The U.S. economy is not suffering from a temporary lull in demand but rather from a structural problem that yields slower growth from a permanently lower base

Equity, not inflation, 

drives innovation and growth

Edward Conard

It has finally dawned on left-leaning economists like Paul Krugman and Larry Summers that the U.S. economy is not suffering from a temporary lull in demand but rather from a structural problem that yields slower growth from a permanently lower base. If this economic outlook is correct, and there is plenty of evidence that it is, there is little reason for Keynesian stimulus, which sacrifices long-term growth to avoid permanent damage from a temporary lull in demand. When a slowdown is structural, as it is today, the damage from economic displacement is unavoidable. If government spending could permanently grow an economy, Europe, especially Southern Europe, would have proven to be one of the faster growing economies in the world, rather than the opposite.

Paul Krugman correctly notes that savings now outstrip the need for investment, but mistakenly attributes the reason to slowing population growth. The notion that all investment waits for growing demand is extreme. Today, innovation drives growth. Investments in innovation create value independent of population growth and force competitors to respond in kind in order to avoid losses and preserve their profits.




More likely than Krugman's theory is that the economy now recognizes something it never should have forgotten-banks are inherently unstable. Eight hundred years of financial history has proven this to be true. Without a significant U.S. run on the banks since the Great Depression, we naively came to believe we had solved this problem. But the 30-percent drop in real estate prices between August of 2007 and the first quarter of 2009 set us straight. The private sector has permanently dialed back risk-taking in all its forms to compensate for this now-recognized risk. As a result, growth has slowed and savings sit idle.

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