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US 'out of ammunition' to tackle economic 'rut': Phelps

Wednesday, 22 Jan 2014 | 9:45 AM ET
US is stuck in 'innovation rut': Phelps
Thursday, 23 Jan 2014 | 4:50 AM ET
The U.S. has been stuck in an "innovation rut" for decades argues Edmund Phelps, 2006 Nobel Laureate in Economics and says a change of attitude is needed.

The U.S. economy is in a "rut" and has been in stagnation since 1972, a Nobel Prize-winning economist told CNBC.

Edmund Phelps, who was awarded the Nobel Prize for Economics in 2006, said the U.S. government has run out of ideas about how to fix the economy.

"Governments have thrown all sorts of ammunition at it including concocting the housing boom. And we are kind of out of that ammunition and we have to dig deeper if we are going to get out of this rut," Phelps told CNBC in a TV interview.

Phelps is highly credited with advancing the Golden Rule savings rate, which aims to promote state growth, as well as creating the theory of the natural rate of unemployment, a figure still used today to inform central bank policy.

Many experts are predicting growth in the U.S. to hit levels of around 3 percent in 2014, but the Nobel Prize-winner said that was "a little on the optimistic side".

He also said there is weak business investment in the U.S. because of a lack of innovation.

"The reason business investment is weak is that investment has run into diminishing returns…In the good old days we had innovation always creating new investment opportunities. So we were always countering diminishing returns," Phelps said.

Phelps received his PhD. from Yale in 1959, where he mixed with future Nobel Prize-winners.

The Swedish Academy who selected Phelps for the prize said in 2006 that his work "deepened our understanding of the relation between short-run and long-run effects of economic policy".

The Illinois-born economist received 10 million kronor ($1.5 million at today's exchange rate) along with the award.

But Phelps said the economy could be fixed if the U.S. "gets back with the program".

"I think we've got to change attitudes. We have to get back with the program, with the idea that life can be fun and challenging and riveting and thrilling. But to do that we've got to open up the gates for innovation again and that means attacking vested interests," Phelps told CNBC.

—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal

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