Robert Litan - Former Director, Economic Studies, Brookings Institution
Ella Bell Smith - Professor of Business Administration, Tuck School of Business at Dartmouth
Matthew Slaughter - Paul Danos Dean of the Tuck School of Business at Dartmouth
Robert Lawrence -Albert L Williams Professor of International Trade and Investment, Harvard Kennedy School and Non-Resident Senior Fellow, The Peterson Institute for International Economics
The thoughts expressed in this Guest Opinion are those of the writer and do not necessarily reflect the views of S&P Global.
Published: October 21, 2021
This is the first chapter in a series of content related to Entrepreneurial Leadership Must Help Meet America’s 21st Century Challenges in a Post-Pandemic World
Chapter Two: The Power and Limits of Federal Policy
Chapter Three: Entrepreneurial Leaders at Work
Chapter Four: Barriers to Social and Policy Entrepreneurs
Chapter Five: Reducing Barriers to Effective Social Policy and Policy Entrepreneurship
Chapter Six: Changing Mindsets
Join S&P Global Sustainable1 for the next episode in our ‘Beyond ESG’ series as we sit down with the authors of the report. Register here to join the discussion or receive the on-demand replay
Once the United States fully recovers from the COVID pandemic, Americans still will face an extraordinary set of social, economic, and even existential challenges: ensuring inclusive economic opportunities for people of all backgrounds by reversing decades-long trends toward greater income inequality; addressing climate change; eliminating overt racial discrimination and addressing racial disparities in income and wealth due to a long history of past discrimination; and reinvigorating our democracy in a highly polarized political environment. These are problems that federal policies and laws can help remedy but cannot solve alone.
This is the case, in part, because our system of government, by design, is federalist in nature. Whereas the federal government can and should adopt and fund national policies, state and local governments also help carry them out. In addition, in the oft-quoted words of Supreme Court Justice Louis Brandeis, “states are laboratories of democracy,” a description that applies equally well for local governments. Sub-national units of government are not only closer to citizens and their problems, but also often are better equipped than the federal government to develop and implement innovative collective responses tailored to different needs and circumstances of people and business living in different locations throughout the country.
Americans cannot rely solely on the federal government to fully address the four main challenges the country faces. This is not to deny the importance of federal policy. Our country would be a different and less desirable place to live without federal regulation or tax incentives to correct market failures (e.g., pollution), federal civil rights laws, and federal progressive taxation and safety net programs. Looking ahead federal government policies will be important in addressing each of the four main post-pandemic challenges we now face.
Those challenges will not be fully overcome, however, without changes in mindsets, behaviors, and social norms—all of which cannot be achieved purely through a top-down approach but rather need to be deeply internalized at the individual and local level. These changes, in turn, will require entrepreneurial leadership in all sectors, public and private, to lead the way.
In this essay, we illustrate how entrepreneurial leaders in three non-federal sectors – through non-profit organizations, local governments, and business – are doing precisely this, inspiring others to emulate them. We also point to the constraints that need to be overcome if effective changes are to result. We provide even greater detail on how multiple individuals and their organizations, operating so far under the national radar, are also addressing the challenges we address here, in our companion essay Profiles in Entrepreneurial Leadership.
Bold actions of these leaders are the major reasons why we are more optimistic about the future than the pessimistic mood of America seems to indicate. The U.S. has faced daunting challenges in the past – Civil War, two World Wars, and the Great Depression – and has not only managed to survive but to come out stronger on the other side. Most recently, although our collective response to the COVID pandemic could and should have been much better, we are well along toward recovering from the worst pandemic in over one hundred years. With enough will and determination, the U.S. should be able to meet each of the four main post-pandemic challenges it faces.
But non-federal leaders also face constraints. Unlike the private for-profit sector, where profits, deep capital markets, competition, strong information flows, and networks help scale good products and services that consumers value, barriers at the state and local level and for non-profits inhibit the diffusion and scaling of effective activities and innovations. More specifically, there are inadequate mechanisms now for certifying the effectiveness of these innovations or for providing financial incentives to assure their rapid diffusion. The ability of businesses to address important social objectives is also limited: the stakeholder interests of businesses may not always align or may not always relate to society’s broader objectives, and public policy does not always ensure that private companies fully internalize all the social costs or benefits from their activities, such as emitting greenhouse gases (GHGs) or training workers.
Accordingly, our second aim in this essay is to identify several ways to overcome existing limits to the effectiveness of non-federal action, even where complementary federal support would be welcome. Social interventions can be usefully scaled if they are evaluated and if future funding is tied to measurable positive impacts. The philanthropic community, which is essential for funding new ideas and potential social interventions, should also expand its funding of accelerators and networking for entrepreneurial leaders involved in social change, in much the same way that accelerators and local entrepreneurial networks assist startup companies and their founders. Successful interventions also would be more rapidly scaled if the media and the White House were to regularly spotlight and celebrate organizations, not just individual leaders, that are helping meet important social challenges.
In addition, all entrepreneurial leaders, including the multiple stakeholders of corporations and the corporations themselves, as well as society more broadly, will benefit when the power of information to effect change – so evident in the markets for goods, services, and investing – is fully recognized and harnessed. Information works best when it is standardized. Multiple efforts are now under way to standardize methods for investors to measure the impacts public corporations are making on environmental (specifically climate change), social (diversity and employee health and safety) and governance, or “ESG” objectives. The same efforts at standardization should be devoted to the GHG-related labeling of products and services. And while the business community has recently taken major steps to make their workforces more inclusive and to expand entrepreneurial opportunities for minorities, more can and should be done linked to the power of information—such as companies setting clear and transparent diversity goals.
Finally, effective change often requires a change in mindsets. Social science research has established that mindsets are more likely to change with extensive interpersonal interactions – or when people move outside their digital filter bubbles. With that lesson in mind, we recommend that the federal government condition some college scholarship money on community service by high-school graduates in settings with people from diverse backgrounds or helping others from diverse backgrounds. We encourage foundations and philanthropists to support more bridge-building organizations, including those involved in engaging more adults in reasoned discussion and using debate techniques, which are built around civility, reason and facts, as pedagogical tools to enhance student engagement and learning in middle and high school. In addition, philanthropy can help harness cutting-edge technologies, like virtual reality, to spread the lessons of our history, both the good and the bad, to help avoid the tragedies of the past while building a more perfect union here and now.
Ultimately, we must realize that despite our political differences, as well as variations in economic conditions across and even within communities, as Americans we really are all in this together. We all have an interest in expanding the opportunities for everyone to realize their full potential. Likewise, we all benefit when successful endeavors by state and local government and other entrepreneurial leaders are diffused and scaled more rapidly. This essay offers our reflections and the recommendations with this collective well-being in mind.
Once vaccinations became widely available, the U.S. has been recovering from the COVID pandemic—even amidst hurdles not yet fully overcome including evolving variants and vaccine hesitancy. And the increase in private-sector investment during the recovery augurs well for future productivity growth, the engine of rising average living standards over time.
Still, at least four major challenges, all building up before COVID, require urgent attention from U.S. policymakers at all levels of government, from companies, and from citizens. These seemingly diverse challenges, which to some degree overlap or intersect, all have something in common: while market forces, supplemented by appropriate federal government responses, can help meet each of them, in no case will markets and federal action alone be adequate to the task.
America has long attracted people from around the world not only because of the political freedom it offers, but also the economic opportunities that this country has made available to multiple generations. Of course, economic opportunities have been far from equal for everyone, especially for Black Americans (discussed in depth shortly), but over time efforts have been made to narrow those differences. The performance of the U.S. during roughly the first three decades of the post-World War II era helped in this regard. The nation’s annual output of goods and services advanced at almost four percent annually, averaged over the business cycle, while income gains in each quintile in the income distribution, from the top to the bottom, increased at roughly the same rate. It was a magical time when a rising tide truly did tend to lift all, or at least most, boats.
But just as broadly shared economic prosperity helps level economic opportunities for future generations, increasing income and regional inequality breeds unequal opportunities. Being born to well-off parents in a higher income location allows one to start the race of life ahead of others born to less fortunate parents. Harvard’s Raj Chetty and various colleagues have documented in a series of path-breaking papers that it has been progressively more difficult for American workers to climb the ladder of economic success, achieving what economists call “upward mobility.” This is reflected in their widely cited finding that whereas over 90 percent of older Americans born in or before 1940 were able to out-earn their parents by the age of 30, that is true of only about half of Americans born in 1980 or 1985 [Chetty, et al.]. Chetty and other colleagues have also shown that lifetime upward mobility varies widely by zip code, documenting that where one is born, on average, affects one’s future life prospects [Chetty and Hendren].
How did this happen? For one thing, since the 1970s the income escalator has been moving more slowly for all but the very richest Americans. Economic growth has slowed, not just because our population and labor force have been growing less rapidly, but because the growth in productivity – output per person or hour – also has slowed down. Total growth is now barely in the 2-3 percent range per year, or well below the 4 percent annual advance of earlier decades.
Upward mobility has also declined because disparities in income, by education or skill level, and by region, have grown. Highly educated US workers and others in the top 20 percent of income-earners since 1980 have benefited more from economic growth than the bottom 80 percent [Reeves]. In contrast, workers with no more than high school educations, especially men, who had a decent shot at a achieving a middle-class lifestyle in the 1950s and 1960s, have seen their incomes fall after adjusting for inflation since the 1970s. [Congressional Research Service]. Today, the United States has the highest degree of income inequality of any G-7 country [Schaefer].
Similar disturbing economic trends have played out at state and city levels. Until roughly 1980, incomes and productivity levels in the poorest and richest US states were converging [Russ and Shambaugh; Barro and Sala-I-Martin]. Since then, “innovation clusters,” often located in super-star cities (pre-pandemic), have prospered relative to other areas of the country, widening geographic economic disparities. Indeed, since 2000, the top one-fifth of zip codes in terms of economic well-being captured more than 60 percent of U.S. growth through 2019 [Economic Innovation Group, 2020]. Geographic income disparities would have been mitigated, or conceivably prevented, if workers suffering displacement or earnings erosion moved to higher income locations. But geographic mobility has declined over time, in large part because high and rising housing costs in fast-growing urban areas have priced out newcomers (as well as middle to lower income long-time residents), contributing to the persistent divergence in economic fortunes of cities and states across America. [Fikri et al.; Ganong and Shoag]
The roughly simultaneous timing of the divergence in income by skill and by region is not an accident. Driven by innovations in information technology, the demand for highly skilled workers has accelerated, outpacing the increase in their supply, reflected in the levelling out of the growth in the percentage of Americans with four-year college degrees. As a result, wages for skilled workers have been pushed up relative to those with less education [Goldin and Katz]. More educated workers are also increasingly concentrated in, or were attracted to, larger cities, especially on both coasts.
Even before the pandemic, slower economic growth, combined with widening economic inequalities, had been leading to growing health inequalities, especially reflected in the disturbing rise in opioid and other causes of “deaths of despair” [Case and Deaton]. In addition to causing so many tragic deaths, the pandemic has aggravated health inequalities. Black and Latino workers have been far more likely to lose their jobs and to die from the pandemic. [DePillis, 2021].
The pandemic has also widened economic inequalities. Black entrepreneurs have been especially hard hit, threatening to wipe out a generation of Black-owned business. Many women, especially those who are Black or LatinX, left the labor force once the pandemic took hold, either involuntarily because their service-sector employers were forced to lay them off, or because women disproportionately have had to care for children “attending” school remotely from home [Slaughter, Ann Marie; Alon et al]. The pandemic has also discouraged high school students generally, but disproportionately students of color, from going on to college, threatening their economic futures [Reilly].
Reversing the trends toward income and hence opportunity inequality will be especially challenging going forward, given constantly evolving digital technologies, especially advances in artificial intelligence (AI) and robotics. Although the much-feared pandemic-induced replacement of humans with robots has not materialized [The Economist, Special Report], the McKinsey Global Institute has projected that by the end of this decade, automation alone will require 10 percent of the U.S. workforce to switch to new occupations, up from 8 percent projected before the pandemic. Although eventually most displaced workers find new employment, and while technological advances will create new kinds of jobs that previously didn’t exist (think of “privacy” or “cybersecurity” experts, jobs that were few or non-existent before the Internet), the transitions required by disruptive changes are often painful, and too often knock workers down the economic ladder in the process.
While governments can and must, in our view, provide the funding and incentives for retraining to take place, much of it by the private sector and through community colleges, retraining is most effective when firms work with training institutions to ensure that the skills they teach and certificates they provide will be in demand for the jobs the firms want to fill. Equally important, workers must have a lifetime retraining mindset, or the willingness to engage in continuous skills upgrading if they want to maintain at least a middle-class standard of living.
The pandemic so far has had a different effect on geographic inequality, as some of the most mobile workers who use or develop information technology have moved out of superstar cities like Boston, Chicago, New York and San Francisco, and have scattered to the suburbs, other cities or even rural areas [Bahney; Gopal and Wittenberg]. Some major cities between the coasts – Austin, Denver, Indianapolis, Kansas City and Salt Lake City – also have been prime beneficiaries of this shift in talent [Lang and Mackrael]. It is not yet clear how permanent these moves will be after the COVID pandemic substantially wanes. Even if some of these moves are permanent, the pandemic-related population shifts alone are not likely to improve the fortunes of many “left-behind” urban and rural areas unless major efforts are made in those locations to retain current residents or attract new ones.[i] But if the discovery and acceptance of remote work become more feasible, left-behind areas may have more opportunities to attract new residents that could work at a distance, but spend more locally. [ii]
In March 2021, the National Intelligence Council ranked climate change – due to accumulating GHG emissions (primarily carbon dioxide, but also methane and nitrous oxide) in the atmosphere – as the greatest global challenge of our time. The Paris Agreement on Climate Change of 2015, which the Biden Administration rejoined after an earlier withdrawal by the Trump Administration, commits nearly 200 countries collectively to keeping global temperatures relative to pre-industrial levels from increasing by 2 degrees centigrade by 2050. This will require a 50 percent reduction from a 2005 baseline in net GHG emissions by 2030, and net zero emissions by 2050, goals to which the Biden Administration has committed the U.S.
Emissions reductions this large and fast cannot be accomplished without a combination of breakthrough technological innovations that will make emissions reduction and the recapture of GHGs far less costly than they are today [Gates]. Policies that encourage, through taxes or their regulatory equivalents (cap and trade), or that mandate or fund emissions reductions, would facilitate this process. Notably, these policies require not just national responses but a global response – ideally with enforcement mechanisms built into future global climate agreements – and a change in polluting behavior at the individual level.
Given already high ambient concentrations of GHGs and the time it will take to transition to lower and eventually zero net emissions, however, the world will continue to be exposed to an increasing number of severe weather events, already evident in 2020: hurricanes, wildfires, and record low ice in the Arctic sea [World Meteorological Organization]. One estimate suggests that because almost 75 percent of the GHG emissions commitments by countries under the 2015 Paris agreement are insufficient to hit the 2030 target, the world will suffer $2 billion in climate related damage per day until the commitments are strengthened and enforced [Leahy].
Governments here and abroad therefore must finance greater investment in climate resilience. Policy should also allow market forces to discourage people and businesses from locating or even remaining in high hazard areas. [Litan and Fleming].
Overt racial discrimination has dramatically declined in our lifetimes. Major civil rights legislation has eliminated most of the formal barriers blocking Blacks from participating in all parts of American society. Racial attitudes have changed enormously, too. Inter-racial marriage was once unthinkable, now it is widely accepted.
But we are still a long way from fully eliminating racism. The horrifying video of George Floyd’s murder at the hands of a Minneapolis policeman in 2020 shocked the conscience not only of Americans but of people throughout the world. Likewise, the shocking increase in hate attacks on Asian and Jewish Americans highlights that America still has much work to do to perfect our Union.
The Floyd murder and the subsequent protests shattered any idea that since enactment of the 1960s civil-rights laws, life had been continually and dramatically improving for all Black Americans. In his sweeping and well-documented survey of the history of the United States since the late 19th century, Robert Putnam in Upswing documents that, in fact, across multiple dimensions – health, education, income and wealth, and voting – despite continued legal segregation enforced by multiple “Jim Crow” laws and a widespread culture of White supremacy after a brief period of post-Civil War reconstruction, the relative gap between Black and White Americans had been more or less consistently improving before the 1960s, from 1900 until then.
Disturbingly, since the mid-1960s these trends in relative improvement have halted—and in some instances even reversed. As a result, measured by absolute indicators, today Black Americans on average remain substantially behind Whites in life expectancy, educational attainment, income, and wealth. These continuing economic disparities are confirmed in a McKinsey report issued in June 2021, which shows, for example, that the median wage of Black workers remains 30 percent below that of white workers. This report also found that racial disparities in occupations employing just 4 percent of all Black workers (those requiring a college education or more, especially in professional and managerial jobs) account for 60 percent of the median wage difference [McKinsey, 2021b].
In contrast to trends in racial disparities, since 1980 the female /male gender gap has been narrowing. Nonetheless there remains a substantial pay differential that cannot be attributed to factors like education, experience, race, unionization, industry, and occupation. [Blau and Kahn]. Putnam documents a similar pattern regarding women’s progress. Here, too, the trends toward greater gender equality improved more rapidly across multiple dimensions in the decades preceding the major legislation and judicial decisions in the 1970s that formally ending discrimination against women, than in the decades since these breakthroughs. Black and Brown women have borne the brunt of gender inequities in the workplace and in their communities, demonstrating the intersection of race and gender (Bell and Nkomo).
We are struggling as a society with how to explain and deal with these troubling facts. Part of the answer is that, despite changes in the law, discrimination in attitudes and practices whether or overt or more subtle, has not ended. Multiple studies over recent decades, including those cited by Putnam, show that Blacks continue to face discrimination in employment and housing, in addition to criminal justice and in health discrepancies [See also Agan and Starr, Bertrand and Duflo].
But another part of the answer is that the cumulative effects of preexisting disadvantages caused by past discrimination have acted as headwinds keeping Blacks from continuing to close relative gaps in various measures of well-being. Before he became President, Barack Obama laid this out clearly in a speech in March 2008 given at the National Constitution Center in words that, unfortunately, still ring true today:
“But we do need to remind ourselves that so many of the disparities that exist in the African-American community today can be directly traced to inequalities passed on from an earlier generation that suffered under the brutal legacy of slavery and Jim Crow.
Segregated schools were, and are, inferior schools; we still haven't fixed them fifty years after Brown v. Board of Education, and the inferior education they provided, then and now, helps explain the pervasive achievement gap between today's black and white students.
Legalized discrimination - where blacks were prevented, often through violence, from owning property, or loans were not granted to Black business owners, or black homeowners could not access FHA mortgages, or blacks were excluded from unions, or the police force, or fire departments - meant that Black families could not amass any meaningful wealth to bequeath to future generations. That history helps explain the wealth and income gap between black and white, and the concentrated pockets of poverty that persists in so many of today's urban and rural communities.”
Then-candidate Obama was describing what today is commonly called “systemic racism.” To say that as a society we should want not only to eliminate overt racial discrimination, but also help undo the present effects of past discrimination, is not a radical idea. Our country’s history has long been defined by our efforts to ensure more equal opportunities. We have never achieved a totally level playing field, and surely never will. But that doesn’t mean we shouldn’t try. That noble effort is enshrined in the preamble to our Constitution, through which “We the People” are governed “in Order to Perfect a more perfect Union.” Achieving that more perfect Union requires, at a minimum, recognizing that opportunities cannot be equal when, solely because of the cumulative effects of past discrimination, Blacks on average, are placed at a disadvantage.
Rectifying this fundamental inequity will not be easy for multiple reasons. Rooting out the effects of past racial discrimination will be difficult because the challenge requires concerted improvement in multiple areas including education, the workplace, housing, and criminal justice.
All Americans, of all races and ethnicities, must understand that the benefits of removing systemic racial disparities would ultimately be enormous and would bring broad benefits to us all. Mary Daly, the President of the Federal Reserve Bank of San Francisco calculates that had educational achievement and skill gaps between Blacks and Whites been eliminated since 1990, the U.S. would have gained an additional $71 trillion in economic output, or in 2019 alone, the additional output would have totaled nearly $3 trillion, a roughly 15 percent gain [Norton; Coalition for Inclusive Capitalism].
Americans are acutely aware that our country is highly polarized along partisan lines –starkly illustrated by the unprecedented assault on the Capitol Building and our leaders on January 6, 2021. What many may not fully appreciate, however, is that partisan divisions reflect more than just fundamental differences in ideas about how our country should be governed, but also how our political affiliations have become essential parts of our personal identities [Klein].
Divisions this deep erode trust not only between strangers, but also co-workers, and even family members, while making it exceedingly difficult to govern at the national level, except when one party controls both houses of Congress and the Presidency. Even then, if party control is razor thin, legislative, and regulatory policy reversals may be just the next election away. Social media has aggravated polarization for many people by helping create ‘information silos” or “filter bubbles,” where biases can be confirmed and truth itself can be attacked. [Rauch].
Eroding social trust both within the U.S. and across countries is so serious that the National Intelligence Council ranks it (along with climate change, as noted earlier) as one of the major global challenges of our time [National Intelligence Council].
There is no clear consensus on how to reduce polarization and restore social trust. There are two election related proposals that could elect more moderate officials to office who would be more inclined to break partisan gridlock. One method for accomplishing this is for states to use independent commissions to draw Congressional and state representative districts, which would eliminate gerrymandering. Another idea is to adopt open primary systems for primary elections, under which the top two vote-getters regardless of party would make it to the general election, a winnowing process that encourages candidates to appeal to moderation and compromise rather than confrontation. But the prospect for proposals such as these is unclear, at best. Later, we will outline some ideas that could build stronger bridges between us, and by doing so, strengthen our democracy.
[i] We profile one ingenious initiative, aimed at inducing skilled workers to return to their hometowns, wherever they may be, in our companion essay, Profiles in Entrepreneurial Leadership).
[ii] There is one way, however, in which some regional economic disparities might narrow as the pandemic recedes. America has been divided into have and have not towns and cities and, over the past forty years, the divisions among regions have become increasingly deep. Just as President Franklin Roosevelt brought electricity to rural households and President Eisenhower oversaw the interstate highway system to link the country together, today broadband is a sine qua non for linking outlying areas into the national mainstream. A potential legacy of COVID has been to demonstrate the feasibility of remote work and to stimulate the adoption of virtual connections that can induce highly educated workers to avail themselves of cheaper housing costs by moving further from expensive downtown locations. This should offer new opportunities for some outlying areas to attract high-income individuals, who in turn, will create demand for locally supplied services. These trends are already reflected in rising prices in housing markets in multiple “between-the-coasts” locations throughout the country [Friedman].