The College Fix

Democracy and capitalism in America may be doomed unless serious improvements to the nation’s education systems are made, a respected economic scholar opined at a recent guest lecture at Yale.

Technology and globalization continue to eliminate middle class jobs, so to combat that threat the middle class needs a better education to improve its capabilities and take on jobs emerging from this shift, said Raghuram Rajan, a former chief economist at the International Monetary Fund who is widely regarded as a global economy guru.

Bettering the middle class’s financial situation is critical, lest the growing divide between the have and have-nots in America balloons exponentially and ultimately leads to the demise of democracy and capitalism in America, he said.

“When and if they start storming the barricades I don’t know, but it seems to me untenable that any democratic society can maintain high levels of inequality without the pushback eventually coming,” Rajan said recently during his Coca-Cola World Fund at Yale Lecture.

In the past, the middle class suffered from a false sense of security thanks to the largely unregulated credit, housing and banking industries, and now they are in a worse predicament because of the Great Recession and its aftermath, said Rajan, chief economic adviser to India and finance professor at the University of Chicago’s Booth School of Business.

When and if that comes to a head remains to be seen, but it would not be on the scale of the Occupy Wallstreet movement, it will probably be much, much bigger, he said.

“There is a sense across the world that we have moved away from capitalism, but the capitalists are still around, and it looks like they have captured policy to bail themselves out,” he said. “Given that labor seems increasingly put upon, given that it’s powerless, are we going to see a reaction, because democracy is not giving voice to those people at the bottom.”

The answer remains to be seen, and meanwhile there’s plenty of blame to go around, he said. Politicians are at fault for much of this mess, he said, as crony capitalism does exist in America. But don’t place all the blame on fat cats, he added.

“The crisis itself wasn’t caused by elitists,” he said. “It had some populist underpinnings, attempts to spread the gains more widely – but they backfired because they were short term attempts, not really well thought out longterm efforts of spreading the gain.”

“We have this dual economy where the elites are doing very well, while the people who the policies were supposed to help are worse-off post-crisis.”

Now the middle class in America is at a crossroads, as their jobs are replaced by computers or workers in other countries, and the country’s political and economy systems could crumble without change, he said.

“My sense is if this increasing in inequality persists we are going to get a delegitimization of capitalists as well as democracy, and it will be to the detriment of both,” Rajan said.

But all hope is not lost, he said.

“Get back to more reasonable income distribution – not through massive government intervention, limiting outside entry and limiting the growth of technologies – but by improving people’s endowments, by improving education, by improving capabilities, and tying education and capabilities more to the kinds of jobs being produced by the economy,” he said.

It won’t be easy, he said.

“Clearly we have to focus on education and skills, clearly we have to improve innovation … clearly we can spend better, but it will also require some resources,” Rajan said. “The key question here is how do you get the working rich … to pony up for the kind of changes that need to take place, and at the same time how do you keep the policies of the government from getting overly focused on taxation and redistribution to the detriment of innovation? We need a balance between both sides, and that is the difficult challenge going forward.”

IMAGE: Aaron S./Flickr

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