A sustainable, inclusive, and growing future for the United States

(12 pages)

As the United States looks beyond the COVID-19 crisis, it has an opportunity to create the conditions for an economy that grows robustly—and at the same time, grows in an inclusive and sustainable way. The benefits of an economy that delivers broad-based prosperity; advances many more people in more places, leaving fewer behind; and protects the environment for this generation and the next are manifold.

Achieving this ambitious goal will be difficult. As our McKinsey colleagues have outlined, creating the conditions for an economy that is growing and sustainable and inclusive is particularly challenging. While the three elements of sustainability, inclusion, and growth together can create a powerful and self-reinforcing dynamic, they can also counteract one another in challenging ways (Exhibit 1). Even if they are not seen as trade-offs or in conflict with one other, the goals may be viewed by some as ideals to be pursued in sequence, with little agreement on what that right sequence should be.

Sustainable and inclusive growth can be a dynamic, self-reinforcing combination, combination, but achieving it will require addressing counteracting forces.

The challenge this time for the United States, and for the global economy more broadly, is certainly a big one. The country will need to pursue these three goals simultaneously, harnessing that dynamism of the linkages among them and, at the same time, resolving their counteractions. This is daunting but attainable. The United States has a rich history of rising to the occasion and creating new opportunities in the face of major challenges—and the traditions of democracy that help it do so.

Challenges confronting the United States

Even before the onset of the COVID-19 pandemic, significant strains in the US growth model, including its economic competitiveness and its social contract, were apparent—and the pandemic shone a harsh spotlight on them. Here we highlight seven of the key challenges that the United States will need to confront on the road to a more sustainable, inclusive, and growing economy:

Productivity growth (which drives overall economic growth and prosperity), and the investment that fuels it, have slowed. The United States experienced a strong productivity boom in the mid-1990s and early 2000s followed by a sharp productivity-growth decline, which began even before the 2008 financial crisis. Between 2005 and 2019, annual productivity growth in the United States fell by more than half, to 1.0 percent, and it dropped to 0.6 percent from 2010 to 2019, after the 2008 global financial crisis. Federal spending on education, infrastructure, and scientific research fell from approximately 2.5 percent of GDP in 1980 to less than 1.5 percent of GDP today. The pandemic has exacerbated the investment slowdown: net fixed-capital formation declined from 12 percent of GDP in 1950 to 8 percent in 2007 and just 4 percent in 2014 and completely flattened between the third quarters of 2019 and 2020. Demand growth is slowing because of demographic changes, and rising inequality is shifting income from spenders to savers.
Growth, investment, and economic activity have been uneven across the United States. In recent years, the country’s economic growth has been relatively concentrated in a few places. For example, just 6 percent of US counties account for two-thirds of GDP output. MGI’s Future of Work in America research highlighted the starkly unequal patterns of job growth depending on geographic location: over the past decade, 25 US megacities and high-growth hubs generated more than two-thirds of the nation’s job growth. By contrast, 54 trailing cities and roughly 2,000 rural counties that are home to one-quarter of the US population have had higher unemployment and lower educational attainment during the same period.
Performance and competitiveness have been uneven across sectors and companies. While the United States has many of the world’s leading companies and sectors, others that matter for national competitiveness, resilience, job growth, and prosperity have not remained competitive. For example, while the US manufacturing industry has grown in absolute terms, its relative global share has declined over the past two decades to 17 percent, from 25 percent, since 1997, with a net loss of 4.6 million jobs. In all sectors, competitiveness is increasingly driven by the strongest superstars—which we define as the top 10 percent of companies that capture some 80 percent of positive economic profit—rather than a broader set of companies. Gains over the past 20 years have been concentrated in a small subset of sectors, including finance, real estate, technology, pharmaceuticals, and some business services. This concentration has driven strong wealth effects through higher returns to holders of physical and intangible assets and capital. And during the pandemic, a smaller share of US companies showed growth in the factors that drive competitiveness compared with the prepandemic rate.
Wages have stagnated, and millions of Americans have incomes that are at risk. Between 2000 and 2018, despite an expansion in work opportunities, US wages stagnated: growth in average wages amounted to just 0.9 percent annually in 2000–18, or one-third of the 2.8 percent annual growth in 1995–2000. The labor share of income in the US private-business sector declined by about 5.4 percentage points between the periods of 1998–2002 and 2012–16. Without such a decline since 1998, the average pay for workers might be about $3,000 higher per year in real terms. Moreover, we see a growing disconnect in the United States between productivity, which has risen (even if only relatively weakly in recent years), and wages, which have largely flatlined (Exhibit 2).

There has been a growing disconnect in the United States between productivity and average worker compensation.

The rising cost of basics—housing, health, and education—has eroded the income gains of the average US household. Costs of education, healthcare, and housing rose faster than general inflation did in the United States between 2002 and 2018 (Exhibit 3). These three categories account for more than half of consumer spending, and the cost increases ate away more than half of the average US household’s income gains. This is affecting four of five low- and middle-income US households. The McKinsey American Opportunity Survey found that only 51 percent of Americans surveyed, including only 45 percent of Black respondents and 41 percent of Hispanic respondents, said they could cover living expenses for more than two months in the event of a job loss in their household.

Education, healthcare, and housing costs in the United States rose sharply from 2002 to 2018, while some other goods and services’ costs declined.

Inequality is rising, and members of minority groups, women, and younger Americans bear the brunt of economic challenges. A disproportionate share of economic gains has accrued to high-income households, leading to inequality of both wealth and income in the United States. In 2021, for example, the top 10 percent of households owned about 70 percent of total wealth, and the top 1 percent in 2021 owned more than 30 percent.¹ Among demographic groups, large gaps persist in workforce participation, wages, and higher-education attainment (Exhibit 4). The pandemic had a regressive effect on women in the workplace: the rate of women participating in the US labor force dropped from more than 57.7 percent in December 2019 to below 56 percent in September 2021—its lowest level in three decades.² Other research we have done found a $220 billion annual disparity between the wages for Black US workers today and their level if the same workers were to achieve full parity in wages and employment mix. Nearly half of Black US workers are concentrated in healthcare, retail, and accommodation, with the vast majority of those workers in lower-wage service roles. America’s young people are struggling on multiple fronts and building wealth at a much slower pace than their peers did half a century ago. For instance, just 31 percent of 30- to 34-year-olds in the United States had average adult wealth in 2017, compared with 69 percent in 1984.

Large gaps in workforce participation, wages, and higher-education attainment persist across demographic groups in the United States.

Climate change is affecting people in different geographies in the United States in various ways, and it could get worse. Some parts of the United States could experience a 70 percent projected decrease in the mean annual surface-water supply by 2050. While climate change will affect the entire country, it may additionally be regressive, as places with the lowest job growth and economic opportunities are most vulnerable. Studies have found that states in the Northeast and West would fare relatively better than would parts of the Midwest and Southeast, which would be especially hard hit.³ The effort to square the net-zero equation is formidable, requiring a reduction in emissions of 90 percent for the United States to comply with a 1.5°C pathway (a goal of limiting the increase of the global average temperature to 1.5°C above preindustrial levels). Potentially very-large-scale investments and costs will be needed to achieve that reduction, and the transitions to be managed are significant.

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Counting on American strengths and emerging momentum

For all the United States’ economic frailties, vulnerable populations, and left-behind places, it can count on major strengths, including the resilience of its economy, the strength of its private sector, and a long tradition of innovation. On their own, the following assets will not be enough to generate sustainable and inclusive growth, but they are the essential tools needed to help the country do so:

A dynamic and resilient economy. Over the past two decades, the US economy has demonstrated remarkable resilience and dynamism. The United States rebounded from the 2008 financial crisis with robust aggregate employment growth, low inflation, and technological innovation that boosted entrepreneurship and sharply reduced prices for many consumer goods and services. Further, its economy is showing strong signs of recovery from the COVID-19 pandemic.
A robust market economy and private sector with a record of delivering. Despite the recent slowdown, US GDP per capita has more than doubled over the past 50 years, and its personal-consumption expenditure has almost tripled during that period. The domestic-business contribution to US GDP per capita has risen fourfold. Businesses account for 83 percent of US technology investment, 76 percent of US R&D investment, and 81 percent of US labor-productivity growth in the 21st century. And Americans are living longer and have more leisure time.
An unparalleled innovation engine. The United States is at the forefront of advanced technologies, from biotechnology to AI, with contributions from companies, universities, and government agencies. These technologies could be critical new sources of growth and potentially help further both inclusion and sustainability—with advances in climate science especially relevant for the latter. Innovation is not just taking place in laboratories: the COVID-19 crisis accelerated the adoption of new technologies. A McKinsey survey conducted in October 2020 found that roughly half of the respondents reported increasing digitization of customer channels (such as through e-commerce, mobile apps, and chatbots), and two-thirds reported accelerating adoption of automation and AI.
Promising prospects for productivity growth. Evidence from some companies and sectors suggests that the United States can rebound from the COVID-19 pandemic with renewed vigor. Indeed, the pandemic accelerated trends that will likely have persistent effects with profound economic implications, hastening the potential for productivity gains—even in the sectors that have historically been slow to change. For example, in retail, with the exception of e-commerce players, companies had been slow to adopt digital sale strategies, doing so mostly as a way to complement Main Street retailing. That changed abruptly during the pandemic. It will take more companies and more sectors contributing to productivity to drive national-level productivity. If all US companies and key large sectors adopt the range of digital and productivity acceleration already seen during the pandemic, the nation could see around 1–1.5 percent higher growth across sectors over the next three years (Exhibit 5).

The US economy has the potential to raise productivity growth by 1.2 percentage points through 2024.

Prospect of robust demand in the near term, although it would need to be sustained. Stimulus programs related to the pandemic have boosted personal incomes and represent considerable savings ready to be spent. From March to April 2020 alone, the personal savings rate in the United States shot up to nearly 34 percent, from 13 percent, and remained above 15 percent for most of the pandemic as households cut spending in the face of uncertainty. This large cache of accumulated savings and pent-up demand could drive growth momentum as people start to spend at prepandemic levels, assuming widespread vaccinations and a benign “COVID-19 exit” scenario.
Growing commitments to decarbonize and achieve net-zero emissions. Looking ahead, the urgency of climate mitigation and adaptation is now more widely acknowledged in the United States and elsewhere, the resetting of government and corporate agendas is under way, green-tech costs are favorable and declining, and climate- and infrastructure-related investments can boost jobs. Many US companies are making net-zero commitments and beginning to develop plans to achieve them. Consumers may be more open to demanding more sustainable goods and services. According to a McKinsey survey in October 2020, for example, more than half of the consumers surveyed said they would buy more products with sustainable packaging if their pricing matched that of conventionally packaged ones.
Coming together on an inclusive economic agenda. Already before the COVID-19 pandemic, organizations were examining their stances regarding inclusion. For example, the US Business Roundtable revisited its purpose statement to put new emphasis on “an economy that serves all Americans,” broadening the scope from shareholders to a wider range of stakeholders.⁴ During the pandemic, the US social contract has been strengthened with massive state support to individuals, although it remains to be seen whether this will be a sustained change. Going forward, it will be important to harness the economic dynamism that already exists in minority communities.⁵ Public–private cooperation has been successful in many geographies, and technological adoption spurred by the pandemic offers new solutions—not just hybrid work but also digital finance and large-scale retraining programs.

All this is just a start. The distance the United States could traverse on all three dimensions of sustainability, inclusion, and growth is significant, given the depth of the challenges we previously outlined. But there is an opportunity for concerted and bold action by all, private and public sector alike, to make progress at the scale and pace that are required.

Jump-starting the journey with some no-regret actions

How does the United States start down the path of sustainable and inclusive growth? Tackling the counteracting forces of the three elements and harnessing the dynamism of their linkages are massive tasks that will likely require a combination of approaches that are known to work, as well as bold and innovative approaches to match the scale and urgency of the challenges. While we do not have the answers, there is a clear set of areas requiring attention that could be considered no-regret priorities. These are not sufficient or comprehensive, but they seem necessary and, in some cases, foundational. They include the following:

Building a more competitive US manufacturing sector. This could have multiplier effects across a wide and diverse geographic area. Our analysis of 16 manufacturing sectors suggests that they have the potential to boost annual US GDP by $275 billion to $460 billion over baseline forecasts while adding up to 1.5 million jobs, including those for middle-skill workers. Renewing the capital stock in US manufacturing industries could get billions of dollars of investment flowing, setting off a virtuous cycle of increased economic activity in communities that sorely need it. US manufacturing industries make disproportionate contributions to national competitiveness relative to their GDP and employment shares. Although the sector represents roughly 10 percent of US GDP and jobs, it drives 20 percent of the nation’s capital investment, 35 percent of its productivity growth, 60 percent of its exports, and 70 percent of its business R&D expenditure. Manufacturing remains the main economic engine and primary employer in some 500 counties across the nation.
Redoubling and scaling workforce development and reskilling. Workforce skills have been a growing concern in the United States for many years. Now technology demands new and higher-level skills, including more critical thinking, creativity, and socioemotional skills. The skills needed in fast-growing science, technology, engineering, and mathematics roles, in particular, are continuously evolving. The old model of front-loading education early in life will need to give way to one of lifelong learning. Training and education can no longer end when workers are in their 20s. Employers can be the natural providers of training and continuous-learning opportunities for many workers. But millions of Americans who need to switch employers or change occupations will require training options outside the workplace. All levels of government, nonprofits, education providers, and industry associations can play a role here. Midcareer workers need to continue paying their bills while they train for the next chapter in their careers; they require short, flexible courses that follow the boot-camp model, teaching new skills in weeks or months rather than years. The challenge ahead is to scale up the most successful programs. Using data to track employment outcomes can help channel funding into what works and allow individuals to make more informed choices about their own training and careers.
Revitalizing entrepreneurship and the small- and medium-size-business (SMB) base. SMBs account for roughly 48 percent of the US economy and provide employment to about 60 million people in the United States. Many have only low financial resilience, and in a survey conducted during the COVID-19 crisis, almost one-third said they were operating at a loss or only breaking even prior to the crisis. To thrive in the postpandemic era, SMBs may need to adapt to new business and operating models—as some have already started doing—and adopt new technologies. Yet many lack the capital, people, and access to technology that their larger counterparts enjoy. It will take innovation and participation from across the economy to help smaller businesses thrive. One way to compete more effectively would be for SMBs to find new ways to differentiate their value propositions, such as focusing on hyperlocal demand trends, competing on service quality instead of price, and building customer loyalty through marketing campaigns that engage the local community. Policy can play a role in modernizing smaller businesses and manufacturers through financing programs, business accelerators, or tax incentives.
Accelerating infrastructure and housing. This could help many American cities that struggle with a shortage of affordable housing, which can dampen economic growth. In Los Angeles alone, MGI estimates that the shortage of affordable housing depresses GDP across the metro area by more than 2 percent, or $18 billion to $22 billion in lost output every year. Most of this occurs as households forgo other types of consumption to pay rent or mortgage. Apart from meeting consumer needs, boosting infrastructure could give a productivity lift and accelerate job creation—every $1 billion of highway- and transit-infrastructure investment is estimated to support 13,000 direct, indirect, and induced jobs for one year, according to the US Council of Economic Advisers, for example.⁶ Keeping costs and benefits in mind, the United States has important choices to make about the amount of infrastructure it needs relative to the amount it is currently spending, how best to plan the investment mix, and how to be efficient with available budgets.
Investing in healthcare. This is a significant opportunity to improve lives and the economy at the same time. MGI estimated that each year, poor health costs the US economy about $3.2 trillion from premature deaths and the lost productive potential associated with diseases. By deploying existing approaches to improve health and prevent and treat diseases, it found that the United States could reduce its disease burden by as much as one-third by 2040. That would have a significant impact on an individual’s health. For example, the research found that the average 65-year-old American in 2040 would be as healthy as today’s average 55-year-old and that almost eight million more Americans would be alive. The key to achieving these health benefits is prevention: most of the health improvement would occur simply by ensuring access to interventions that are preventive in nature, such as weight management, smoking cessation, use preventive generic drugs, and routine vaccination.
Closing gender and racial gaps. This is another powerful opportunity. While achieving full gender equality in short order is unlikely, given the barriers that continue to hinder women’s progress in the labor market today, MGI found that a best-in-class scenario in which each US state matches the state with the fastest rate of improvement toward gender parity in work over the past decade could add about $2.1 trillion of incremental GDP in 2025. That is 10 percent higher than in a business-as-usual scenario. Eliminating the $220 billion wage gap for Black US workers—that is, with Black representation across occupations matching the Black share of the population and the elimination of racial pay gaps within occupational categories—would boost the total wages of Black workers by 30 percent and draw approximately one million additional Black workers into employment. Improving business formation in underinvested communities can help support and create new business clusters for continued innovation while creating new centers of job creation. Previous McKinsey research found that equitable access to capital—through providing minority-owned SMBs with capital they need to operate—has the potential to add billions of dollars to the US economy. It can also spur further economic growth by creating a multiplier effect that reverberates through communities across the United States.
Investing in and tackling place-based inequalities. Every community, from the most dynamic to the most distressed, faces economic-development issues that need to be solved at the local and regional level. For megacities and high-growth hubs, the priorities may be connecting disadvantaged populations with new opportunities, adding affordable housing, and improving transportation. Communities that are seeing a waning of their economic dynamism can focus on entrepreneurship and skill development. That can mean taking inventory of available industrial space, natural attractions, local universities, and specialized workforce skills, among other assets, and using that to build an economic-development plan. The next step is attracting investment from a variety of sources. For rural counties, the road is tougher. Many of these places do not have the vibrancy, economic activity, or inflows of investment or people to create new jobs. No amount of workforce retraining can solve the bigger challenge from a lack of economic activity. Individual companies can help ease this strain by considering whether there is a business case for establishing operations in more affordable parts of the country that need the investment.

Even if the United States implements all these actions, it will still need to crack many tough problems to achieve sustainable and inclusive growth. The counteracting forces remain strong, and they generate numerous questions. For example, even as Americans benefit from the scale technology brings, how do they prevent technology-fueled growth from working against the inclusion of middle- and lower-pay workers? How do they prevent growth from leading to the increased consumption of nonsustainable goods and services that puts new burdens on the environment? How can they shelter the vulnerable if a sustainability agenda displaces some jobs or raises energy prices? How do they finance the investments needed to tackle the sustainability challenges—and then address the transition challenges that may emerge? How do they encourage investment and business activity in more parts of the United States? And how do they help the most vulnerable, including the working poor, as those groups struggle to afford healthcare and housing?

We hope to work with many others on these collective challenges and opportunities, and we will return to these issues in more detail in the coming months. What is already clear is that all stakeholders—governments, businesses, local communities, and individuals—have the opportunity to play a role to usher in a new era of sustainable and inclusive growth. For all the seemingly intractable problems the United States faces, it excels at seizing opportunity and has shown again and again how well it can rise to challenges. In some ways, the holistic goal of sustainable and inclusive growth could be the nation’s postpandemic moon shot—an ambitious and wide-ranging program that improves the lives of everyone. How the United States embraces this new agenda will mark its future prosperity.