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There’s a silver lining behind the dark clouds hanging over US businesses

Strengths in the US economy—including entrepreneurship and innovation—are being weighed down by deterioration in areas where the country used to be most competitive, such as the education system and corporate tax system.

In a new Harvard Business School (HBS) study, Professors Michael Porter and Jan Rivkin surveyed about 5,000 HBS alumni with 19 elements of the business environment that prior research had shown to be drivers of national competitiveness over the long run. The assessment, below, was sobering, with the majority of categories—including infrastructure, the education system and the corporate tax code—deteriorating.

Source: Harvard Business School US Competitiveness Study
Source: Harvard Business School US Competitiveness Study

A survey of the general population had an even more critical view of the state of competitiveness, as seen below. Members of the public agreed with business leaders on America’s weaknesses, but they saw the US business environment as having very few strengths, highlighting only communications infrastructure and innovation.

Source: Harvard Business School US Competitiveness Study
Source: Harvard Business School US Competitiveness Study

Importantly, areas of deteriorating weaknesses—including the tax code, legal system and infrastructure—are areas largely determined by the federal government.

“The silver lining behind these dark clouds is that some of the weaknesses involve choices that, at least in principle, can be changed relatively quickly,” the report explained. “For example, America can reform its tax code faster than other countries can develop a rich context for entrepreneurship.”

A history of unsustainable promises

Pundits and politicians have cited the 2008–2009 recession as a key cause for the ongoing economic malaise in the US. Thursday marked the eighth anniversary of Lehman Brothers’ bankruptcy, but Rivkin told Yahoo Finance that much of the weakness kicked off well before the Great Recession.

“We managed to mask some underlying structural problems for a long time by making some promises to ourselves as a society,” Rivkin told Yahoo Finance. “Starting around the 1980s, we already had effects of globalization and technological change putting intense pressure on America’s middle class. We could have responded to that by doubling down to try to make our middle class enormously productive and able to compete with anyone around the world. But instead what we did is we made a series of unsustainable promises.”

Rivkin explained that promises to include the extension of credit (including for houses), to cover healthcare costs in retirement and to reduce taxes in all tax brackets.

“You take those promises, you couple them with a bad downturn and a couple of wars and you’ve got deep fiscal problems for the federal government.”

Meanwhile, the economic outcome has been a lack of shared prosperity in the country, Rivkin told Yahoo Finance.

“Large companies and the people who run them and invest in them in America are doing quite well, but working- and middle-class Americans and many small businesses are struggling,” Rivkin said, adding that many of the US problems are structural and longer-term in nature.

Large companies benefit from US strengths, while small businesses are captives of US weaknesses

The patterns of strengths and weakness in the figures above shed light on the diverging economic trajectories between large companies and affluent individuals versus middle-class workers and small businesses.

“For their success, many large companies rely on access to innovation, capital, and high-quality management – all among America’s greatest strengths,” the report explained. “At the same time, large companies can better cope with and often avoid America’s weaknesses: a tax inversion allows them to escape the convoluted US corporate tax code, for example; offshore investments allow access to the world’s most skilled workforces and best transportation infrastructures; and large companies have the scale to navigate complex regulations.”

Meanwhile, small businesses and the middle class are more exposed to weaknesses in the US.

“Workers, in contrast, rely heavily on the human capital they bring to the workplace – human capital they draw from weak systems of K-12 education and workforce training,” the report added. “Lacking global mobility, workers and small businesses cannot escape the negative impacts of America’s political system, tax code, healthcare system, costly regulation and crumbling infrastructure.”

Meanwhile, there has been backlash against globalization, automation, outsourcing, which Rivkin said is dangerous.

“On technological change and globalization you can try to hold back that tide, but I wish you luck,” he said.

Instead, he emphasized that we should be focusing on the systemic under-investment in shared resources to keep workers productive.

For more on the HBS study, please see below:

Harvard economist never thought his new study would take him where it did

Harvard professor identifies the ‘worst nightmare’ in America right now

Harvard study singles out a game-changing economic opportunity: TAX REFORM

Harvard Business Dean tells us what this huge 5-year study is all about

Harvard Business Dean: The post-crisis monetary policy is ‘running out of runway’

How improved infrastructure could end America’s vicious cycle of poverty

Some companies have taken the next obvious step to filling jobs that sit vacant

There’s one piece of tax reform that would have a real impact with little resistance

America’s outdated education system isn’t producing the workers companies need

Revitalizing small businesses is key to drive America’s economic growth