Contrary to fears that economic inclusion must come at the expense of economic growth, global management consulting firm McKinsey & Company’s research and empirical evidence supports the idea that economic growth is at its best when it is most inclusive – but that equity needs to be embedded in systems from the start in order to be effective. What does ‘inclusion’ mean in the context of an economy that works for everyone? McKinsey’s JP Julien explains how policymakers and companies can ensure that economic growth goes hand-in-hand with – and is enhanced by – reducing inequality.
JP Julien is an Associate Partner at McKinsey & Company, where he serves US federal, state, and city governments on inclusive economic-development topics and supports private-, public-, and social-sector organizations in advancing racial equity. He is a leader of the McKinsey Institute for Black Economic Mobility, a global economic think tank focused on inclusive economic development and racial equity topics.
Twitter: @McKinsey
The case for inclusive growth: https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-case-for-inclusive-growth
Website: https://pitchforkeconomics.com/
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David Goldstein:
The more people we fully include in the economy, the faster and more prosperous it grows.
Nick Hanauer:
Inclusion and economic growth, not only are in contradiction, but may actually go together.
JP Julien:
Growth is actually at its best when it’s most inclusive. And the more you’re able to meaningfully engage and participate as workers, entrepreneurs, consumers, et cetera. You end up with an economy that is stronger and more resilient
Speaker 4:
From the home offices of civic ventures in downtown Seattle. This is Pitchfork Economics with Nick Hanauer, the best place to get the truth about who gets what, and why?
Nick Hanauer:
I’m Nick Hanauer, Founder of Civic Ventures.
David Goldstein:
I’m David Goldstein, Senior Fellow at Civic Ventures. One of the themes of this podcast from the very first episode is that inclusion drives growth. That the more people we fully include in the economy from every race and region and gender and background in every capacity as entrepreneurs and innovators and workers and well-paid consumers, the more people we fully include in the economy, the faster and more prosperous it grows. And that is grounded deeply in the economic theory that informs us.
Nick Hanauer:
Yeah, the last 45 years of sort of economic theory and economic policy, this sort of neoliberal and neoclassical economic paradigm has taught the exact opposite. That for a very long time, economists and policymakers believed that there was a trade off between economic growth and economic fairness or justice. That we could include more people, but we would do it at the expense of growth. And that made inclusion effectively this sort of liberal luxury to be afforded if, and when we have growth.
David Goldstein:
For moral reasons.
Nick Hanauer:
For moral reasons.
David Goldstein:
Even though they’re not deserving because clearly in the economy gives you exactly what you deserve. You’re always paid exactly what you’re worth, so we have to spend some money to include you. It’s out of the goodness of our own heart. When we first adopted that inclusion narrative, back in 2014, we were economic heretics.
Nick Hanauer:
That’s right. Slowly but surely people have come around to this more general view. And today we get to talk to somebody from the McKinsey company, the world’s most prestigious management consulting enterprise about a remarkable new study that finds that if you look at the data, suggests that inclusion and economic growth, not only aren’t in contradiction, but may actually go together.
David Goldstein:
So, rather than giving it away, Nick, in the intro, why don’t we get it straight from the horse’s mouth?
Nick Hanauer:
Absolutely. And we get to talk to JP Julien today, who is an associate partner in the public and social sector practice at McKinsey. And in addition, JP is on the leadership team of the McKinsey Institute for Black Economic Mobility, which has recently launched and is a think tank. The focus is on the economic development of black communities globally, which is really super cool.
JP Julien:
I’m JP Julien. I’m an associate partner at McKinsey & Company. I’m one of the leaders of McKinsey’s new Institute for Black Economic Mobility. It was launched last year officially, and it’s our internal think and do tank focused on racial equity. The other part of my life at McKinsey is spent supporting state and local governments across the country on economic development topics. The report that we wrote, the case for inclusive growth really does bring together both of those parts of my life at McKinsey.
Think about how do we provide and support an economy that not only works more effectively for everyone, but actually sees stronger and more resilient growth.
Nick Hanauer:
So can you explain a little bit, JP, what you mean when you’re talking about inclusion? What does inclusion mean in the context of an economy that works for everyone?
JP Julien:
So inclusion is really trying to understand the who and the how of the economy. So inclusive growth is really bringing together two concepts, economic growth and inclusion. So we think about growth as the size and pace of economic expansion. So how big is the economy? How fast is it growing? Inclusion really tries to answer who benefits from, participates in and shares in those economic gains. And so that really answers the who. The important distinction is getting to the how. And so the reason the how is important is because, through our research, we really identify that inclusive growth is not just about outcomes, as important as they are, but it’s also about the process.
So as we think about and try to understand how growth happens, who decides where and how we invest, who is at the table at actually making the decisions, it really is important to think about both of those components. And so if we think about the economy as a pie, inclusive growth is both trying to understand how big the pie is. And inclusion is specifically is trying to understand who gets how much of that pie and then who gets a say in creating how the pie is made and ultimately what goes into it.
David Goldstein:
So you’re saying that inclusion is both a means and an end.
JP Julien:
Exactly. Exactly right.
David Goldstein:
I know what the econ 101 books say about this, that inclusive growth should be in oxymoron, right? Where’s that big trade-off between fairness and growth we’ve always learned about.
JP Julien:
Yeah. So it is an often, often highly debated topic, right? So does growth come at the expense of inclusion, vice-versa? What we find is that they are not at odds. And so we posit that growth is actually at its best when it’s most inclusive. And the more you’re able to meaningfully engage and participate as workers, entrepreneurs, consumers, et cetera, you end up with an economy that is stronger and more resilient.
David Goldstein:
And you found actually that the lack of inclusivity has cost us a lot of growth. How much did you find?
JP Julien:
So we find in some of our research is some of the inequalities that are so persistent in our economy cost us quite a lot. And so our prior research has found that if we were to solve the racial wealth gap between black and white families, that alone could unlock $1.5 trillion of annual GDP in our economy. That’s value being left on the table by having persistent inequality.
David Goldstein:
Yeah. And just to be clear, what we’re talking about very specifically is increasing the income and wealth of minorities to where white folks are today, correct?
JP Julien:
That’s absolutely right. And so this is incremental growth that we otherwise do not see in the economy.
Nick Hanauer:
The economy is people and the more people we fully include in it, the better it will be, which is an extraordinarily obvious thing to say. And sort of, can’t not be true, but is at odds with the last 45 years of neoliberal economic policy. And certainly a lot of the sort of canonical concepts that come from neoclassical economics. So, like where did we go wrong? How did we not recognize these basic truths?
JP Julien:
It’s so interesting, because the data actually tells a very different story, both domestically and internationally. So if we look at our own economy, we know that 40% of GDP growth between 1960 and 2010 can be almost directly tied to the greater participation of women and people of color in labor force. We’ve seen internationally, the World Bank has done quite a bit of good research on this topic, looking across 90 plus countries. And we find such strong correlations between mean income growth and the share of income for the bottom 40%.
And so honestly the data speaks quite clearly that who participates and the more we get people to participate actually does produce better outcomes. And so it’s actually quite puzzling about how we kind of have gotten to this debate about-
Nick Hanauer:
Lost the plot there.
JP Julien:
Exactly. Lost the story a little bit.
David Goldstein:
But let’s be clear, not just better outcomes for the people that are now being included in the economy, but better outcomes for absolutely everybody.
Nick Hanauer:
For everyone. It boils it down to the most basic terms that when you take an excluded minority that is poor and make them thriving and middle class, you have created millions or tens of millions of just call them new customers for businesses in the economy at the most basic level. And how can that be bad?
JP Julien:
It is quite puzzling to think that that is really the argument that needs to be made, but it’s worth reiterating, right?
Nick Hanauer:
It’s just shocking that people don’t understand this and that neoclassical economics sort of missed it. And so by inclusion, I presume you mean paying people more, because that is the principle method by which we do include people in a market economy.
JP Julien:
Yes. So it is both thinking about how do we include people as workers, but also thinking about as entrepreneurs and who pursues entrepreneurial pathways as thinking about folks as savers and investors, and how they realize the returns of their investments, there are all these dimensions in which exclusion actually has this negative implication, not just for the people that are excluded, but your point for our society as a whole.
[inaudible 00:09:54] and his team have done quite a bit of good work, even just looking at the innovation component. Right? So thinking about this idea of who pursues entrepreneurship and innovation, and what you find is things like race and gender and income leave us to the point where there are certain demographic groups or folks in certain geographies that, not due to a lack of ability, but due to some of these other factors, don’t pursue innovation. So you end up in a world in the US where 90% of US backed VC firms are headed by white nation men. And it’s not that they don’t have amazing ideas, but just think about all of the other ideas in terms of products and services and innovations that we aren’t seeing in the market due to some of these other factors.
David Goldstein:
So it’s clear from your report, you found that inclusive growth is this virtuous cycle. More people we include, the faster and more prosperous the economy grows for everybody. What did you find to be the main barriers to inclusion in the US economy?
JP Julien:
Well, we came at this actually in two ways. So we, as part of the research really put together a panel of 50 or more economic development experts and practitioners. So heads of economic development organizations, leaders of CO councils, policy experts, academic economists, and so actually wanted to understand both why does economic development as a process not result in these outcomes. And then secondly, in terms of the outcomes themselves, why don’t we see a more inclusive set of variables there.
On the process front, it was interesting, is in talking to practitioners that do this work, the biggest thing that came up was there actually just isn’t buy in, a commitment to include more people in how things are decided. And so your point, Nick, around part of this is actually inviting folks that have been historically excluded into the room, into the conversation. There seems to be a little bit a lack of that.
And then secondly, was this idea of actually understanding what a good process looks like, and where we are today was where the two other big gaps that we saw. I think, interestingly, as we get to the outcomes, what we fundamentally believe is outcomes don’t just magically appear. They manifest out of processes. And the disparities that we see are the result of broken and often biased processes that people just have to navigate. And so particularly for groups of people in the US context, whether you’re a woman or a person of color or someone with a different physical ability, they’re facing a set of constant barriers, or they’re trying to navigate some of these systems and processes.
David Goldstein:
You’re telling us, this is unbelievable, that if we want to include more people in the economy, we should include the people who’ve been excluded in making the decisions on how to include them.
JP Julien:
Exactly. Right. And then taking their lived experiences to account as how we design the solutions that move us forward.
David Goldstein:
This gets to the heart of the problem of course, is that what you’re calling for is more political inclusion. And there’s probably more resistance to political inclusion in this country right now than there is to economic inclusion.
Nick Hanauer:
So JP, a couple of questions. So the first is, are you prepared to insist that there is a causal relationship between inclusion and economic growth?
JP Julien:
So I would say that the data suggests a strong correlation, and that what we’ve seen in our work suggests that how we go about including or excluding groups of people in the economy has a material impact on the outcomes. I cannot say scientifically and statistically that it is causal, because those relationships are complex and the economy is a interesting and very complicated machine, but I can say the correlations across both in the US and internationally are quite strong, that suggests that they’re inextricably linked.
Nick Hanauer:
Okay. And within McKinsey, does this come as a surprise, do you think, I mean, or among elite economic … you know.
David Goldstein:
You’re trying not to use the word economists. Economic thinkers?
Nick Hanauer:
Yeah. I mean, do you think that this set of facts is surprising to people or do they kind of know it, or does it make them happy or angry or what?
JP Julien:
I think what we’ve seen is that at some level people get it, but in some ways they don’t necessarily buy it. There tends to be this anchoring on, well, we can’t have both. There’s got to be some trade off that we’re seeing that we’re not fully capturing. What I think we’re realizing though, and we’re seeing this quite a bit in the private sector, is they’re really leaning into trying to think about a more inclusive economy is that there is immense opportunity not being captured. And there are expectations that are now changing, such that even if at some level folks believe that there’s this tension, their employees are expecting them to really lean into things like racial equity. Investors are expecting it. Customers are expecting it.
And so even if they are on the fence about whether or not this really works, I think they’re realizing both that there’s immense opportunity at the table, and at a moment where we need as much economic growth as we can coming out of the pandemic, but also that the expectations of what their employees, investors, et cetera, expect of them has lifted. And so even if they’re on the fence, they need to kind of lean forward and do this.
Nick Hanauer:
Yeah. Interesting. What are you presently finding are the most persuasive arguments to get people to adopt this point of view? Are they sort of moral arguments? Are they practical arguments about economic growth, or?
JP Julien:
They tend to fall into two camps. There are folks that are convinced by the economic argument. And so what is the opportunity at stake? The value that could be contributed to our GDP, the new customers, et cetera, that you might be able to capture.
But I think increasingly folks have realized, especially in light of the pandemic, that lives are really at stake. That there is a moral case to be made around the wellbeing of our neighbors and neighborhoods really does hang in the balance. And so living on the economic edge and what that means in terms of family security, we see the shorter life expectancy. We see increases on dimensions of things like death of despair. There’s not just a conceptual idea that an unfair economy has these negative consequences, but that there are actual human lives at the center of them. And I think the combination of those two arguments tend to kind of land with the folks.
Nick Hanauer:
For sure. I mean, we are in violent agreement that including more people in the economy in more ways will be better for the economy and for people. And we absolutely believe there’s a causal effect, that in fact inclusion causes economic growth. But we have lived through this era, which is both policymaking and basically the economic frameworks have pointed basically in exactly the other direction, and shareholder value maximization, SVM being sort of just a perfect example of that, right?
Because again, the principle way in which we allow people to participate in the economy is how much we pay them. So where does McKinsey fall? Where does the business community fall when these two principles are in such obvious tension?
JP Julien:
Yeah, I think what’s been encouraging in what we’ve seen, especially in the past year are that there are many fortune 1000 companies specifically that are really leaning into the idea that being good corporate citizens actually creates opportunities. So we’ve seen $66 billion from the fortune 1000 in racial equity commitments between May of last year and the end of last year.
And I think what is becoming increasingly clear is, from a talent perspective, who I am able to recruit, groom and then lead my organizations, the fact that the more diverse and inclusive that pool of talent is, the better I perform. And so we’ve done quite a bit of research on the benefits of kind of more diverse boards, more diverse leadership teams, and they actually do financially outperform their peers. So I think that point is landing.
Increasingly, what folks are starting to think about is externally what firms do in terms of their social responsibility, what they do in terms of their operations and their strategy is another set of real opportunities for new unlock, right? So if I think about from an operational perspective who I supply from, where I make location decisions, and from a strategy perspective, how I bring products to market, what customer segments I’m going after, that they’re realizing that there are real untapped opportunities that exist in the marketplace. And so I think increasingly this idea of there is value to be captured if I could do this well is really starting to resonate. And that’s been encouraging to see, especially over the past year in light of all that’s taken place.
David Goldstein:
I mean, there are a lot of big corporations that have offices of diversity and inclusion. And I assume they’re not doing this out of the goodness of their own hearts. They’re doing it because they believe it’s good for the company to have diverse management.
JP Julien:
Exactly right. There’s a clear economic case of that. It helps with retention. It helps with better problem solving. It results in stronger profits. And so I think there’s a clear case that that’s been made on the internal side. I think increasingly we’re seeing companies really start to make the case externally that things like their strategy and operations infusing inclusion, diversity there could have real benefits as well.
Nick Hanauer:
Yeah. Interesting. So JP, let’s imagine you’re the benevolent dictator, you’re the President of the United States and you have both houses of Congress. What policy agenda do you advance? What set of things do you do, concrete things to make the economy more like the one that you envision?
David Goldstein:
Yeah, no filibuster also, so.
JP Julien:
What I’d say is to actually center economic development on communities. And so actually as a benevolent dictator, what I would not do is say, “Here are the sets of policies that everyone should go do.” What I’d rather impose is for every community to actually go through a focused process in which those that have been historically excluded are in the decision-making seat. And they are helping understand where we are as a community, building off of their set of assets. And lived experiences and setting a local ensured vision of what the future will look like. And then being at the center and designing a set of strategies and investments that reflect both those needs and their strengths such that we get to a set of outcomes that really work locally. Because economic development is hyper-local, so really wanting to center what we do and what we invest in, in terms of what communities need, particularly those that have been left on the margins.
David Goldstein:
Would it help also just to throw money at the problem? I mean, I saw a report. I mean, the people say that disparagingly, but I saw a report recently that there was been this spurt of a small business creation in majority black communities during the pandemic, somewhat linked to the pandemic relief. They had a little capital on hand, so they started small businesses. That seems to suggest that giving people capital might be part of the solution.
JP Julien:
Totally. Economic resources can be very helpful, right? So we know that black families have on average an eighth of the wealth of white families, and that creates a ton of ripple effects in terms of their ability to invest in entrepreneurship, home ownership, their own education, retirement, all of those dimensions. What I will say though, is just throwing money at the problem doesn’t necessarily fix the systems that result in the outcomes that we see. So you can throw money at trying to build more affordable housing, but until you change things like zoning and how we actually decide what gets built where, and who gets to live where, we won’t fully solve that problem.
David Goldstein:
So quick fixes are very appealing. What you’re talking about doesn’t sound like a quick fix. It’s something that would take quite a bit of time, maybe even generational to address these issues. How long a path do you see out there? Do you see towards solving this problem and creating a more inclusive economy?
JP Julien:
Well, I think getting to the final answer will take … there is a journey to get there. I do think there’s quite a bit of short term, near term investments that are quite helpful, right? So the American Rescue Plan is going to invest $1.9 trillion into our economy. There are state and local governments that are getting 40%, 50% increases in their budgets over the next several years than they’re used to. And so thinking about how we spend those resources and how we ensure that those resources reflect the needs of those that have been excluded historically, whether it’s things like re-skilling those that have been unemployed or connecting them back to the labor force or ensuring that challenges that we’ve seen in the pandemic, like digital access and learning loss are really recovered in the near term, can be ways that we not only just not lose ground, but ensure that we’re making strides, especially with the near-term acceleration of some of the funding that we’re seeing at the federal level.
Nick Hanauer:
So this report and the conclusions of it, were these obvious to you before you looked at the data, or how did the report unfold?
JP Julien:
Yeah. So we really set out to answer three fundamental questions. So inclusive growth has become this mantra in economic development circles and the private sector. And so we really want to understand, what do people mean when they say inclusive growth? To the point we made earlier, are inclusion and growth at odds, or do they actually work in concert? And then ultimately, how do we actually get that growth? And I think for me personally, having done this work in communities across the country, I’ve actually seen glimmers of where it’s worked really well.
And so to give you a bit of an example, there’s this work that was done out of Fresno, California called Fresno Drive. It was developing the regions inclusive and vibrant economy, and they actually took a very different approach to economic development. They said, “Let’s actually try to engage as many people in the community as possible. So they brought together 150 organizations. There was a 350 person steering committee, full day community planning sessions. And what was beautiful about that is they brought people in a room that didn’t agree, that yelled at each other, that tears were shed in some of these moments, but ultimately did the hard work of bringing people together and bringing those giving power to those that traditionally didn’t have it, and developed a set of tangible investment opportunities that would move the community forward. And what we’ve seen in that work is by really centering it in community. They’ve actually been able to not only gain investment in new ways, but actually drive implementation and execution.
Where a lot of economic development falls apart is in the execution. And so I’ve seen glimmers of how it’s worked well. And so I think this research really helped solidify talking to experts across the country, that there are these impediments that we can break through if done right. Provided me with a lot of hope around what this could look like moving forward.
Nick Hanauer:
So why do you do this work?
JP Julien:
I am just deeply committed that we must do better. I’m mindful that today marks the one year anniversary since George Floyd was murdered, and we can’t continue to live in a world where demographic characteristics, whether it’s race, gender, fiscal ability, shapes our life outcomes. My wife and I recently had a son. And so I’m increasingly just thinking about what the world could look like when he is growing up, such that we have an economy that both supports the lives and livelihoods of all of its residents and provides a way for those that have been historically excluded to really thrive in ways that we just haven’t set our systems up to do so. And so that’s what powers me to do this work, is a commitment that this can be done well and can be done better.
Nick Hanauer:
That’s a terrific answer. Well, JP, thank you so much for being with us. Congrats on the report. Nice work. I hope your colleagues take it seriously.
David Goldstein:
I hope your colleagues take it seriously, Nick.
Nick Hanauer:
Yeah. Well, I mean, JP’s organization, it’s a nice conduit to my colleagues.
JP Julien:
That’s true.
Nick Hanauer:
So, but honestly, thanks for putting your shoulder to the wheel on this stuff. I think it’s a really consequential thing that you’ve done and I hope you keep grinding on it, because the quicker we can persuade the world that the more people we include, the better off we all will be, the quicker we’ll all be better off. So thank you again.
David Goldstein:
Yeah.
JP Julien:
Thank you both.
Nick Hanauer:
I’m always reminded of the book Equality and Efficiency, The Big Trade Off by the celebrated economist, Arthur Okun who basically argued that we could have some fairness, but it would come at the cost of economic efficiency and that is sort of the bedrock idea of the neoliberal outlook on economics. And the existing paradigm, usually in the best of cases among people on the left is that, of course we should have inclusion, but it’s this luxury that we can now afford because we have economic growth. And what’s exciting to watch is even the McKinsey company who to be clear has been at the center of some very, very, very bad corporate practices come around to believing that in fact, including more people creates economic growth, that it’s both the right thing to do morally, but perhaps even more importantly, it’s the best practical path to a greater prosperity.
David Goldstein:
It turns out when people are included in the economy, you get a bigger and more prosperous economy, and a bigger and more prosperous economy is what people want. So include more people in it and you get better outcomes. And another distinction I think you made here is, and I know JP, he had to be all sciencey and McKinsey in saying there’s a strong correlation, but he wouldn’t cop to there being causation. Well, we don’t have to be so careful, Nick, you and I. We’re not economists, It’s clearly causative.
Traditionally, orthodox economists have this view that a large and thriving middle class as a consequence of economic growth. And actually they have that wrong and backwards. That a thriving and prosperous is actually the primary cause and source of economic growth.
Nick Hanauer:
That’s right. And I think that the neoclassical framework, which sees the economy is this closed equilibrium system leads you to believe again, as Arthur Okun argued that believing that you can have both more fairness and more economic efficiency is like believing you can have your cake and eat it too. But in fact, in an open system where energy is pouring into the system in well constructed … you create this virtuous feedback of increasing prosperity for everyone. That metaphor actually doesn’t apply. That in fact a well-structured economy creates more cake for everyone in greater and greater measure.
David Goldstein:
Yeah. So on the subject of correlation, Nick, I don’t think it’s a coincidence that Okun’s book, The Big Trade-off was published in 1975, which is the exact year that we see median wages start to diverge from productivity. And so you see that the whole era of rising inequality starts in 1975 at the very moment that economists, policy makers, corporate leaders, politicians all start to believe in the myth of the big trade-off. And it’s incredibly encouraging to see organizations like McKinsey coming out with these studies finally refuting and destroying that myth once and for all.
Nick Hanauer:
Absolutely.
Speaker 4:
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to subscribe, rate and review us wherever you get your podcasts. Find us on Twitter and Facebook at Civic Action and Nick Hanauer. Follow our writing on Medium at Civic Skunk Works, and peek behind the podcast scenes on Instagram @PitchforkEconomics. As always, from our team at Civic Ventures, thanks for listening. See you next week.