The Third Pillar. Raghuram Rajan

the increased attractiveness of drugs, gangs, and crime; and persistent youth unemployment. The opioid epidemic is just one symptom of the hopelessness and despair that accompanies the breakdown of once-healthy communities.

      The technological revolution has been disruptive even outside such economically distressed communities. It has increased the wage premium for those with better capabilities significantly, with the most capable employed by high-paying superstar firms that increasingly dominate a number of industries. This has put pressure on upper-middle-class parents to secede from economically mixed communities and move their children to schools in richer, healthier communities, where they will learn better with other well-supported children like themselves. The poorer working class are kept from following by the high cost of housing in the tonier neighborhoods. Their communities deteriorate once again, this time because of the secession of the successful. Technological change has created that nirvana for the upper middle class, a meritocracy based on education and skills. Through the sorting of economic classes and the decline of the mixed community, however, it is also becoming a hereditary one, where only the children of the successful succeed.

      The rest are left behind in declining communities, where it is harder for the young to learn what is needed for good jobs. Communities get trapped in vicious cycles where economic decline fuels social decline, which fuels further economic decline . . . The consequences are devastating. Alienated individuals, bereft of the hope and the feeling of belonging that comes from being grounded in a healthy community, become prey to demagogues on both the extreme Right and Left, who cater to their worst prejudices.

      When the proximate community is dysfunctional, alienated individuals need some other way to channel their need to belong.4 Populist nationalism offers one such appealing vision of a larger purposeful imagined community—whether it is white majoritarianism in Europe and the United States, the Islamic Turkish nationalism of Turkey’s Justice and Development Party, or the Hindu nationalism of India’s Rashtriya Swayamsevak Sangh.5 It is populist in that it blames the corrupt elite for the condition of the people. It is nationalist in that it anoints the native-born majority group in the country as the true inheritors of the country’s heritage and wealth. Populist nationalists identify minorities and immigrants—easily identifiable targets and the supposed favorites of the elite establishment—as usurpers, and blame foreign countries for keeping the nation down. These fabricated adversaries are necessary to the populist nationalist agenda, for there is often little else to tie the majority group together.

      While the populist nationalists raise important questions, the world can ill afford their shortsighted solutions. Populist nationalism will undermine the liberal market democratic system that has brought developed countries the prosperity they enjoy. Within countries, it will anoint some as full citizens and true inheritors of the nation’s patrimony while the rest are relegated to an unequal, second-class status. It risks closing global markets down just when these countries are aging and need both international demand for their products and young skilled immigrants to fill out their declining workforces. It is dangerous because it offers blame and no real solutions, it needs a constant stream of villains to keep its base energized, and it moves the world closer to conflict rather than cooperation on global problems.

      reviving communities

      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 youth while elevating others. When the pathway to entering the labor market is not level, and steeply uphill for some, it is no wonder that people feel the system is unfair. 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 that markets and the state have steadily taken away back to the community. Historically, as markets became integrated within the nation, power migrated to the national capital, with the federal government usurping community powers in order to harmonize regulations across domestic communities—after all, no manufacturer wants to have to deal with different regulatory standards each time his product crosses a community border. As markets have become global, sovereign powers have similarly become constrained by international treaties or have migrated away from nations into international bodies like the European Union. Once again the intent is to allow global firms and markets to function seamlessly across political borders.

      We must reverse this to the extent possible. Unless absolutely essential, power should devolve from international bodies back to countries. Furthermore, within countries, power and funding should devolve from the federal level to the communities. Fortunately, the automation of procedures will help market participants, such as firms, cope at relatively low cost with the ensuing diversity of regulations. Moreover, easier communication and better data will allow both the federal government as well as people in the community to monitor how local government uses its new powers and funding. If effected carefully, this decentralization 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 disorienting tendencies of global markets and new technologies.

      inclusive localism

      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—for it 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 neighbors 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, we will achieve an inclusive localism. This will enable community revival and a desirable rebalancing of the pillars.

      What of truly distressed communities? Is revival even possible? 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 percent of the population, and African Americans 3.1 percent. Non-Hispanic whites composed 12.4 percent of the population in 2010, up from 7.9 percent in