Politics is crippling the US economy, Harvard study says

According to an annual competitiveness survey, dysfunction within federal government is the single biggest barrier to economic progress in the United States. 

Despite somewhat encouraging news this week that the middle and lower-wage workers appeared to see relief in 2015 as the US median household income finally rose, most Americans are much worse off than they were two decades ago.

This is not the product of the natural dips and bumps that typically punctuate our economy. According to a study released Thursday by Harvard Business School, the biggest threat to US competitiveness is our crippled political system and the “unrealistic and ineffective national discourse on the reality of the challenges facing the U.S. economy,” study authors reported.

“A lot of people think that what’s going in is we had a bad recession and that we’re just recovering,” Michael Porter, a study author and co-chair of Harvard’s Competitiveness Project, which conducts an annual survey of US business leaders, tells CNBC. “What we find is that all the major data points that started moving in the wrong direction started in the late 90s and 2000s.”

These data points plot a picture that doesn’t bode well for small businesses and average American workers, whose pay and job opportunities are declining as they’re competing with workers around the globe.

“We used to have the most skilled workers in world; now we don’t,” Dr. Porter says.

According to thousands of Harvard alumni, MBA students and non-Harvard responders, the country’s biggest problem is a tax code that hasn’t been updated in decades, even as the world has become more globalized, digitized, and as closed-off economies have opened for business.

“Other countries have responded to these dramatic changes with significant changes to their tax systems, yet the US tax system has remained relatively ossified,” write the authors.  

Large corporations are flourishing, given that they can move operations to any country with a friendly tax environment and skilled workers. Small businesses with fewer than 500 employees, which used to be country’s most reliable job generators, are suffering. Since the 1980s, shows the report, the number of new businesses forming in America has tanked.

Not only are fewer forming, more are going out altogether. Since the Great Recession of 2008, the number of small businesses has further declined by more than 5 percent, the study points out, “unprecedented since data became available in 1977.”

A dearth of national investment in secondary education and infrastructure, the political system, and health care were identified as other major barriers to American competitiveness. At the right levels, the study's authors that, investment in those things should lead to equal prosperity for all.

Despite the gloomy picture, America still has strengths. Survey respondents identified strong higher education, entrepreneurship, communications infrastructure, innovation, and capital markets among them. But unless our political system – plagued by polarization that’s stalling progress – is reformed, the weaknesses will continue to outweigh the strengths, respondents said. The most supported reforms are to gerrymandering and campaign finance.

“The problems we have are fixable,” Porter tells CNBC. Whether they’re fixable by the next administration is hard to tell based on the promises of the presidential candidates, says Porter. “Their policies are so fragmented … that we really can’t understand what the strategy is.”