STACEY VANEK SMITH, HOST:

The U.S. economy is in good shape. It's in really good shape. But it's also in kind of a weird place. Unemployment is really low. The stock market is really strong. Companies are making record profits. And yet, there's this feeling that all of this growth and progress is leaving a lot of people and places behind. The rising tide is not lifting all boats, and inequality in the U.S. is a big problem - and getting bigger. That is the subject of a new book by Raghuram Rajan. Raghu is an economist at Chicago's Booth School of Business and former head of the Reserve Bank of India. His book is called "The Third Pillar."

This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith. Today on the show, we talk inequality with Raghu Rajan - why it's happening, what it means and how we could possibly solve it.

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VANEK SMITH: I'm talking with Raghu Rajan, economist and author of the new book "The Third Pillar."

Raghu, one of the interesting questions that you tackle in your book has to do with technology. You open up the chapter describing, like, an alien landing on Earth (laughter) and just noticing that we're - like, you know, there's this whole strange species that seems to be staring at these little devices all the time.

RAGHURAM RAJAN: Absolutely. I mean, the world has changed considerably over the last 30 years because of the technological revolution. It's already had tremendous effects. It used to be you couldn't make in another country because you couldn't control the process of production. You didn't know what was going wrong. The information and communications technology has changed that completely. You can maintain minute-to-minute control over what's going on in your factory in a different country, and that's made a big difference in where the location of manufacturing happens. It's no longer only in industrial countries. Of course, we have supply chains across the world moving products back and forth. And of course, where you produce is where it's cheapest.

VANEK SMITH: Right, the famous example being the iPhone.

RAJAN: Absolutely. The iPhone is produced largely in China. But the profits go to Apple, one of the most profitable companies in history. Who does it hurt? Certainly the manufacturing worker who loses his job in the United States. Who does it benefit? The service worker who's doing R&D for Apple or who's managing Apple finance or Apple marketing. And this is the second effect of technology, that what it has done is it has removed jobs at the middle level - middle-income level, created more jobs at the high-income level and more jobs at the low-income level.

What is interesting is, for the jobs at the high-income level, it's created what we call sometimes the superstar effect - that is, because that really productive R&D engineer can now target a global market rather than just a local market, their pay goes up tremendously because you want the best R&D engineer since having that best R&D engineer will allow you to create products which target the whole world. There's one example in the book. Elizabeth Billington, who sang in the London Opera in 1801...

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MARIA DRAGONI: (Singing in foreign language).

RAJAN: ...Her pay - she was the most renowned artist at that time. Her pay was about a million pounds in today's money.

VANEK SMITH: Wow.

RAJAN: Yeah. That sounds a lot. Right?

VANEK SMITH: Yeah.

RAJAN: But think about who the most - one of the most famous divas at this point is Taylor Swift.

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TAYLOR SWIFT: (Singing) Is it cool that I said all that? Is it chill that you're in my head?

VANEK SMITH: (Laughter) Indeed.

RAJAN: And Taylor Swift earned 170 million in today's money. OK? That's dollars. So translate into pounds, maybe 150 times what Elizabeth Billington earned. So in other words, our superstar artists earn far more. And that's true of our superstar lawyers. It's true of our superstar CEOs. They earn far more because they now address a much larger market. Taylor Swift's songs are downloaded in the billions. Elizabeth Billington could sell out only in one single opera house.

So in that sense, effectively, what technology is doing is creating an extreme meritocracy where you - if you're really skilled, if you've been to the right schools, you've been to the right universities, your wage can be significantly more than others. We've heard again and again of the 1 percent. Well, to be in the 1 percent, increasingly, it requires you to have a tremendous education.

Now, how do you get a tremendous education? Well, you have to start by being born in the right family. Then, you get the right sort of nutrition, right health. You get the right preschooling. You go into a school where you're surrounded by a lot of people like you if your parents moved to the right district. But what does that do to the parent who's trying to think of where they want to put their kids? They don't want to stay in the old mixed communities where there are lots of kids from poorer families; you want to move your kids to places where they'll be challenged by other kids who've had the same or even better backgrounds. So you pick the richest district that you could possibly afford. None of this is saying that your inheritance is your destiny, but it's saying it comes very close to it. What I say in the book is we've moved to that nirvana of the middle class, a true meritocracy. But this meritocracy is a hereditary meritocracy. You essentially are born into it.

VANEK SMITH: And then the effect of this is, I guess, a backlash of sorts.

RAJAN: I mean, the effect of this is to leave the people in the mixed neighborhood who can't move, it leaves them more frustrated - more, you know, sensing that capitalism has a wonderful set of opportunities, but they're not opportunities for me. And so what accompanies all this - and you see this in the United States - is social destruction in a sense - the breakdown of families, growing divorce rates, growing pregnancies, of course the opioid epidemic to some extent. These are all social tragedies that follow on the economic tragedy.

VANEK SMITH: What are some solutions to our current situation?

RAJAN: Well, I would argue that obvious answers are to have more growth in the areas that are falling behind. So it doesn't matter that the country is growing at 3 percent - if the coastal cities - the New Yorks and the San Franciscos - are growing at 5 and 6 but, you know, Steel City, Ill., is growing at minus 1 or 2.

VANEK SMITH: Right.

RAJAN: So what we need is more - a better distribution of growth, especially in the areas that haven't recovered since the financial crisis. Now, what sometimes people immediately jump to is that means we need centralized, place-based policies. We need - this is economic jargon for saying the policy should be targeted at a specific area. For example, the opportunity zones the administration has come up with, which essentially reward investment in some of these areas, is touted as a way to spread activity. But think of one of the major recent events when Amazon basically was told by the residents of Queens that it was not so welcome even though it was...

VANEK SMITH: (Laughter) Yeah.

RAJAN: Yeah. I mean, this is what every locality is supposed to be dying for - right? - more jobs, good jobs.

The reality is perhaps those jobs weren't appropriate for that community. And instead of that being jobs for the boys in the neighborhood or the girls in the neighborhood, it could have been jobs for outsiders. The bottom line is, you know, when we look at examples like Amazon - what should have worked, what everybody has been touting as the answer, the community turned around and said, no, that's not the answer we want. And that should make us think.

VANEK SMITH: Thank you so much for coming on and talking about your book. It's so interesting.

RAJAN: You're most welcome.

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VANEK SMITH: This episode of THE INDICATOR was produced by Darius Rafieyan, edited by Paddy Hirsch. Our intern and fact-checker is Willa Rubin. And THE INDICATOR is a production of NPR.

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