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Phelps on innovation

In an interesting op-ed  in Saturday's New York Times, Edmund Phelps, the Nobel-prize winning economist at Columbia University, called for a "focus on fixing the structural problems, that, unresolved, will stymie the economy over the long haul". It is defintely worth reading.

Like many economists, Phelps criticizes Keynesian ideas about insufficient demand. But unlike many other critics of contemporary Keynesianism, he does not say the answer is deficit reduction or simply allowing the market to self-heal:

There are no symptoms of deficient demand, like deflation, and no signs like a huge liquidity shortage that could cause a deficiency. Rather, our economy is damaged by deep structural faults that no stimulus package will address.

Phelps argues that broad prosperity is based on business investment, which in turn, depends on continual innovation. However, today "short-termism has become rampant" and "many of the factors that have long driven American innovation" - such as venture capital and pharmaceutical research - "have dried up".

Phelps is spot-on in identifying that the US economy faces structural issues related to the lack of productive dynamism. His suggested reforms - which include creating a First National Bank of Innovation, tying executivces' compensation to long-term performance and exempting start-ups from corporate income tax - are not that impressive. But if he can shift the discussion away from stimulus vs. deficit-reduction and towards the structural barriers to growth, he will have done a great service.

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