Harvard Study: Political Dysfunction Threatens U.S. Economy

65% of business leaders say the U.S. political system is holding back growth and competitiveness

Political infighting has an economic impact, researchers say. Political infighting has an economic impact, researchers say.

The long U.S. election cycle and political infighting in Washington aren’t just taking a toll on voters. According to a recent Harvard survey, the divisiveness and gridlock are hurting U.S. competitiveness.

“Overall, we believe that dysfunction in America’s political system is the single most important challenge to U.S. economic progress,” three business school professors said in a report released Thursday.

“The U.S. economy is growing, but only slowly, and it’s leaving too many Americans behind,” Jan W. Rivkin, a professor at the Harvard Business School, said in a statement. “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 authors—Rivkin, Michael Porter and Mihir A. Desai—bring together data collected by the Pew Research Center and by Harvard, which polled about 5,000 current and former Harvard MBA students, as well as 1,050 members of the general public.

“Of those who voiced an opinion, 65% of business leaders and 50% of the general public believe that the political system is obstructing U.S. economic growth and competitiveness,” the authors explained in the report.

Specifically, survey respondents were asked if they expected U.S. competitiveness to decline in three years—in other words, did they expect firms to become less able to compete, less able to pay well or both. An average of 50% of all poll respondents said yes. Just 30% were optimistic, expecting one or both dimensions of competitiveness to improve and neither to decline, while the remaining 20% said they expected no change from current conditions.

Among Harvard Business School graduates, most believe the U.S. political system obstructs economic growth and competitiveness: 56% of Democrats, 82% Republicans, 74% of Independents and 80% of others.

In terms of future salaries, 41% of all respondents polled expect firms to be less able to pay well in three years, and just 25% expect them to be better able to do so in the next few years. Furthermore, 47% expect the typical U.S. firm to employ fewer people in three years, while just 16% anticipate more employees.

One problem facing the economy, the Harvard instructors said, is that fewer jobs are being generated by small companies: In 1978, new businesses created 14.5% of U.S. jobs vs. 8% in 2014.

“While large firms have been able to prosper, small companies are struggling, startups are lagging, and small business is no longer the leading job generator,” they explained.

Taking the research one step further, the three business professors label the U.S. political system a failure.

Once the envy of many nations, the system has become “our greatest liability,” they said. “Americans no longer trust their political leaders, and political polarization has increased dramatically. Americans are increasingly frustrated with the U.S. political system. Independents now account for 42% of Americans, a greater percentage than that of either major party.”

Trust in the federal government, the report pointed out, is now less than 20%, according to Pew data. That’s down from above 70% in 1958 and roughly 40% from 1982 to 1990.

As trust has declined, so has economic growth, which averaged 4.3% from 1950 to 1969, and is now at 2.1% for 2010-2015.

Taxes, Infrastructure

Though the research highlights negative trends, it also offers concrete steps for businesses and government to take to improve prospects for both American workers and companies.

The authors, whose work is done as part of Harvard’s U.S. Competitiveness Project, identified 19 elements that determine competitiveness.

Next, they put together an eight-point plan to do the following, which they polled alumni and others about:

• Simplify the corporate tax code.

• Move to a territorial tax system.

• Ease high-skilled immigration.

• Address problems in the global trade system.

• Improve the logistics, communications and energy infrastructure.

• Simplify and streamline regulation.

• Create a sustainable federal budget.

• Develop unconventional energy sources.

Though the Harvard research found “strong bipartisan support” of both alumni and the general public for the eight-point plan, the authors said Washington “has made very little or no progress” on the economic priorities—for more than a decade.

“The current presidential election is showing no signs of advancing a coherent plan to address these areas,” they explained in the report, which they said is most unfortunate.

“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 Porter, co-chair of the U.S. Competitiveness Project, in a statement.

“To make the U.S. more competitive, it is imperative that we have a fact-based national discussion about our economy and future prosperity," he added. “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.”

---Related on ThinkAdvisor

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