US Innovation 'Dead in the Water': Columbia's Phelps

Innovation in the U.S. has been stagnant for ten years and the government isn't doing enough to boost the sector, which is risking the economic recovery, Edmund S. Phelps, professor of political economy at Columbia University, told CNBC Friday.

"The untold story of the past decade is that business investment activity was dead in the water … because innovation had slowed down," Phelps said.

"This notion that the only thing wrong with the American economy is there's not enough money chasing goods, it's just so crazy. It's really led policy makers astray," he added.

The slow economic growth that's been in place since the financial crisis is the new normal and short-termism in the business sector is a big part of the problem, he said.

"If the big companies are flat on their backs … and not inclined to do any new investing, the message will go down to the folks in Silicon Valley and the folks working in garages that there's no point in trying to innovate," he said.

Small start-up companies have to have customers for their new products and businesses themselves are a big potential market that is not buying, according to Phelps. The effect is failing to boost the jobless numbers, he added.

"The big driver of employment … is business investment activity and driving that is innovation," Phelps said.

Phelps is proposing the introduction of the First National Bank of Innovation to help support the sector. He said that innovation is the only thing the U.S. government doesn't subsidize, which is equivalent to taxing it. The innovation bank could partner with start-up companies and provide financing, Phelps said.

"The idea that everyday is a great day for innovation in America is just wrong. We had those glorious years of the Internet revolution, but we haven't had much since. Google cannot carry alone on its shoulders the U.S. economy," he said.

Phelps said that there is an investment opportunity in innovation as well as economic benefits.

"Business investment activity has been depressed for ten years and there's room for a huge resurgence of old-fashion business investment," he said.