In September 2014, Professor Michael Porter and Professor Jan Rivkin released a seminal report on the state of the U.S. economy titled “An Economy Doing Half its Job.” In it, they argued that years of underinvestment in K-12 education, vocational skills training and infrastructure combined with the forces of globalization and technological change have resulted in the hollowing out of the Middle Class, rising inequality and an economy that is structurally underperforming. Below are excerpts from a conversation we had with them:
Can you briefly explain what the U.S. Competitiveness Project is and why you decided to undertake this project?
Jan Rivkin (JR): The Dean of the Harvard Business School started the project in 2011, and about 20 faculty colleagues have been involved so far. The project was motivated by two ideas:
First, a number of faculty felt that what we were seeing in the U.S. economy was more than just the hangover of the Great Recession. At the time, many people were talking about weakness in the U.S. economy as a cyclical phenomenon, but we felt we were seeing something more: a structural challenge to U.S. competitiveness.
The second motivating idea was that something important was missing in the public discourse. Much of the discourse focused on the question, “What should the Government do?” which left unanswered the question, “What should business leaders do?”
We defined U.S. competitiveness as the ability of firms to succeed in the global marketplace while also lifting the living standards of the average American.
Our diagnosis was that, with competitiveness defined this way, there was strong evidence of structural weakness in the U.S. economy, weakness that predated the Great Recession.
Michael Porter (MP): When we started diving into competitiveness this way–the idea that business has to do well BUT also the average employee has to do well–we started confronting the issue of this growing inequality among the outcomes of citizens. People with certain skills were doing phenomenally well because, all of a sudden, they could create value on a global scale. It is inevitable in globalization that the upside gets higher. The idea that the rich are getting richer is a natural extension of the globalization of the economy.
But we also saw that the middle was under serious pressure and that there was this growing inequality. The idea that some people can do really, really well and others are struggling is untenable and unsustainable. It undermines the American Dream. It also starts to create severe friction in the political system between the few who do well and the many who are struggling.
Also, as the middle is not doing well, their ability to drive the economy goes down. Also, one of the reasons we are seeing this inequality is that the skill deficit is a profound problem not just for those individuals but also for businesses looking to hire.
Over time we have come to see that this is the issue of our age. One of the most important things for millennials to understand is that their fundamental challenge in life is to move to a society in which everyone can do well.
JR: A natural question is, “Why should those who succeed be concerned about the lack of shared prosperity in the U.S.?” If the middle class is weak, consumption will be weak and it will eventually hurt business and the economy. If workers aren’t sharing in prosperity they will be unhappy and less productive. In a democracy, if the vast majority are not prospering, then you wind up with anti-business legislation that will hurt everyone.
So for many reasons, the next generation should feel that the cross hairs are on their back. If we don’t find a path toward shared prosperity in America, even the most successful individuals in the next generation will suffer.
MP: A lot of the trends we discuss started in the 90s, and maybe even before that. Alarmingly, a little known trend is that the population of small businesses as a whole in America has been struggling. The ability to start your own business has been a ticket to opportunity for so many Americans, but that wealth creation mechanism has been faltering as well. For the first time ever I think, we had more businesses fail than were started in 2008.
That is quite a stunning development in the context of the American Dream. We need people to start thinking differently to reverse these trends.
For example, there was an article about Starbucks adopting new working hours where employees were supposed to work half a shift, close the store, then come back and open the store and continue the shift. A very smart person probably thought of that as a way to optimize the business, but that person didn’t take into account the effect this would have on the employee’s family life and what it does to their morale and health.
Ultimately, we are going to destroy this amazing business culture. If we lose faith in business, we will become Venezuela, we will become a society that loses the very essence of what makes it unique.
What is the most recent evidence of signs that this is happening?
MP: Well, I think Occupy Wall Street is a symptom that people are angry. Wall Street was doing well while the economy was wrecked. People always thought banks are there to help me and provide capital for my life, and now banks turn out to be leeching off their customers like giving people a free checking account and collecting overdraft fees. And that was some clever MBA who thought of that, but that is not good for the customer and that is not the fundamental purpose of business–to succeed when their customers fail.
Somehow we have evolved to a very dangerous place, and we have to change how people like you view what business is about. How to think about their employees, their community and how to drive productivity, not just gimmicks that help them avoid paying benefits.
The best shot lies with 25-35 year olds who are much more aware of the problems in society and are more amenable to the ideas of creating shared prosperity.
JR: One of the ideas we have been paying attention to is the notion of the commons. The commons is a set of shared resources that businesses draw upon to be productive–things like an educated and healthy workforce, basic R&D and strong infrastructure. Over time the commons has deteriorated as forces of globalization have made it easier for companies to move from place to place, trying to optimize their location. That has led companies to be less connected to their communities.
The commons deteriorated further in America as we tried to sustain an illusion of prosperity by making promises to the middle class like giving them more debt so they can consume despite stagnant incomes. When we have a government that is fiscally hobbled and politically divided, it also doesn’t invest adequately in the commons.
It is important to distinguish between changes we can’t and don’t want to reverse (e.g., globalization and technological change), and changes due to underinvesting in the commons, which are fully reversible and should be reversed. Underinvestment in the commons is a self-inflicted wound. Businesses have to invest in the commons and invest in things that make the middle class productive.
What are those self-inflicted wounds and how can we reverse them?
JR: We’ve highlighted eight areas that federal policy makers should focus on. We’ve also highlighted actions for business leaders in collaboration with local government and non-profits.
MP: Many local and state governments have made quite a bit of progress in reversing these trends. It is the federal government that has made virtually no progress on any of important issues in the last 15-20 years.
JR: What is frustrating with federal policy is that many basic things we believe would improve competitiveness have bi-partisan support. So the mystery is not what we need to do, but why we aren’t doing them.
MP: And part of it has to do with the political system where the Democrats are for the people who aren’t doing well and the Republicans are kind of for the people who are doing well. There is a lot we can do that is bipartisan but it is too much like WWI where we fight over every little step and the trenches move one inch at time.
High-skilled immigration is a perfect example. It is nutty. We know we have gaps in skilled labor, and we can at least give the people who graduate from our universities the ability to stay and work if they want.
JR: Our optimism stems from what we see going on at the local level. Mayors and Governors and local business leaders are breaking down silos and finding new ways to restore the commons city by city. I tend to leave Washington depressed, but I go to Nashville or Columbus or Minneapolis-St. Paul and come back energized.
What is a city that has done a particularly good job?
JR: Salt Lake City: when you look at the combination of economic growth, equality and mobility, you find that Salt Lake City stands out on all of them. Boston, in contrast, has high mobility and growth, but also high inequality. The same is true in the Bay Area.
Pittsburgh is also a great story. The really great story is to look at Pittsburgh and Detroit, side by side. Go back to the 1960s and you will find that the two cities looked very similar. Both were industrial powerhouses dominated by a single industry that was about to be attacked by changes in foreign competition and technology. Pittsburgh turned itself around, while Detroit collapsed.
In Pittsburgh, part of the story was strong cross-sectoral collaboration. Business leaders worked with political leaders of both parties to get the center of the city working, to invest in education and infrastructure, and revitalize downtown. In Pittsburgh, business leaders never abandoned downtown.
What is the path forward?
JR: Many of the most of the promising initiatives we see in America are local, cross-sectoral and long term efforts to rebuild the commons and restore shared prosperity. These efforts typically involve all sectors: business, government, non-profit, faith-based institutions, and so on. We’re asking ourselves, how can we prepare more young leaders to break down traditional silos and rebuild the commons?
MP: We recently had a major convening of energy and environmental leaders to talk about the issue of our ability to create a competitive advantage through energy. How can we invest in unconventional energy sources without compromising our environment? This energy opportunity is a game changer for our economy. How can we avoid having a fight, state after state, that pits interests against each other without focusing on win-win pathways?
We are also focused on how we can create growth with shared prosperity. How can you drive growth that benefits everyone?
JR: We are doing research to understand the problem, identify and spread best practices, and find common ground so we can move forward.
MP: But we have a lot of people who have spent the last 25-30 years running companies and we have evolved into a definition of what businesses should do that I think has gotten us off track and into a dangerous area.
Those who are best equipped to lead in another direction are going to be people just entering business today. We didn’t talk about this before because America was a success. Now that reality is changing, and we need to think differently about how we do business.
Christina Sgardeli also contributed to this article.