There are only two ways out of the current global economic mess: innovation and inflation. And as the saying goes, hope for the best (more innovation) and prepare for the worst (higher inflation).

Global_Lightbulbs_SmallNo matter which explanation you favor, the essential mismatch between growth and debt has only two possible solutions: Increase the growth rate or reduce the debt. For a country like the U.S., increasing the growth rate requires innovation, and innovation requires a devotion to investment: Investment in physical capital, investment in human capital, investment in knowledge capital. That increased investment, in turn, should result in higher rates of productivity growth and increased innovation.

In other words, we have to shift from a consumer economy to a production economy. This is partly about a change in spending patterns, but also about a change in attitude. For example, we need to boost R&D and other investment in knowledge capital, but we also need federal regulatory agencies to encourage rather than discourage innovation. We need more infrastructure spending and other investment in physical capital, but it should be directed towards supporting exports and production in the U.S., rather than clearing up bottlenecks of imported consumer goods. This profound shift in policy and behavior is essential over the long run, but it won’t be easy or quick.

Click here to read the complete article.

Source: Michael Mandel | The Atlantic