Prosperity Is So Much More Than Wealth

For the 2019 Milken Institute Global Conference, we asked speakers to consider what prosperity means. See their insights and share your thoughts using #MIGlobal. See more coverage on the Milken Institute LinkedIn page.

It is entirely appropriate that widening wealth and income disparity in the U.S., particularly since the financial crisis, has led to some serious soul searching about our economic system and the way rewards and benefits are shared across the economy. Many have argued that the capitalist economic system, which emphasizes open trade and market-determined capital allocation, has produced large inequalities of income, and in turn, an erosion in the sense of prosperity for many in our country. This story has much truth to it, but the world is far more complex, and prosperity is so much more than just income or wealth.

First, the big picture: Over the past 30 years, our economic system of open trade, global expansion of capital markets, and an increasing move to capitalist systems in emerging markets has led to an enormous move towards global equality. Nearly 1.1 billion people have been lifted out of poverty, 2.5 billion moved into the middle class, and levels of literacy have doubled worldwide, according to the World Bank.

While it’s true that the very top income groups have accumulated great wealth, the most important part of the story is the vast number of people lifted out of poverty and the fast-growing middle class around the world. What is also true is that in many developed countries the benefits of this remarkable transformation have not accrued to the working classes. While the educated and entrepreneurial have done well and real GDP has grown by more than 40 percent in the U.S. since 2000, real median household income has expanded by just 2 percent, the Federal Reserve says.

The income story, however, is only part of the underlying issue. Since the financial crisis, there’s been an acceleration of three trends that I believe, along with low income growth, have led to our collective sense of a loss of prosperity:

Hope: The American dream was built on the notion of meritocracy and that hard-working children would be better off than their parents. This is no longer true. A recent study from Stanford, Harvard, and UC Berkeley shows that absolute mobility, or the fraction of children earning more than their parents, has declined from more than 90 percent for children born in 1940 to 50 percent for children born in the 1980s.  

Dynamism: The underlying dynamism of the U.S. economy has slowed considerably, measured in many ways. While U.S. productivity grew at nearly 3 percent during the 1960s and ‘70s, growth since the financial crisis has been below 1.5 percent, the Fed says. Small businesses have formed at less than 70 percent of historic rates before the recession, and while jobs have been created in large numbers, the quality of these jobs, measured both by wages and benefits, is far less attractive than in previous recoveries. 

Vulnerability: Multiple studies have concluded that many Americans do not have enough savings to last very long without a paycheck. Beyond the paycheck, benefits continue to be reduced, and job security is increasingly tenuous. This leads to profound financial stress, which is also a daily emotional reality for many in our country.

It is only when you combine income stagnation with a loss of hope, a decline in dynamism, and a dramatic rise in a sense of vulnerability that you start to really understand the raw emotions underpinning our sense of decline in national prosperity.

How can this problem be addressed, and what role can investors play?

Institutional investors are particularly important to solving the puzzle because of two critical characteristics. First, as fiduciaries, and second, as the long-term money in the system. Over many years of investing, I’ve observed that certain types of investments can be both profit maximizing for corporations and generate outsized economic growth benefiting society more broadly. I would like to highlight three key areas. All require a long-term lens to investing—and all three have been in decline since the financial crisis.  

Investing in people: The most valuable asset we have is people, their skills, and capabilities. And yet we consistently underinvest in people at all levels—primary and secondary education, skilled worker training, vocational training and lifelong learning, and career development. Institutional investors can play a far more active role in driving change, in part because learning and development in today’s age is a lifelong pursuit. We all know that well-performing companies invest in their talent and culture, and these attributes trump the latest product design every time. And yet, investors rarely insist on careful plans for investment in people, require management to quantify the benefits, or tie these investments to increases in productivity. Great companies can show the way; partnerships with universities, vocational training institutes, and technology and coding training are great examples. Investments in financial wellness on behalf of employers have shown dramatic improvements in employee effectiveness and satisfaction. All of this needs to be done with a relentless focus on productivity—unless productivity rises, wages over the long run will not.

Investing in infrastructure: Need a primer on how to do infrastructure right? Fly into Hong Kong, drive over the Macau Hong Kong Bridge, and take the high-speed train to Beijing. Then fly to JFK and take Amtrak to Boston. It’s a real wakeup call. America remains one of the few countries to finance its airport infrastructure from a per-ticket fee. And it's not just airports, tunnels, and roads; infrastructure is a much broader concept that includes high-speed fiber optic cables, the power transmission grid, and renewable energy storage. In fact, infrastructure as a category is extremely broad and critical to sustaining growth in any economy. Importantly, it also creates jobs—and not just for the initial development, but also for maintenance and ongoing improvement. We must, as a country, unlock public-private partnerships around infrastructure and reduce the enormous regulatory and legal barriers. Access to capital is not the issue; economic dynamism is the real problem. We must dramatically increase the number, scope and scale of projects that can be undertaken on sound commercial terms. 

Investing in communities: PGIM is the world’s second-largest manager of real estate assets across both debt and equity, according to IPE Real Assets, and we see the long-lasting impact thoughtful real estate development can have on empowering communities. We see that when an office building goes up and is well-leased, restaurants, services, and businesses are rapidly formed in the community. We see that when we finance a multifamily development that is well-located, there is immediate positive impact on the local economy and schools. Affordable housing is one of the most critical needs of our nation’s building stock. It is well known that productivity and wages rise significantly as people move to more dense urban locations. This requires good urban planning and a long-term investment mindset, but the payoff from increasing community investing is dramatic for the economy as a whole.

We need to execute on these ideas, many of which have been with us for some time, and we need to execute at a scale that has not been imagined before. Take infrastructure, where McKinsey estimated the U.S. needs to invest $120 billion to $150 billion per year merely to sustain its economic growth. For comparison sake, this is roughly the same amount spent on the entire Marshall Plan from 1948-1952 in today’s dollars.

The U.S. needs to dramatically modernize its economy through long-term investments to drive job creation and a rise in wage levels. We should aspire to a bold set of goals to achieve this. Done well, this will not only begin to address income equality issues, but also, more fundamentally, will restore the sense of hope, dynamism and opportunity that is such a vital part of the American story and our collective sense of prosperity.