This blog post is part of the series “Closing the Racial Gaps: Together We Can” which highlights efforts across the United States that show promise for closing racial opportunity gaps and creating a more equitable future.
Next year will bring a new president into office here in America. It will also mark 50 years since the worst summer of civil unrest in America and the Kerner Commission’s unforgettable warning that we were becoming “two nations,” separate and unequal. The 25th anniversary of Living Cities, an extraordinary collaboration, and the upcoming 50th of that terrible breaking point in our national experiment, make this an important moment to take stock and set our sights higher.
What have we actually learned about striving for one of the core promises of the experiment—creating opportunity for all?
There are uniquely national dimensions to this, of course, from wise and fair monetary, trade, and safety net policies to a coherent, transparent, and equitable national system of taxation. These national imperatives provide the foundation for much of the rest, and they must adapt much faster to the economy and society we are becoming. But I will focus here on the local work of creating shared prosperity, suggesting five brief, and in some cases impertinent, lessons learned.
Five Ways to Make Capitalism More Inclusive
First: promoting shared prosperity—or making the economy work for all—is essentially about making capitalism inclusive. This implicates rules of the game, which in turn suggests a very important and sometimes inconvenient truth: That we will never simply innovate our way out of exclusion and inequality. We have to summon the will to make the system work differently, work more fairly and inclusively. And we have to work through political and other differences to do that.
With due respect to Adam Smith, the economy does not simply operate according to the invisible hand or “natural” laws of the market place. It is structured by the rules we choose socially and politically, as Nobel economist Joe Stiglitz reminds us in his recent, aptly titled book, Rewriting the Rules of the American Economy. “Inequality is a choice,” Stiglitz argues, not an unavoidable outcome. Capitalism exists to support a good society, not the other way around.
Capitalism is not a constant, even if certain underlying principles have motivated our choices.
And it helps to know your history: Capitalism is not a constant, even if certain underlying principles have motivated our choices. We have changed the specific rules over time in this country. We invented anti-trust law and Social Security and labor rights. We must continue to invent, debate, and make bold choices.
A growing evidence base underscores a related and equally powerful point: that inequality undermines growth. Inequality affects us all, not just the disadvantaged. And economies that enjoy sustained growth and prosperity are fundamentally inclusive ones.
Second, and a bit more concretely now, we have learned that at the local level, creating inclusive economies “takes a village.” Business is essential to the work, but so are government and nonprofit organizations. To really move the needle, these partners must sometimes be willing to engage in unnatural acts (pardon the expression). From Detroit to Los Angeles and Memphis to Miami, high performing partnerships have required risk taking and learning, not just feel-good acts of easy cooperation. The label “partnership” is still thrown around much too loosely. It dresses up contractor relationships, marginal commitments, and short-run marriages of political convenience—among other impostors.
Third, corollary to that, we have learned that each sector must be willing to share risk or give something up. The federal Low Income Housing Tax Credit program, now the nation’s most important source of capital for expanding the supply of affordable housing, is a good example. Private investors often tie up their money for 15 years—much longer than they normally would—while government provides a tax credit that investors can use flexibly, not a less generous or less flexible tax deduction.
Fourth, it is not enough to believe that markets matter or even that they are key engines of prosperity. Rather, our shared work is to figure out how to enable markets to generate and distribute wealth in ways markets would not automatically do. That calls for open minds and, again, an appetite for taking smart risks.
For example, nearly twenty years ago, here at the Ford Foundation, we made a bet. We invested in a community development financial institution called Self Help, which was working to expand mortgage access for low-wealth families across the country. And Self Help, in turn, partnered with mortgage giant Fannie Mae. Along with Self Help, we bet that it was possible to identify low-wealth, traditionally under-served but creditworthy borrowers and offer them mortgages. We bet that over time, most would be successful. Fannie Mae’s models, consistent with standard industry analytics and practice at the time, predicted otherwise. Ford provided, in effect, a loan loss reserve to mitigate the financial risk to Fannie Mae. It was an extraordinarily good bet. These carefully underwritten loans—a pool of thousands of families, so analysts could track the mortgages and analyze in meaningful ways—performed extraordinarily well, even through the worst of the financial crisis. The demonstration showed that the mainstream mortgage market could extend itself to serve these borrowers, making the dream of owning a home—still the number one road to building family wealth—attainable. Years on from the financial crisis, Fannie Mae recently restarted its program for creditworthy, low-down-payment mortgage customers.
The multi-trillion dollar mortgage market did not get there on its own.
The multi-trillion dollar mortgage market did not get there on its own. Somebody had to see things differently—had to spot the “undervalued stocks,” so to speak—and a variety of players had to take some risk. A foundation provided vital risk capital. Self Help provided expertise and a ton of “sweat equity,” beyond putting its reputation on the line, and so on.
The same is true for community land trusts, which take an unconventional approach to land ownership and development rights, or impact investing, which is poised to move from the margins to the mainstream of finance if we can show imagination and mature the field, or financing affordable housing as part of promoting community health—rethinking, in the process, what it means to spend on health and what our spending actually achieves in terms of outcomes.
Fifth and finally, we have learned, as basic as it sounds, that those with a stake in decision-making have to participate in meaningful ways. And that means being clear about the purposes of stakeholder participation: Is it to define a problem, set the agenda? Is it to develop strategy? Is it to implement smarter by tapping “the wisdom of crowds.” These are three crucial but very distinct purposes. Much “participatory” or “inclusive” or “collaborative” work, by comparison, is a mush of confused purposes, unrealistic hopes for consensus, and shaky capacity to clarify, learn, deliberate, debate, decide and then learn some more. This last lesson is among the more sobering ones. It, too, is a legacy of the 1960s, of the activism that challenged powerful experts and forever changed the way urban development and many other things get decided in America. It is also a reminder that the information revolution has outpaced the way our civic institutions function, at the same time offering vast new access and much untapped promise.
Changing the way we work together to make decisions both inclusive and wise—and many are trying—is a very worthy goal for the next 25 years. Our national experiment, after all, is to marry an inclusive economy to a deep democracy. And that’s a moonshot aspiration worthy of all our energy and commitment—and a fair dose of humility along the way.