In today's Wall Street Journal Nobel Laureate Edmund Phelps takes on the issue of taxation and insuring wealth across generations. Some snippets: The Wall Street Journal:...Your "golden rule" of capital accumulation states that each generation must save a certain amount so that future generations can enjoy the same standard of living. Should we be concerned? Prof. Phelps: When you apply the golden rule, you have to look at the world economy. Certainly the world as a whole has saved enough...I would, however, have to give bad marks to the U.S. government, which has run persistent budget deficits at a time when we have to start climbing up the mountain of pension obligations that will come due with the retirement of the baby boomers. Yup, spending is out of control. WSJ:..you've suggested that the U.S. economy could possibly grow its way out of its demographic difficulties if productivity...keeps booming as it has in recent years. Do you see that as a likely outcome? Prof. Phelps:...I see such a prolonged boom as unlikely...We should study the market for new ideas, where entrepreneurs and financiers come together, and try to see how that could be made to work better. Venture capital still accounts for less than half a percent of all investment. Stupid regs like SARBOX doesn't help. But Phelps' focus on investment, especially early stage risk-capital investment is right on the money. Get rid of the capital gains tax so investors have no disincentive to move from one investment to another. If we need to limit it, then eliminate the tax on investments in companies below a certain size threshold. WSJ: Would [increasing taxes on low wage earners] be economically just, especially at a time when the gap between the rich and the poor has been growing? Prof. Phelps:...[My proposal is] subsidies that would be paid to companies for the ongoing employment of low-wage workers. The resulting increase in the demand for those workers would pull up their employment and ultimately give a big boost to their paychecks. Our Earned Income Tax Credit is a step in the same direction, but it's aimed toward low-wage parents. I remember reading this a few months ago. It seems like a better idea than direct unemployment benefits. Much better incentives all the way around. WSJ: You've been studying ways to permanently lower the unemployment rate. Any advice? Prof. Phelps: I have the eccentric view that there's too much wealth sloshing around the American economy. This wealth has bad incentive effects on the supply of labor, employee performance and maybe even innovation. We have become wealthy thanks in part to unsustainably low tax rates. From that point of view, it would be a good thing for the federal government to raise taxes and run big surpluses until we have retired the public debt. In the short run the higher tax rates might be unpleasant. But in the long run, with the debt reduced or eliminated, incentives to work or to advance in the world would be enhanced, because after-tax pay rates as a proportion of wealth would be higher. That is certainly an eccentric view. "Might be unpleasant?" I'd guess so :) I wish the interviewer would have asked Dr. Phelps about what kind of taxes he'd like to see and what his view on Federal spending is. But his intergenerational approach, his focus on investment being the answer to most economic questions and his reliance on incentives makes him worth the read. I hope you agree.