Edmund Phelps is a Nobel Laureate in economics. I had expected more from him than he offers in this article. He argues that income inequality is primarily due to a lack of innovation in the US. We had less inequality earlier in our history when innovation and productivity were higher. Inequality has increased as innovation and productivity has slowed down in recent years. His solution, therefore, is to find ways to increase innovation and productivity.
He does not believe that government can do much to increase innovation and productivity. He rejects the use of industrial policy because private investors are better at identifying and funding innovation than government. He also argues that government efforts to deal directly with inequality, by making the tax system more progressive, will weaken the incentives needed to stimulate innovation.
He believes that banks could do more to stimulate investment in innovative enterprises, but they have other priorities. Wall Street is also a problem because it focuses management attention on short term performance that will increase their bonuses. Most of them won't be around to benefit from investments that promote the longer term interests of their enterprise. Consequently, we should not expect many needed changes from the financial sector or from businesses.
Since neither government or private enterprise are likely to provide the innovation and productivity that are needed to stimulate growth and reduce inequality, what does Phelps offer as the solution? He believes that we need to restore the "ethos" of innovation that had led to growth and greater equality earlier in our history. He doesn't offer any advice on how we can restore the ethos of innovation. Perhaps that will be the subject of book that he is writing. In the meantime we are left with the problem of inequality and the hope that we can figure out ways to inspire more ethos. Of course, we also have the confidence fairy to rely upon if we can't locate more ethos.
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