The Third Pillar: How Markets and the State are Leaving Communities Behind

RESTORING THE COMMUNITY PILLAR TO HEALTH

Schools, the modern doorway to opportunity, are the quintessential community institution. The varying qualities of schools, largely determined by the communities they are situated within, dooms some while elevating others. When the pathway to entering the labour market is not level, and steeply uphill for some, it is no wonder that people feel the system is unfair. They then are open to ideologies that propose abandoning the liberal market system that has served us so well since World War II. The way to address this problem, and many others in our society, is not primarily through the state or through markets. It is by reviving the community and having it fulfill its essential functions, such as schooling, better. Only then do we have a chance of reducing the appeal of radical ideologies.

We will examine ways of doing this, but perhaps the most important is to give the power the state has steadily taken away back to the community. As markets have become global, international bodies, driven by their bureaucrats or the interests of powerful countries, have drawn power from nations into their own hands, ostensibly to make it easier for global markets to function. The populist nationalists exaggerate the extent to which power has migrated into international bodies, but it is real. More problematic, within a country, the state has usurped many community powers in order to meet international obligations, harmonise regulations across domestic communities, as well as to ensure that the community uses federal funding well. This has further weakened the community. We must reverse this. Unless absolutely essential for good order, power should devolve from international bodies to countries. Furthermore, within countries, power and funding should devolve from the federal level to the communities. Fortunately, the ICT revolution helps in doing this, as we will see. If effected carefully, this decentralisation will preserve the benefits of global markets while allowing people more of a sense of self-determination. Localism – in the sense of centering more powers, spending, and activities in the community – will be one way we will manage the centrifugal disorienting tendencies of global markets and new technologies.

CIVIC NATIONALISM

Instead of allowing people’s natural tribal instincts to be fulfilled through populist nationalism, which combined with national military powers makes for a volatile cocktail, it would be better if they were slaked at the community level. One way to accommodate a variety of communities within a large diverse country is for it to embrace an inclusive civic definition of national citizenship – where one is a citizen provided one accepts a set of commonly agreed values, principles, and laws that define the nation. It is the kind of citizenship that Australia, Canada, France, India, or the United States offer. It is the kind of citizenship that the Pakistani-American Muslim, Khizr Khan, whose son died fighting in the United States Army, powerfully reminded the 2016 Democratic National Convention of, when he waved a copy of the United States Constitution. That document defined his citizenship and was the source of his patriotism.

Within that broad inclusive framework, people should have the freedom to congregate in communities with others like themselves. The community, rather than the nation, becomes the vehicle for those who cherish the bonds of ethnicity and want some cultural continuity. Of course, communities should be open so that people can move in and out if they wish. Some will, no doubt, prefer to live in ethnically mixed communities while others will choose to live with people of their own ethnicity. They all should have the freedom to do so. Freedom of association, with active discrimination prohibited by law, has to be the future of large diverse countries. We will eventually learn to cherish the other, but till then let us live peaceably, side by side if not together.

Markets too must become more inclusive. Large corporations dominate too many markets, increasingly fortified by privileged possession of data, ownership of networks, and intellectual property rights. Credentialed licensed professionals dominate too many services, preventing competition from those who do not have the requisite licenses (one reason friendly neighbours cannot help rebuild a house today). In every situation, we must locate barriers to competition and entry and remove them so that opportunity is available to all. Thus, as we strive for an inclusive state and inclusive markets, which embed the empowered community in society and keep it engaged and dynamic, we will achieve an inclusive localism, which will be essential to community revival and a rebalancing of the pillars.

Even in such a setting, though, community effort to pull itself up will be critical. Consider the community of Pilsen on the southwest side of Chicago, a few miles from my home. This once terribly damaged community is now turning a corner.

A Real Community Pulling Itself Up

Pilsen used to be populated by Eastern European immigrants, working in manufacturing establishments around Chicago. Since the middle of the last century, Hispanic immigrants and African Americans moved in steadily, and the Eastern Europeans moved out.6 In 2010, Hispanics or Latinos made up 82 per cent of the population, and African Americans 3.1 per cent. Non-Hispanic whites composed 12.4 per cent of the population in 2010, up from 7.9 per cent in 2000.

Pilsen is poor, with median household income averaged over 2010–2014 at $35,100, about half that of metropolitan Chicago as a whole. It has an unemployment rate of nearly 30 per cent averaged over 2010–2014. Over 35 per cent of individuals over twenty-five have not graduated from high school. Only 21.4 per cent of individuals over twenty-five have a bachelor’s degree, less than half the comparable ratio in the overall US population. Nearly half of renters or homeowners have housing costs that account for more than 30 per cent of their income. Keeping people in their homes is essential for community stability, and Pilsen has a hard time of it.

Low education, low incomes, and high unemployment are a recipe for drugs, alcohol, and crime. At its peak in 1979, there were 67.4 murders per 100,000 residents in Pilsen, over double the wider city rate. In comparison, Western Europe averages a murder rate of about 1 per 100,000 per year. The average military death rate for Germany and the Soviet Union during World War II was about 140 per year per 100,000 of population.7 Pilsen was thus truly a war zone – in 1988, a Chicago Tribune reporter counted twenty-one different gangs along a two-mile stretch on the main 18th Street thoroughfare. The 1980s and 1990s were years of horrific gang fights and bloodshed.

Yet Pilsen is a community that is trying to pull itself up. One sign it is succeeding is that the murder rate has been significantly below the overall Chicago rate for a number of years since the early 2000s, exceeding it slightly only every few years. As we will see, communities typically do not pick themselves up spontaneously – leaders emerge to coordinate the revival. Among those driving Pilsen’s revival is Raul Raymundo, the CEO of the Resurrection Project, a nongovernmental organisation (NGO) whose motto is ‘Building relationships, creating healthy communities.’ Raul came to the United States from Mexico as a seven-year-old immigrant, went to Benito Juarez High School in Pilsen, attended college (including some time in graduate school at the University of Chicago), and started helping out in the community. He found his vocation after the murder of a young man just outside his church, when his pastor asked the congregation what the community was going to do about it. Answering the call, Raul and a few others started the Resurrection Project, with $5,000 each from six local churches. When the candidate they found to head the project declined to take the job, Raul stepped in, and he is still there, after twenty-seven years. Today, the Resurrection Project has funneled over $500 million in investment into the community.

As with other revival projects, the community first undertook an inventory of its assets to figure out what it could build around. It had its churches that would provide moral, vocal, and financial support for any revival, it had decent schools, it had a strong Mexican-American community with tightly knit families, and it was in Chicago, a city that goes through ups and downs but is still one of America’s great cities.

The first order of action was to make the community more livable, which meant keeping it clean, ridding the streets of crime, and strengthening the schools. Residents were organised to hound the city sanitation department to do their job – clean the streets and collect garbage. People were urged to form block clubs and ad hoc groups against crime. They would walk out of their houses when they saw suspicious activity so as to crowd the criminals out, or jointly call the police so that the criminals would not know who to blame. The community campaigned successfully for a moratorium on city liquor licenses in Pilsen, got some especially problematic bars closed down, and worked with police, churches, and absentee landlords to target and close down known gang houses.8 Remedial education, after-school extracurricular programmes, and job-training programmes increased, enabling young people to get more from their schoolwork, and giving them a ladder to jobs. Parents were urged to get involved in the schools, and they did. New school programmes started – one example is the Cristo Rey Catholic School, which aims to give its students a quality education like that obtainable at St. Ignatius, one of Chicago’s premier Catholic schools, while keeping it affordable. Cristo Rey raised funds from local businesses, in return for which students work one day a week for their sponsoring business. The student attends school the other four days, getting both a good education and work experience each week.

As the community members saw revival efforts paying off, they got more engaged, and virtuous cycles started emerging. As some older gang members turned to legitimate business, their prosperity inspired other gang members to develop skills other than the ability to inflict violence. The proliferation of youth-oriented programmes at the schools gave them a way to escape their past. As crime came down, new businesses started opening, including franchises like McDonald’s, and they offered low-level entry jobs that drew youth into work. With Chicago becoming more of a hub for the regional distribution of goods, more jobs were created as wholesale warehouses and refrigeration centers opened in Pilsen, drawn by the still-low real estate prices and falling crime.

With the area more livable, the Resurrection Project turned to keeping the poor, some of who have very few assets and very little buffer against a sudden loss of job or illness, in their rented homes. This would stabilise the community. Ironically, it is getting harder as the community strengthens because rents are increasing and buying is becoming costlier. Large banks, of which a growing number have now set up in the community, are not well equipped to understand community practices. This hampers their lending. In Pilsen, a working woman’s mother will often cook for her and babysit her children, so the worker’s salary goes a much longer way because she does not pay for these services. Similarly, family members may lend each other money, making it possible for someone to keep up loan payments even if their income is volatile. Typically, such practices are hard for a loan officer from a large bank to substantiate or document, which is why he has to go primarily on the explicit record of income.9 Community-based financial institutions, where decisions are made locally based on the soft information available in the community, understand the worker is more creditworthy than her salary slip might suggest. Being free from the tyranny of requiring hard documentation, they are more willing to lend locally than large banks.

Recognising the importance of local institutions, in 2013 the Resurrection Project helped rescue a failing community bank, Second Federal. At that time, 29 per cent of the bank’s mortgages were delinquent, and many local borrowers would have faced eviction if the bank had been closed or sold outside the community. Vacancies would have depressed house prices and brought back crime. Second Federal’s delinquencies are now down to 4 per cent of its mortgage portfolio, because it worked with its borrowers and nursed the loans back to health. People continue to use its branch as a community center, meeting there to chat with neighbours, or bringing their mail to have it translated by tellers.

The Resurrection Project has itself built affordable housing that it rents to needy families, nudging them to move out when they can afford market rents. One of its developments, Casa Queretaro, looks sleek and welcoming, seeming more luxury housing than affordable – in management’s view, there is no reason why so much affordable housing should look run down. The Resurrection Project also tries to increase access to credit locally. Its volunteers work with community members to improve their financial understanding, to get them to build and improve their credit histories by, for example, paying their utility bills regularly and on time.

There is much more to community revival, but the picture should be clear. Pilsen is by no means a rich or prosperous community but it now has hope. It has built on its Mexican connections – it has a National Museum of Mexican Art – though it is proudly American. Cinco de Mayo, a Mexican festival, is celebrated with great gusto, but over two hundred fifty thousand people join the Fourth of July parade in Pilsen. Raul Raymundo’s aim is to welcome people of every ethnicity into Pilsen while building on the core stability of the existing community. As he tells people when they buy a house, ‘You are not buying a piece of property, you are buying a piece of the community.’

FINAL PRELIMINARIES

Who am I and why do I write this book? I am a professor at the University of Chicago, and I have spent time as the Chief Economist and head of Research at the International Monetary Fund, where we gave advice to a variety of industrial and developing countries. I also was the Governor of India’s central bank, where we undertook reforms to improve India’s financial system. I have experience working in both the international financial system and in an emerging market. In my adult life, I have never been more concerned about the direction our leaders are taking us than I am today.

In my book Fault Lines: How Hidden Fractures Still Threaten the World Economy, published in 2010, I worried about the consequences of rising inequality, arguing that easy housing credit before the Global Financial Crisis was, in part, a way for politicians to deflect people’s attention from their stagnant paychecks. I was concerned that instead of drawing the right lesson from the crisis – that we need to fix the deep fault lines in developed societies and the global order – we would search for scapegoats. I wrote:

‘The first victims of a political search for scapegoats are those who are visible, easily demonised, but powerless to defend themselves. The illegal immigrant or the foreign worker do not vote, but they are essential to the economy – the former because they often do jobs no one else will touch in normal times, and the latter because they are the source of the cheap imports that have raised the standard of living for all, but especially those with low incomes. There has to be a better way …’10

The search for scapegoats is well and truly on. I write this book because I see an increasingly polarised world that risks turning its back on seventy years of widespread peace and prosperity. It threatens to forget what has worked, even while ignoring what needs to change. The Populist nationalists and the radical Left understand the need for reform, but they have no real answers as they resort to the politics of anger and envy. The mainstream establishment parties do not even admit to the need for change. There is much to do, and the challenges are mounting. The state, markets, and the community can be brought into a much better balance. We must start now.

The rest of this book is as follows. I start by describing the third pillar, the community. To some, the community stands for warmth and support. To others, it represents narrow-mindedness and traditionalism. Both descriptions can be true, sometimes simultaneously, and we will see why. The challenge for the modern community is to get more of the good while minimising the bad. We will see how this can be obtained through the balancing influence of the other two pillars – the state and markets. To continue our exploration, we must understand how these pillars emerged historically. In Part I, I trace how the state and markets in today’s advanced countries grew out of the feudal community, taking over some of its activities. I explain how a vibrant market helped create independent sources of power that limited the arbitrary powers of the state. As the state became constitutionally limited, markets got the upper hand, sometimes to the detriment of communities. The extension of suffrage reempowered communities and they used it to press the state to impose regulatory limits on the market. People also demanded reliable social protections that would buffer them against market volatility. All these influences came together in the liberal market democracies, which emerged across the developed world in the early twentieth century. However, market downturns, especially following technological revolutions, were, and are, disruptive. The Great Depression, followed by the Second World War, seemed to sound the death knell of liberal market democracies in much of the world, and the ascent of the state.

In Part II, I describe how the United States shaped the postwar liberal order, and how both the state and markets grew once again. Democracy was given firmer roots. The thirty years of strong postwar growth, however, were followed by years of relative stagnation as developed countries struggled for new ways of reviving growth. In response, the Anglo-American countries empowered the markets at the expense of the state, while continental European reforms favoured the superstate and the integrated market. Both sets of reforms came at the expense of the community. These different choices left countries differently positioned for the ICT revolution, the subsequent Global Financial Crisis, and the backlash against the global order. I describe the reasons for the rise of populism and trace related developments in China and India.

I turn to possible solutions in Part III. To strengthen the chances that society will stay liberal and democratic, we need profound changes that rebalance the three pillars in the face of technological change. We need more localism to empower the community while drawing on the state and markets to make society more inclusive.

Finally, some caveats. I intend this book to be comprehensive, but not exhaustive. Therefore, I illustrate the course of history with examples from prominent countries, but it would tax the reader’s patience (as well as my editor’s) if I substantiated points with the detail that specialists require. This book offers a broad thesis of its own, and draws on much academic work, but it is aimed at a wide audience. I also offer policy proposals, not as the final word but to provoke debate. We face enormous challenges, to which we need not just the right solutions but also ones that inspire us to act. It is worth recalling the words of Chicago architect Daniel Burnham, ‘Make no little plans; they have no magic to stir men’s blood and probably themselves will not be realized.’11 I hope this book stirs your blood.

INTRODUCTION

THE THIRD PILLAR

Why do our neighbours matter when we can reach people across the world with a click? What role do proximate communities play today in an advanced country that has both a well-functioning state and vibrant markets? Despite the state and markets having taken up many of the early community’s functions, the proximate community still performs important ones. It helps define who we are. It gives us a sense of empowerment, an ability to shape our own futures in the face of global forces. It also offers us help in times of adversity when no one else will. Of course, the community can also be narrow-minded, traditional, and resistant to change. A successful modern community supports its members even while being more open, inclusive, and dynamic. We will see why it is difficult for a community to do all this, but also why it is necessary if the community is to address the problems we face.

THE PROXIMATE COMMUNITY

We are shaped by the people who surround us. Our joys are more pleasurable when they are cherished by our friends, our successes more enjoyable when they are applauded by those whose opinions we care about, our protests are less lonely and our indignation less unsure when shared by our supporters, our hatreds more corrosive when goaded by fellow zealots, our sorrows less burdensome when borne with our family. Moreover, we gauge our actions based on how they affect people near us, on the indentations our actions make on their lives. Without such effects, we would be ephemeral passersby, with little evidence of ever having existed. Each one of us draws from multiple overlapping communities that help define who we are, that give us identity over and above the core we think is uniquely us.

There are varieties of communities, some more tightly bound than others. A community could be a group of people who are linked together by blood (as a family or clan) or who share current or past physical proximity (as people in, or having emigrated from, a village). A community could be those who have a common view on how to live a good life (as in a religious sect), share a common profession (as in the movie industry), or frequent the same website or chat groups (as in my college alumni group, where everyone seems to have a different opinion on everything that they absolutely must express). Each one of us has multiple identities, based on the groups we belong to.1 Moreover, some of us have virtual identities in addition to real ones.

As communication has improved, and transportations costs have come down, more distant communities have gained importance. For some of us, these communities may be much more important than our neighbourhood. Indeed, a central concern in this book is about the passions that are unleashed when an imagined community like the nation fulfills the need for belonging that the neighbourhood can no longer meet.

Nevertheless, we will focus on the proximate community for much of the book for a variety of reasons. Through most of history when distances really mattered, it was the only kind of community that had a serious influence on most people’s lives. Even today, it is where much economic activity is centered. For most of us, the neighbourhood is still what we encounter every day, and what anchors us to the real world. It is where we participate as sociable humans, not as clan members, co-religionists, professionals, or disembodied opinions on the web. It is where we have the best chance of persuading others that our humanity unites us more than our ethnicity, profession, or national origin differentiates us. It certainly is where we debate and persuade as we elect officeholders and participate in the governance of the local public services that affect us. It is where we congregate to start broader political movements. As we will see later in the book, a healthy, engaged, proximate community may therefore be how we manage the tension between the inherited tribalism in all of us and the requirements of a large, diverse nation. Looking to the future, as more production and service jobs are automated, the human need for relationships and the social needs of the neighbourhood may well provide many of the jobs of tomorrow.

In closely knit communities, a variety of transactions take place without the use of money or enforceable contracts. One side may get all the benefits in some transactions. Sometimes, the expectation is that the other side will repay the favour, but this may never actually happen. In a normal family, members typically help one another without drawing up papers and making payments. In many societies, friends don’t really care who pays the bill at dinner, indeed the ability to not keep count is the mark of true friendship.