Harvard Study Warns Business Community Of Economic Inequality Risks

We've heard about the risks that come with the growing gap between the rich and poor from all the usual suspects — Senator Elizabeth Warren, President Obama, Warren Buffett, and more.

But now, the voices warning us about the dangers of economic inequality are starting to come out of the deep trenches of the business community — from the CEO and chairman of the investment banking firm Goldman Sachs and the ivy-league towers at Harvard Business School.

Michael Porter, professor at the Institute for Strategy and Competitiveness at Harvard Business School. He tweets @MichaelEPorter.

On how the economy is only doing "half its job":
Michael Porter: "When we think about the competitiveness of an economy, we have to understand that competitiveness really consists of two things — one is, we need to create an environment where businesses operating in America can compete successfully in international markets, meet the test of international competition. But there's another part of competitiveness, which is...we also have to create an environment where the wages and standard of living of the average citizen improve. And we what we found in this research is really, we're doing number one pretty well. American companies are, in general, doing quite well. They're able to compete quite successful in the global economy...but the second part of the definition, the improving standard of living for the average American, we're failing at that. And it's this divergence between the success of firms — and, by the way, the success of highly skilled individuals — and the lack of progress of the average American. And also, it turns out, of small business. It's this divergence that is a profound, really, challenge to the long-run future success of our economy, not to mention a healthy society in which we can all be participants.

On how this divergence is out of the ordinary, historically:
MP: "That co-success, if you will, [of] business and the average citizen thriving together, is what's made America a place where we have had a unique consensus about the importance of business, the importance of competition, the importance of having a healthy economy. Whereas, in many other countries, there's kind of a war between business and society. So, ultimately, if we lose this alignment of interests between the average American and the businesses in our economy, we are facing some really, really challenging circumstances going forward."

On why middle skill workers are needed:
MP: "The middle level skills which even now move into the kind of college graduates without some special technical training and people that haven't got a college education, our skill level compared to workers all over the world in other countries is increasingly falling behind. And so, when you compare a Romanian worker and an American worker that are not highly educated, that Romanian worker is really just as skilled as an American. And that means that work then depends not so much on us having better skill but on us having a higher cost. On public education, our public education system has been systematically, slowly, falling farther and farther behind. It's not that we haven't made some improvements, but other countries are moving much more rapidly. So, we found a staggering statistic, and that is our 55- to 65-year-olds in America are world-class in terms of their capabilities, in terms of their numeracy, their literacy. Every cohort of Americans younger than 55 or 65 has gotten farther and farther behind the other countries in terms of...the basic capabilities that are required kind...We used to have the most educated and most skilled people in the world, we could put up with a less efficient business environment in some respects. We could afford, you know, regulatory costs that were higher than they needed to be."

On whether the system we have drives toward continual divergence:
MP: "Business has to kind of perceive and understand how it is going to be inextricably caught in the consequences of that divergence over the long run. I mean, we're going to end up with workers that aren't as productive as we'd like in America because business hasn't invested to contribute to that productivity, we're going to end up with people who can't be the kind of consumers that business wants them to be because they're not earning a high enough income and we're going to have a lot of unhappy voters who are going to want to take it out on business."

On the role Harvard Business School alums play in closing the divergence:
MP: "The business community does sort of lack the perspective and the tools and the understanding about how to [close] it effectively. For example, we have substantial work that we've done on the K-12 education system. You know, many businesses contribute to K-12 education, do things in K-12, you know, give scholarships, donate money, but what we find in our our work is that business has not been effective, really...because they haven't been engaged in the right way. So, we're trying to lay out the playbook...for how business can really do something...Ultimately, business has not understood how to think about this the right way and part of our job as the Harvard Business School, with so many tremendous alumni, is really to get our alumni thinking differently and motivated to really take leadership and take action. We're committed to that."

Harvard Business School: An Economy Doing Half Its Job

The Boston Globe: Business Leaders Downbeat On Workers’ Prospects

CBS: Goldman Sachs CEO: Income Inequality Is "Destabilizing"