U.S. economists keep winning Nobel Prizes. Too bad we don’t listen to them

Nobel Prize image

If the Nobel Prizes were like the Academy Awards, then they would be like the Lifetime Achievement Awards instead of this year’s best film or actors. In other words, they honor a body of past work, not the present.

And no one category best represents the biggest gulf between past and present than economics, which Americans have particularly dominated in recent years. Judging by our current state of affairs, the United States has not been particularly good at implementing their ideas.

Take Bengt Holmström, an economics professor at the Massachusetts Institute of Technology, who won a Nobel in 2016. During the late 1970s, Holmström’s work on contracts showed how companies could effectively incentivize CEOs and other top executives by linking pay to performance.

Today, executive compensation is a bloated mess, arguably the weakest part of U.S. corporate governance. In 2017, the average CEO of the 350 largest firms in the U.S. received $18.9 million in compensation, a 17.6 percent increase over the previous year, according to a report by the left-leaning Economic Policy Institute.

The typical worker’s compensation remained flat, rising a mere 0.3 percent. The 2017 CEO-to-worker compensation ratio of 312-to-1 was far greater than the 20-to-1 ratio in 1965 and more than five times greater than the 58-to-1 ratio in 1989.

The CEO runs the company and therefore deserves the highest pay of any employee. But I’m not sure they deserve 312-1 kind of pay.

But it was this year’s Nobel Prize in Economics that particularly caught my attention. Paul Romer, a professor of economics at Harvard University, won the honor for his work pioneering endogenous growth theory, the idea that internal factors, such as government policy, boosted economic growth, not external forces.

Specifically, Romer showed that government investments in things like research and development and human capital could generate the necessary innovation to power an economy.

But on those two things, the United States is falling woefully short.

American companies still spend the most on R&D than rest of the world, thanks to generous tax incentives for corporate R&D expenditures. But that R&D has become increasingly inefficient.

Anne Marie Knott, a professor of strategy at Washington University’s Olin School of Business in St. Louis, recently analyzed the performance of publicly traded companies since 1972, measuring productivity by comparing increases in R&D spending with increases in annual revenue.

She found that corporate returns on R&D spending actually declined 65 percent.

Part of the reason might be a distorted U.S. tax system meant to stimulate innovation and create high paying jobs has essentially morphed into a huge corporate tax giveaway that only grows bigger every year.

For example, in California, home to Silicon Valley, companies accumulated $14 billion in unused R&D tax credits as of 2012. Alphabet, the parent company, holds about $1.8 billion in tax credits alone last year.

We subsidize already cash rich companies to do something they should already be doing. But we’re not investing enough in human capital, such as health care, job training, and education.

Since the Great Recession, states have dramatically cut funding for public colleges and universities, according to a report by the Center of Budget and Policy Priorities.

As of 2016, after adjusting for inflation, funding for public two- and four-year colleges is nearly $10 billion below what it was just prior to the recession. Forty-six states — all except Montana, North Dakota, Wisconsin, and Wyoming — are spending less per student in the 2015-16 school year than they did before the recession.

Last year, the World Bank debuted its Human Capital Index to measure countries’ investments in people for greater equality and economic growth. This year, the index ranked the United States, the richest country in the world, at 27, just behind Serbia and just ahead of Cyprus, Estonia, and Kazakhstan.

Asian countries such as Singapore, Japan, and South Korea dominate the top of the index followed by European nations.

Economists like Romer and Holmström are racking up prizes but American government and corporations are increasingly ignoring their research– to the detriment of the economy and the people.


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