Review: The Third Pillar

The Third Pillar by Raghuram Rajan was a good read. Some of it was boring to me, some was really interesting and relevant, and some was interesting and irrelevant.

His basic argument is that societies are healthiest when there is a balance among the state, the market, and the community. He says the latter is what is lacking right now.

The most fascinating section was when Rajan commented on our abandoned inner cities from white flight and the decaying rural communities affected by globalization and automation. How do we address this problem knowing there is so much wealth, productivity, and human capital in many of our largest cities?

The liberal solution is to employ equity; tax the rich and use that money to make poverty tolerable. For the conservatives that care about poor people, their solution is to build meritocratic bridges and ladders for the poor to escape those communities and thrive in more productive and prosperous cities.

Rajan suggests a different idea: build bridges (slides?) that incentivizes the well-off to move into struggling communities and schools. This is equity without the coercion.

He cites a article from The Economist that notes:

“A study by researchers at Bristol University in 2006 found that the boost to a pupil attending a grammar school was worth four grades at GCSE, the exams taken at 16. But this comes at a cost. Those who fail to get into grammar school do one grade worse than they would if the grammars did not exist. The likely explanation is that grammar schools attract the best teachers, says Rebecca Allen of Education Datalab, a research group. There is no overall improvement in results as the benefit to the brightest is cancelled out by the drag on the rest.”

In other words, students in poor performing schools benefit by being in a class with smart kids. Take the smartest kids out of theses schools and everyone is worse off (If true, this makes gifted tracking programs look pretty bad.) Here is Rajan on what his idea might look like:

“Another way of encouraging mixing, or at least discouraging sorting, is through tax code. High income households whose children are enrolled in public schools in low income districts could be given a tax rebate, essentially because of the positive spillovers that their children are likely to contribute to their class. Top universities could give incentives to students studying in public schools in low income districts by allocating a fraction of admits to each public school in the state… the presence of these well prepared children and their pushy highly educated parents in the schools will be beneficial to all.”

I'm really intrigued by this, but it would have to be a pretty big incentive to get an upperclass suburban family to send their kid to the inner city. All it takes is one day of bullying for the parents to pull their kid.

Could some sort of bizzaro affordable housing zoning work? A poor community zones a neighborhood for new development that is 150 percent market rate? Anyone who moves in gets the same tax and college incentives he suggests?

Here are the other sections from the book I highlighted:

On Post-market support

“...pre-market support—help in preparing the individual to enter the market ... Post-market support—help to those who are hit by adverse economic conditions, or who, because of disability, misfortune, aging, or technological change, are incapable of earning a living ... today the U.S. schooling system is no longer adequate, hence more weight falls on post-market support, which the U.S. is ill structured to provide.”

If pre-market support (our public school system) is not adequately preparing kids for getting jobs, maybe the solution is to spend less money there and more on post-market support.

On Rent Seeking

“As Adam Smith recognized, regulatory bodies often become subservient to the powerful among the regulated--in which case, paradoxically, regulations become a tool with which to protect the powerful and stifle competition.”

Yes, you need the state to regulate business. But two things happen when the state gets too big. First, less is asked of the community to provide aid to their neighbors and people become less engaged civically and more individualistic (see the next quote below). Second, when the state gets too big it becomes prone to corruption. Big businesses will use it to snuff out competition, which ultimately hurts the consumer.

On Localism and Housing

“Progressives wanted freedoms that were tempered by responsibility toward the family and the broader community. In the short run, they pushed for greater government involvement. Unfortunately federal and state governments, as well as professional organizations like teacher’s associations, assumed greater power. This had the tendency to usurp communities, reducing local control as well as the customization of policies to local needs, leaving citizens less engaged.”

“... when inclusiveness goes up against localism, inclusiveness should always triumph … when we have to choose between competition and property rights, we should invariably choose competition.”
[For example:] “A bill … would allow all housing being built within a half mile of a train station or bus route to be exempt from regulations regarding the height of the building, number of apartments, provision of parking spaces, or design specifics.”

I'm always a fan of, when introducing a new idea, someone points out the limitations and exceptions, which Rajan does well above when describing localism. More on housing:

“The state could mandate that some fraction of the residences in any community, say 15 percent, be affordable for low income residents. If the community would like to maintain its aesthetic look and allow only large single family residences, then a sufficient number of these should be rented or sold to low income families, with the rest of the community bearing the cost of making these affordable.”

“Countries that have a severe sorting problem could build in stronger tax incentives to mix, including residential congestion taxes that require rich households to pay higher taxes if they stay in communities with other rich households, and lower taxes if they stay in low income communities.” 

Massachusetts has tried to do this with smart growth zoning. This is a tough issue because it requires local government to solve a national problem (affordable housing), when local government does not benefit from it. It feels like a Nash equilibrium problem where we need the state to step in to coordinate efforts. No community wants low income housing since they worry it will lower property values. If each community allowed it, it would be fine. But the first community to allow low income housing will be less desirable compared to all the other communities that have zoned it away, leaving no incentive for anyone to defect.

On Social Capital

“...Italian cities that achieved self governance in the Middle Ages have higher levels of social capital today—as measured by more non profit organizations per capita, the presence of an organ bank (indicating a willingness to donate) and fewer children caught cheating on national exams. Self governance instilled a culture that allowed citizens to be confident in their ability to do what was needed … decentralizing power to the communities may thus reduce apathy and force their members to assume responsibility for their destinies rather than blaming a distant elitist administration.”

Finally, I was intrigued by his mention of the Elberfield System. From Wikipedia:

"The administration of poor relief was decentralized. Working under a citywide poor office, sub departments were established in smaller precincts—their relief workers worked on behalf of the central office.
Each precinct was in the care of an nonsalaried almoner whose duty was to investigate each applicant for aid and to make visits every two weeks as long as aid was given.
Key to the system was that the almoners and overseers served voluntarily. They came mostly from the middle class, being minor officials, craftsmen or merchants. Women were also accepted as almoners, giving them a rare (for the time) opportunity to participate in public life. The larger number of volunteers decreased both the number of clients per almoner, and the total system costs.
The system gave great satisfaction; the expenses in proportion to the population gradually decreased, and the condition of the poor is said to have improved."

Unfortunately, attempts to introduce the system in non-German cities were unsuccessful.