By requiring banking organizations to incorporate a thorough, risk-appropriate approach to incentive compensation arrangements, supervisors can help address concerns that these firms face a kind of collective action problem, which may make a firm reluctant to rectify misaligned arrangements for fear that other firms will poach the best employees with promises of substantial near-term bonuses.
The statement that the problem we face is largely one of demand—and we do face that problem— seems to imply either that productivity growth is called forth by aggregate demand, or a Say’s Law of productivity growth, namely that productivity growth produces its own demand. That is not an issue that can be answered purely by theorizing.