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15 Sep 2016

Harvard Business Faculty Report: Pessimism about the Future of the U.S. Economy Deepens; Political Dysfunction the Greatest Barrier to Strengthening U.S. Competitiveness

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As political discourse confuses national discussion and candidates fail to put forth credible plans to improve U.S. economic growth and shared prosperity, Harvard’s Michael E. Porter, Jan W. Rivkin, and Mihir A. Desai call for U.S. economic strategy involving business and government

5th annual U.S. competitiveness assessment polls business leaders and general public on federal policy changes that could improve competitiveness, such as corporate tax reform and immigration reform

BOSTON—Three faculty of Harvard Business School’s U.S. Competitiveness Project today released a report that cites political dysfunction as the greatest barrier to strengthening U.S. competitiveness. The report – containing five years of in-depth analysis of U.S. competitiveness and surveys of global business leaders and the general public – lays out concrete steps that must be taken by the business community, state and local governments, and the federal government to improve the prospects of American workers and companies.

“Now, more than any time in recent history, the U.S. needs a national economic strategy involving action by business, state and local governments, and the federal government,” said Michael E. Porter, Harvard Business School professor and co-chair of the U.S. Competitiveness Project. “To make the U.S. more competitive, it is imperative that we have a fact-based national discussion about our economy and future prosperity. Unfortunately, the rhetoric this election year has added to the almost complete disconnect between the national discourse and the reality of what is causing our problems and what to do about them. This must change.”

“The U.S. economy is growing, but only slowly, and it’s leaving too many Americans behind,” said Jan W. Rivkin, Harvard Business School professor and co-chair of the U.S. Competitiveness Project. “Economic anxiety is fueling angry, divisive political campaigns with proposals that could make the economy worse. The American political system is now threatening the American economy, and vice versa. We need a sober look at the strengths and weaknesses of the U.S. economy, so that leaders in government, business, and other parts of society can work together on a national economic strategy for shared prosperity.”

The report aims to help bridge the gap between Americans from different walks of life in how they think about our nation’s economic challenges. The authors believe it is imperative that Americans understand why U.S. economic performance is weaker than in recent generations and how solving our real problems will require us to make compromises and move away from simplistic, ideological positions.

Global Business Leaders Pessimistic about U.S. Competitiveness
In America today, larger companies and the best-off citizens are thriving, but working- and middle-class Americans are struggling, as are many small businesses, a trend HBS has observed consistently during the course of the Project. To gauge the sentiment of business leaders on the prognosis for U.S. competitiveness – that is, the ability of firms operating in the U.S. to compete successfully in the global economy while supporting high and rising living standards for the average American – the Project surveyed HBS alumni on expected future trends in competitiveness and the consequences for job growth. The 2016 survey revealed that, for the first time since they began the surveys in 2011, pessimism about U.S. competitiveness is deepening.

From the survey:

50 percent of survey respondents expected U.S. competitiveness to decline in three years, with firms less able to compete, less able to pay well, or both. Just 30 percent of alumni were optimistic, expecting one or both dimensions of competitiveness to improve and neither to decline. The remaining 20 percent expected no change from current conditions.

41 percent expected firms to be less able to pay well in three years, while only 25 percent expected them to be more able.

47 percent expected the typical U.S. firm to employ fewer people in three years, while only 16 percent anticipated more employees.

Diagnosing What Ails the U.S. Business Environment
In the aftermath of the Great Recession, contrary to ill-informed diagnoses of many politicians and pundits, the Project’s work made clear that America’s problems actually began well before 2008. The Project identified 19 elements that determine national competitiveness – such as the corporate tax code and the political system – and asked HBS alumni to assess the strengths and weaknesses of each in the U.S. As business leaders on the front lines of global competition, HBS alumni are well-positioned to provide an assessment of the strengths and weaknesses of the U.S. business environment. This year, global business leaders cited the political system and logistics infrastructure (roads, bridges, etc.) as the elements that are deteriorating most rapidly in the U.S., and cited communications infrastructure and entrepreneurship as the elements that are improving most rapidly.

Full results from this year’s survey:

Dysfunctional Politics, the Greatest Barrier to Competitiveness
Historically, the authors note, the U.S. set a bold agenda in economic policy and competitiveness: the U.S. invested heavily in infrastructure and education, made a commitment to strict antitrust policy to ensure open competition, created institutions for innovation, and took many other steps. Bold policy initiatives like these strengthened the business environment and built crucial assets that enabled America to be competitive. Today, the major obstacle to progress on the economy is politics, especially at the federal level. A large majority of alumni of every political affiliation believed that the political system obstructs U.S. economic growth and competitiveness (56 percent among Democrats; 82 percent among Republicans; 74 percent among Independents; 80 percent other).

Dire Need for Leadership from Washington
The report highlights that Washington has been largely ineffective, with the current Congress on track to enact fewer laws than any session of Congress in the post-war period. Yet, they point out, this is a time when America needs the federal government to act because federal policy determines or deeply influences many of the weakest elements of the U.S. business environment. To get a better understanding of business leaders’ preferences for federal policy changes that could improve U.S. competitiveness, the school asked alumni to state their preferences on policy areas that have been identified to be the most important when it comes to impacting economic growth.

The strongest consensus was on improving infrastructure (endorsed by 80 percent of respondents), high-skilled immigration reform (77 percent), and streamlining regulation (71 percent). Responsible unconventional energy development, the subject of a polarizing debate pitting environmental groups opposed to any fossil fuel development against the oil and gas industry, still received 60 percent support. The report also breaks down preferences for each policy area by political affiliation.

General Public Diverges From Business Leaders on Policies to Improve Competitiveness
While the general public and global business leaders agreed on America’s weaknesses, the public perceived the U.S. business environment as having very few strengths. The weaker support reflected many in the public who could neither agree nor disagree, or did not know, whether the policy changes would be good or bad for the economy. For example, in the public survey, the highest response for “creating a sustainable federal budget” was 32 percent who said they “don’t know.” The report authors note that divisive political rhetoric and an uninformed national debate has confused the average American on what the country needs to do to restore the economy, which is a serious obstacle to America’s ability to make progress.

A Close Examination of Business Tax Reform
The authors took a particularly close look at business tax reform, an example of a major policy area in need of reform that has been thwarted by political dysfunction.

“Tax reform is the single area with the greatest potential to immediately improve our economy. We are long overdue for structural reform of the tax code, given how the global economy has changed over the last thirty years and how little we have done to keep up with those changes,” said Harvard Business School Professor Mihir A. Desai. “Fortunately, our survey revealed broad consensus on the nature of the problems – particularly on corporate taxes - and the fruitful directions for reform. The survey also revealed several new reforms – a carbon tax, a new higher bracket, and the deductibility of dividends at the corporate level - that are really promising and that enjoy surprisingly broad support.”

Detailed survey results on tax policy can be found here, but the following were the key takeaways from business leaders:

Business leaders understand that taxation is broken, and the appetite for reform is widespread. Less than 5 percent of global business leaders surveyed saw no need for corporate tax reform.

Business tax reform offers enormous promise, with positive net approval for the major components of reform across political affiliations.

Comprehensive reform of personal taxes may have to wait, but a minimum tax rate on very high-earners offers political promise.

Carbon, not consumption, taxes are the future.

Several new tax reform ideas beyond simple rate changes are promising.

We need to educate citizens more about our fiscal future.

Need for an Economic Strategy in the U.S.
Professors Porter, Rivkin and Desai call for the establishment of a U.S. economic strategy with the goal of increasing shared prosperity for America. The report lays out detailed agendas for the business community, state and local governments, and the federal government to improve U.S. competitiveness. The research-backed recommendations include: business investment in workforce skills; regional economic collaboration between firms; cross-sector collaborations among leaders in government, business, nonprofits, educational institutions, labor organizations, and other partners; and an achievable 8-point policy plan for federal lawmakers, which includes corporate tax reform, easing immigration to the U.S. for high-skilled immigrants, infrastructure investments, and addressing distortions and abuses in the international trading system.

About the HBS U.S. Competitiveness Project
The U.S. Competitiveness Project is a research-led effort to understand and improve the competitiveness of the United States. The Project focuses especially on the roles that business leaders can and do play in promoting U.S. competitiveness. Current faculty research focuses on improving PK-12 education; closing the middle skills gap; and improving America’s aging infrastructure for moving people, goods, and information. For more information about Harvard Business School’s U.S. Competitiveness Project, please visit: www.hbs.edu/competitiveness and www.hbs.edu/competitiveness/survey/.

About Abt SRBI, which conducted the alumni and student surveys
Abt SRBI, a full-service global research and strategy organization, is a subsidiary of Abt Associates, a mission-driven, global leader in research and program implementation in the fields of health, social and environmental policy, and international development. Abt SRBI is headquartered in New York City, with offices in Washington, DC; Chicago, IL; Cambridge, MA; Fort Myers, FL; and other cities.

About GfK Custom Research North America, which conducted the general population survey
GfK Custom Research LLC conducted the data collection using KnowledgePanel®. GfK was founded in 1934 as Germany's first market research organization. Today, GfK is among the world's leading market research companies, with a network of more than 13,400 experts working in more than 100 countries. GfK KnowledgePanel® is the original, largest and broadest-based online probability-based research panel in the U.S. The KnowledgePanel® has been at the forefront of online measurement for more than 16 years. The KnowledgePanel® has history of successfully conducting several hundred surveys a year.

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