatever the solution is, it can’t be just about increased fiscal or monetary stimulus, which is what governments have resorted to time and again. In developed countries, there are large pockets of underdevelopment, entire areas that can no longer keep up with the global economy. They are falling further and further behind, and not just economically, which is merely the first thing that happens. As they lose jobs, their social structure also starts to break down. You start seeing more divorces, more teenage pregnancies, and more substance abuse. The schools deteriorate, the still-successful families leave, and a vicious cycle ensues. This has certainly been the experience in the US.