America is now five for five in the Nobel Prizes this year. And the announcement of Edmund Phelps as the economics recipient is an especially sweet victory for American entrepreneurs.<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />
Phelps, a professor at Columbia University, celebrates risk-taking by business as essential to growth and prosperity. His writings highlight the folly of recent policies, such as Sarbanes-Oxley, that hobble innovative businesses.
Phelps isn't a stalwart free marketeer. He has endorsed some types of wage subsidies and opposed President Bush's tax cuts.
And although his research was important in discrediting the Keynesian Phillips curve that purported to show a trade-off between unemployment and inflation, he still holds to some of Keynes' nostrums about money supply, saving and government spending.
But his research of the past decade on the importance of entrepreneurship to economic growth is just what policymakers need to focus on. Phelps has unabashedly championed features of the American model such as venture capital and stock options.
His research also shines a light on the long-term damage Sarbanes-Oxley and other mandates on public companies could do to American prosperity.
Phelps has expressed concern about these reforms, rushed through Congress after the corporate scandals a few years back, hindering U.S. innovation. In a 2005 essay for the Kansas City, Mo.-based Kauffman Foundation titled “Understanding Entrepreneurship,” Phelps wrote of “the damage to entrepreneurship that might result from some of the corporate reforms enacted in response to these scandals.”
In this essay, Phelps argued that policymakers and economists must realize the importance of risk in a prosperous society.
“Entrepreneurs are like fighter pilots: They cannot explain completely their thinking and the decisions they make; the financiers can understand even less,” he wrote. This “radical uncertainty” is a big part of what makes economies flourish.
Phelps often speaks about the idea of “dynamism.” He says it could hold the key to further understanding economic growth.
As for his support of wage subsidies, Phelps has written that many governments should be careful not to overdo it, because it will hinder the desire of employees to start their own businesses.
He has been working on a project to rank countries in order of the level of the entrepreneurship they allow.
In his description of nations, Phelps is strident in his defense of the superiority of America's system of entrepreneurship over what he calls the European “corporatist model.”
Europe suffers, Phelps wrote in 2000 in the Financial Times, because “the typical European economy . . . is a tripartite system of established companies, large trade unions . . . and an interventionist government all bent on preserving their interests.”
America, by contrast, prospered in recent decades because it had “venture capitalists who could later sell shares in startups they financed” and “stock options to focus managers on earnings growth.”
These days, stock options and other financial innovations are under attack because of the abuses of a few. Mandated expensing rules that force startup companies to estimate a future-based value of employee stock options, combined with Sarbanes-Oxley's expensive mandates requiring audits of broadly defined “internal controls,” have made it difficult for innovative companies to go public and raise capital.
Home Depot co-founder Bernie Marcus recently told IBD that his company couldn't have gone public when it did if today's financial rules had been in place. If Sarbanes-Oxley is not repealed or overhauled, will the U.S. come to resemble this moribund “tripartite system” of many European nations?
Phelps' recent research reinforces lessons of American capitalism and innovation that politicians in both parties seem to have forgotten. This makes for a sad irony.
Sweden's Nobel Committee recognizes Phelps' insights on entrepreneurship. Yet Congress hasn't lifted a finger to ease the burden of Sarbanes-Oxley on American entrepreneurs, save for a few like Rep. Tom Feeney, R-Fla., and Sen. Jim DeMint, R-S.C., who have introduced bills to scale back the law's most onerous provisions.
Phelps' research indicates that refusing to lift this barrier to innovative firms could have dire economic consequences. “Entrepreneurship,” he wrote in 2005, “and the economic institutions that facilitate it, ultimately affect people's lives as well as societal concerns like national productivity, wage levels and unemployment. We need to understand all of these areas better.”
Hopefully, America's political class will one day come around to understand some of this Nobel laureate's wisdom about what makes America great.