The Agenda

Thoughts on Raghuram Rajan’s Fault Lines

I’ve been praising Raghuram Rajan’s excellent forthcoming book, and I was struck by the fact that Matt Yglesias has also praised the book. But Matt has a number of caveats, and I’d like to address at least some of them, in part to sharpen my still-evolving thinking on a variety of subjects and themes raised in the book.

The book is a little bit hard to classify, since Rajan writes in the style of a member of the political right and has a couple of wingnutty preoccupations, but the bulk of his ideas would fit comfortable on the progressive agenda.

Late last month, I anticipated this notion — that Rajan’s ideas would fit comfortably on the progressive agenda — and I suggested that it was not quite right. Matt’s analysis suggests why that’s true. After offering an excellent summary of the book’s core arguments, he offers the following:

His proposed solutions, unfortunately, seem unlikely to materialize any time soon. He puts a lot of emphasis on the need to improve the performance of our education system, especially through provision of high-quality preschool and things like prenatal health care and child nutrition. I bet we’ll make some progress on these fronts, but as he observes it takes decades for this stuff to pay off if it works at all.

One of the central reasons Rajan’s agenda is more centrist than progressive is that he thinks measures that would have a more immediate impact would likely prove counter-productive. Indeed, this is part of his critique of populist credit expansion. Improving educational outcomes is hard, expensive, and time-consuming, but it is one of relatively few reliable tools for addressing 50-90 wage dispersion. 

After the fight to the death over ObamaCare we’re certainly not going to see congress want to undertake further controversial measures to delink health care and employment.

I actually think that a repeal-and-replace movement could make a great deal of progress on this front. Ironically, the role of PPACA in encouraging employers to drop coverage in large numbers could make a more cost-effective approach rooted in replacing employer tax subsidies with refundable credits for the purchase of insurance coverage more likely rather than less. It’s certainly true that this won’t happen in the next year or two, but I see no reason for fatalism on this front. 

I see no signs of political interest in reforming the Unemployment Insurance system.

This is probably true, and Matt goes on to offer an interesting discussion of the political dilemmas involved. Rajan suggests that structural changes in the employment landscape suggest that our traditional UI model is no longer adequate. Basically, we used to expect that people would find new jobs fairly quickly after losing their old jobs, without much need for retraining, etc., because the “asset specificity” of U.S. workers wasn’t as high as it had been in an earlier era. But in this downturn we’ve seen an extraordinary rise in the number of long-term unemployed. To some extent, as I’ve argued before, this is an artifact of UI extensions and rising affluence. But there is a darker story at work as well, one that relates to the “cleansing” that has to happen after a long expansion: some sectors aren’t coming back, and workers who dedicated themselves to mastering said sectors will necessarily have a tough time in a new, unfamiliar economic environment. 

I think Matt is too quick to dismiss Rajan’s careful, empirically grounded arguments re: CRA, but he concludes on an important note:

The other thing about that is that if policymakers tighten monetary policy in the face of high unemployment and in the absence of inflation, then I don’t see how middle class wages are never going to go up no matter how well-educated we become. Better human capital lets you command better pay in the long-run, but the causal mechanism still has to be actual bargaining power in the labor market which can’t happen unless policymakers aim for employment. Since Rajan deems rising inequality to be among the threatening fault lines, this seems like a big problem.

He expands on this theme in later post.

My sense is that we need more than UI reform: just as I’d like to see more stable fiscal and monetary policies, I’d like to see revamped labor market policies that retain high levels of flexibility while also placing heavier emphasis on wage subsidies rather than interventions like minimum wage laws, etc., to help stabilize employment numbers at a high level during what is likely to be a long, difficult economic transition. This is a very big subject, and I expect to continue writing about it. 

I will say that I found a lot of Rajan’s policy prescriptions to be pretty weak tea. His lucid explanation of big-picture issues surrounding global imbalances more than make up for that. But don’t look to the book for silver bullets. Rajan, to his great credit, is kind of an anti-silver-bullet thinker. 

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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