A Real Path to Shared Prosperity in America.
How can our nation continue to grow while also providing a path to prosperity for more Americans?
It’s not hard to see why Americans feel they are getting conflicting messages about the economy. On the one hand, they read in the headlines that the economic recovery is in full swing. Unemployment is down to 5.1 percent, lower than it was before the Great Recession. High-tech startups are once again churning out young millionaires. And the stock market was barreling to new highs, at least until China’s economy softened.
On the other hand, most working- and middle-class Americans don’t see the benefits of the recovery showing up in their paychecks, retirement savings and home values. In a recent Gallup poll, half of Americans reported multiple financial challenges at home. The fear that “today’s prosperity doesn’t include me” is creating deep anxiety. As the 2016 presidential election nears, this anxiety will, no doubt, continue to shape the national debate.
It’s this odd bifurcation—an economy filled with contrasts and contradictions—that led us to convene 73 CEOs, mayors, governors, university presidents, economists and thought leaders from across the political spectrum at Harvard Business School (HBS) this summer to work on what may be the critical question for this country: How can our nation continue to grow while also providing a path to prosperity for more Americans?
The group examined why the U.S. economy has failed to generate shared prosperity in recent decades, and a key root cause become surprisingly clear: The nation has invested poorly in the local, shared resources that drove our strength in the half-century after World War II—resources like public education, workers’ skills, infrastructure and innovation. This is a problem we can solve, which is one reason the conversation at HBS left us more optimistic than you might have imagined. Despite the severity of our economic challenges, there is a clear path forward.
As the 2016 presidential election swings into high-gear this fall, the HBS conversation underscored how local leaders in places like Minneapolis, Salt Lake City and Columbus are already showing Washington the path to both growth and shared prosperity.
Falling short of our aims
Our conversation this summer began with an ambitious two-part goal for the U.S. economy: we want strong growth, and we want the resulting prosperity to be shared widely. Sobering data show that the country is currently falling short of this goal. Specifically, the U.S. economy is failing to produce shared prosperity. Large businesses and highly-skilled workers are doing well, but small businesses and the average American are falling further behind. In fact, 54 percent of Americans believe that the widening gap between the incomes of the wealthy and everyone else is undermining the idea that every American has the opportunity to move up to a better standard of living.
If prosperity in America were being shared, we would expect median household income to be rising in real terms. However, inflation-adjusted median household income peaked in 1999 (Figure 1). As of 2014, median income stood at a level first attained 17 years earlier, in 1997.
Though the median household, and indeed most Americans, have seen economic stagnation in recent years, the wealthiest Americans have experienced enormous prosperity. Figure 2 tracks the average inflation-adjusted income of the top 1 percent and the other 99 percent since 1913. The end of the Great Depression until the 1970s was the golden age of the American middle class. But from the 1980s onward, the incomes of the One Percent have soared.
The disturbing trends in our economic data reflect not only a lack of shared prosperity but also slow overall growth. Figure 3 shows the compound annual growth rate of real U.S. GDP during the last six decades. The most recent decade was notably lackluster compared to the preceding five decades.
In sum, we see an American economy today that delivers only modest growth and fails thoroughly at generating shared prosperity.
How did America get here?
So what happened to shared prosperity in America? Some of the answer is well known—the huge economic changes wrought by globalization have been debated for decades. But we and our colleague Michael Porter have argued that part of the answer has been overlooked.
Our answer begins with an idea, what Gary Pisano, Willy Shih, and others call “the commons.” The commons includes the shared resources that companies and communities rely on in order to be productive. Every successful company and every region begins with certain foundations—an educated populace, pools of skilled labor, vibrant networks of suppliers, strong infrastructure, basic research that can be commercialized, and so on. Historically in post-war America, government and business collaborated to build a highly-productive commons, and, as a result, Americans across the economic spectrum thrived.
Starting around 1980, however, shifts in technology, geopolitics, and governance changed the game. It became possible to do business from anywhere to anywhere, and large firms became globally mobile. With new forms of automation, companies could do more with fewer, more-skilled workers. The ensuing waves of globalization and technological progress brought great benefits to American firms and consumers. But longer term, they had three other consequences.
First, these changes weakened the connections between companies and their communities. Less dependent on a local workforce, for instance, companies felt less compelled to invest deeply in nearby schools and skills. The commons suffered.
Second, workers—especially those in the middle of the skills spectrum—suddenly found themselves competing for jobs against hundreds of millions of ambitious workers around the world and against quickly improving technology. Workers lost bargaining power, as reflected in the decline of private-sector unions. America’s middle class languished.
Third, individuals with unique skills—from celebrities and sports stars to entrepreneurs, investors, and consultants—could now sell their services on a global scale, opening up huge opportunities for the most talented and best connected. Inequality soared as the “One Percent” flourished.
As waves of change crashed over our middle class, American society responded in an understandable but dangerous way. Rather than redouble our investment in the commons and equip our middle class to compete in a new economy, we collectively made a series of unsustainable promises to maintain the illusion of shared prosperity: we extended credit to the middle class beyond its means, encouraged consumption, pledged to cover healthcare costs in retirement, and cut taxes across all brackets.
These promises, coupled with the Great Recession and two wars, left America’s federal government—and many states—fiscally overextended, politically polarized, and unable to invest adequately in the commons. Public funding shifted from investing for the future to paying for the past, with infrastructure, basic research, and education suffering as a result.
In sum, with footloose firms and a hobbled government, America systematically underinvested in the common resources that underpin shared prosperity.
Where might answers lie?
This analysis of the roots of the problem helps us pinpoint what can and cannot be done to address America’s lack of shared prosperity. It would be futile and unwise, for instance, to try to reverse recent trends in globalization and technology. Similarly, the gridlock in Washington politics is unlikely to loosen in the immediate future, despite our highest hopes. Rebuilding the commons, however, is within reach.
In fact, many of the leaders who gathered at HBS in June have personally led coalitions that strengthen elements of the commons such as education, workforce skills, infrastructure, and ecosystems that support innovation and entrepreneurship. Three aspects of their efforts stand out.
First, the efforts are intensely local, typically focused at the metro or regional level. In essence, local leaders across the country have chosen to act to boost shared prosperity in their locales and not to wait for change in Washington. In Massachusetts, for instance, an ambitious public investment initiative called the Massachusetts Life Sciences Center is combining the resources and convening power of government with the expertise of local universities, businesses, medical centers, and private investors to accelerate life-sciences innovation and entrepreneurship in the region.
Second, the efforts involve participants from multiple sectors—government, business, education, nonprofits, labor, philanthropy, and others—working together in innovative collaborations. We see, for instance, community colleges working with companies to train the graduates employers want to hire; universities spurring innovations that entrepreneurs turn into new businesses; and elected officials leading coalitions that restore critical transportation infrastructure. In Minneapolis-St. Paul, this type of cross-sector collaboration is manifested in the Itasca Project, an alliance of dedicated business and civic leaders working to address regional deficiencies in areas such as infrastructure and higher education.
A new framework describing these cross-sector collaborations showed us one thing: it’s hard work to start, build and sustain such coalitions. They require real leadership and long-term commitment. But when the right ingredients are in place, progress is possible. Many of these efforts are innovative, pushing on the traditional definition of public-private partnerships. Some look for new ways to finance social innovation, such as pay-for-success models and social impact bonds. In Salt Lake County, Utah, the local government has partnered with nonprofits, educators, and private investors to expand high-quality early education programs through an innovative pay-for-success contract. Others reflect John Kania and Mark Kramer’s principles of “Collective Impact,” an approach to collaboration that requires a common agenda, explicit goals and metrics to measure success, and a funded “backbone” organization to ensure continuity.
Third, our discussions emphasized the crucial role that business plays in efforts to rebuild the commons. In a number of American cities, business leaders have quietly but persistently assembled civic alliances that pursue growth and shared prosperity. After all, business is deeply affected by the erosion of many of the elements of the commons: a business can’t thrive where it lacks skilled workers, strong infrastructure, and an ecosystem that enables innovation. Furthermore, business leaders often have the skills and can assemble the resources to take on large, complex problems with multiple constituencies and sustain them through election cycles and political terms in office. In Columbus, Ohio, for example, the CEO-led Columbus Partnership has marshalled the resources and expertise of the local business community to promote economic development and, increasingly, help city agencies tackle thorny issues like education reform.
Where should we act?
Most of the conversations we held at HBS focused on solutions. In particular, we looked at ways to move forward in four areas of the commons: PK–12 education, middle skills, entrepreneurship, and infrastructure.
Recent research by Harvard Business School faculty highlights the important role that business plays in supporting and participating in cross-sector initiatives that aim to improve PK–12 education. Many of these initiatives take the “Collective Impact” approach mentioned earlier, and they aim especially to align the actions of school districts with the efforts of the many surrounding nonprofits that provide tutoring, nutrition, mentoring, and other services to students in need. In Greater Cincinnati, for example, the StrivePartnership has built a successful coalition of educators, nonprofit leaders, businesspeople, and public officials with a coherent strategy for guiding children from cradle to career.
Business is also key to solving what is called the “middle-skills gap,” the shortage of workers whose training requires more than a high-school degree but less than four years of college. Recent HBS research shows that there is a critical communications failure in the market for middle-skills labor. Employers must recognize that they cannot rely on the “spot market” for skilled workers—posting job openings with the expectation that qualified workers will simply appear on demand. Rather, they must manage their “talent supply chains” with the care and foresight that they already apply to physical inputs. Educators need to cultivate ongoing relationships with local employers. Today, a handful of business-led collaborations with community colleges are achieving better outcomes for students and workers, greater clarity for educators, and lower turnover and retraining costs for businesses. This approach is working well in North Carolina, where Siemens Corporation is collaborating with Central Piedmont Community College to provide students with the training necessary to thrive at the company upon graduation.
A third area of focus was entrepreneurship, which has been widely viewed as a path to the middle class but is now under stress as the country continues to experience a decline in startups as a portion of all businesses. A “playbook” reviewed at the convening provides a roadmap for bolstering the three areas essential to encouraging growth in entrepreneurship: access to capital, investment in skills and development of strong entrepreneurial ecosystems that include clusters, accelerators and other supportive elements for small-company growth.
Finally, local collaborations are playing an important role in improving transportation infrastructure, as Rosabeth Moss Kanter described both at the convening and in her recent book, MOVE: Putting America’s Infrastructure Back in the Lead. Projects like the Port Miami Tunnel, a billion-dollar effort to link the Port of Miami to major highways, have demonstrated that business involvement and leadership are often critical factors in everything from concept development to the financing of these critical investments.
In at least these four areas of the commons, we see collaborations springing up in cities and regions across the country—and making progress. The benefit of these kinds of actions is that they are “win-win-win”: they benefit citizens, communities, and businesses. They tend to rely more on pragmatic leadership than ideology, so membership in these efforts can be inclusive. This gives us hope for the future, and a template for future action.
Growth and shared prosperity
While the lack of shared prosperity in our country is worrisome, the experiences of the leaders who participated in the convening leave us optimistic: the difficult work of restoring the commons has begun in cities and regions across America. However, we still face tremendous hurdles. Good ideas aren’t being improved upon, nor are they being shared fast enough. Agreement on how to measure shared prosperity has been elusive, and partisan politics continue to hold back progress on many of the issues that underpin greater shared prosperity.
As the 2016 presidential elections move into full swing, this issue weighs heavy on the minds of many Americans, including many in the business community. Candidates on both sides of aisle owe American voters thoughtful policy recommendations that address this critical issue.
But real solutions aren’t the responsibility of just our country’s highest office. The experiences of the leaders who participated in the HBS convening last June confirm that the difficult work of restoring the commons in cities and regions across America can and should be shared by other leaders—particularly those in the business community.
The leaders we convened are already making smarter investments in the commons through innovative cross-sector collaborations. Businesses are partnering with government on infrastructure. Community colleges are working with employers on skills. Universities, governments, and the private sector are forming innovation ecosystems to promote entrepreneurship and new jobs. Some of these collaborations use capital from novel sources, such as pay-for-success contracts and social impact bonds. Business leaders have emerged as critical catalysts for the new efforts.
The broader question, one that stretches across politics and corporate America, is this: Can leaders of all stripes in America work together to meet the challenge of growth and shared prosperity? Ultimately, the key idea may be a lesson that America’s history has taught us many times: the diverse parts of our nation will succeed together or not at all.