Capital Shortages and Persistent Unemployment

Abstract

Capital shortage Charles Bean Over the last 10 years the rate of investment has been depressed throughout the European Community, Some people believe that as a result there is insufficient capacity to absorb the unemployed in the event of a recovery in real demand. I estimate the size of this ‘capital gap’ and find that investment may need to rise by as much as 20% above the levels experienced during the first half of the 1980s, However, this represents no more than a return to the investment rates of the early 1970s, Furthermore firms will respond to capital shortages by installing new capital provided it is profitable. Thus the required resurgence in investment will arise automatically, so that capacity shortages are likely to be a temporary phenomenon at worst. The real obstacles to a rapid return to full employment lie elsewhere, paticularly in the labour market. The presence of such transient capacity shortages during any sustained recovery does not, by itself, justify policy measures discriminating in favour of investment, for there is no obvious market failure involved. However, a sustained recovery will almost certainly be associated with a significant spurt in investment. It is quite appropriate for this to be financed by borrowing from abroad, so governments should be willing to see a deterioration in their current accounts and should not adopt deflationary macroeconomic policies to restrain demand.