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Can This Man Answer Economics' Prime Question?


Economics

CAN THIS MAN ANSWER ECONOMICS' PRIME QUESTION?

His is not a household name, nor is it likely to become one. He isn't headed for a job in the Clinton Administration. But economist Paul M. Romer is quietly influential all the same, and his ideas may yet make their way to Washington in some form. For 10 years, Romer has concentrated on the most basic and perhaps most important questions in economics: How does long-run growth occur? What sustains growth? His answers, focusing on the role played by technology and innovation, have been so compelling that they've provoked a tide of new economic research. They also are having a broader influence. "Romer has unlocked a whole new way of thinking about growth," says Harvard business school Professor Michael E. Porter, who says he found inspiration in Romer's work as he undertook his own extensive comparison of companies and industries in The Competitive Advantage of Nations.

That new way of thinking encompasses looking at how an array of institutions--from governments to corporations to universities--help or hinder innovation and growth through explicit policies or organizational structure. Numerous economists are looking at these issues, but few approach them from the vantage of Romer's deep understanding and theoretical training. Now at the University of California at Berkeley, Romer, 37, is trying to bridge the chasm between ivory tower and real world. That's risky in a profession in which technical virtuosity is prized well above practical thinking. But Romer has shown willingness to challenge convention.

His major contribution to economics was simple but profound. The neoclassical growth model, as constructed by Nobel prize-winner Robert M. Solow of Massachusetts Institute of Technology, recognized technological change to be the biggest contributor to long-term growth. But Solow's highly influential model viewed technology's contribution as incalculable except as a "residual" after accounting for changes in labor and capital. Technological change could neither be directly measured nor, for that matter, manipulated by changes in economic policy.

In the 1970s and early 1980s, young economists eager to make their mark with elegant modeling techniques shunned growth theory as a dead end. But Romer was intrigued by it, and in his doctoral work at the University of Chicago he found a way to incorporate technological change into a new model. In his work, technology's contribution to growth became susceptible to both measurement and manipulation. "Romer showed that you can explain growth without appealing to a deus ex machina of technological change, and that was terrifically liberating," says Paul R. Krugman, an mit economist whose work in trade theory paralleled Romer's.

Romer was not alone in his line of inquiry--his Chicago adviser Robert E. Lucas Jr. was looking at some of these issues when Romer was doing his research. And Romer is not without his critics, though even they are quick to commend his intellect. Harvard University economist N. Gregory Mankiw argues that traditional variables of growth, such as investment, have far greater explanatory power than Romer's work suggests. Others say Romer's work simply codifies in a model the technological innovation, monopolist pricing, and increasing returns that have long been anecdotally familiar to economists.

SUDDEN SHIFT. Romer's intellectual and career history have traced an interesting path. He grew up in a Democratic household--his father is Governor Roy Romer of Colorado--but became a registered Republican when he imbibed the University of Chicago's free-market thinking. (He voted for Clinton, though.) Romer's undergraduate training was in mathematics and theoretical physics, but he abruptly switched gears to economics.

Romer did most of his theoretical work at Chicago. Yet one pillar of his growth model--that long-run growth is marked by imperfect competition--defied a long-held Chicago assumption that markets produce efficient outcomes. After teaching at the University of Rochester, he went on to land a coveted full professorship at Chicago in 1988. But he quit two years later to accompany his wife to California, where she took a promising job in medical research.

Long immersed in theory, Romer is now exploring how to promote growth. First, he says, the appropriate patent and copyright protections should be established. But since some innovations are costly to develop and may have benefits that extend well beyond the innovator, government could give the process a nudge. One way would be to allow companies to act collectively and raise research and training funds through a voluntary tax, then decide among themselves how to earmark those funds. There are some precedents for this approach, but it has not been widely tried.

SAVINGS PLAN. Romer is also tackling the question of how to spur savings. His father, chairman of the National Governors' Assn., asked for his input in advance of a mid-December nga meeting on deficit reduction. Romer, who is interested in how values and economic behavior interact and affect growth, took the bait and came up with two ideas.

First, Romer proposes a forced savings plan whereby taxpayers would put a portion of total income into a registered savings account. If a taxpayer failed to do so, the government could require that the money be withheld and the proceeds put in U.S. savings bonds. He also proposes a payroll savings plan for young workers that the government would match dollar for dollar and finance through higher excise taxes.

So far, Romer's ideas for promoting innovation and boosting savings haven't gotten much play, even within economics. That's partly because Romer himself is treading cautiously, well aware that many economists have foundered in designing policy. Even if his work goes no further, though, Romer is assured of lasting recognition for his work in growth theory. He is already a rumored candidate for the prestigious John Bates Clark medal, awarded every other year by the American Economic Assn. to an economist under age 40 deemed to have made a significant contribution. But if Romer succeeds in marrying his theoretical work with practical prescriptions for growth, he has a chance at a far bigger prize: returning economics to its roots and guiding it toward a new political economy for the 1990s and beyond.

TABLE: A SELECTION OF ROMER'S VIEWS

On growth: Ideas and discoveries are the critical engines of economic growth

On spurring innovation: Establishing the appropriate patent and copyright protection is important. For instance, software companies may deserve monopolist-like profits to compensate for the cost of innovation, while medical researchers should not be allowed to profit by patenting gene fragments

On government's role: Growth may be impeded or enhanced by what government does. So policies must be fashioned with care and be market-oriented to provide incentives

On values: Government may be able to reinforce values such as thrift by designing new savings incentives

DATA: BWKaren Pennar in New York


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