The Investment Gap

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"The Investment Gap"

From the General Theory of Money, Interest, and Employment:

Moreover the richer the community, the wider will tend to be the gap between its actual and its potential production; and therefore the more obvious and outrageous the defects of the economic system. For a poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment; whereas a wealthy community will have to discover much ampler opportunities for investment if the saving propensities of its wealthier members are to be compatible with the employment of its poorer members. If in a potentially wealthy community the inducement to invest is weak, then, in spite of its potential wealth, the working of the principle of effective demand will compel it to reduce its actual output, until, in spite of its potential wealth, it has become so poor that its surplus over its consumption is sufficiently diminished to correspond to the weakness of the inducement to invest.

This is roughly speaking what I think is going to be our path out of the slump. Stay in a little depression long enough, and eventually the surplus of people over homes gets to the point where residential investment has to make a comeback. But it’s an unnecessarily long, unnecessarily hard slog.

What’s more, the thing Keynes didn’t foresee is that advanced wealthy societies would eventually adopt a dazzling array of measures that make it exceedingly difficult to conduct public sector infrastructure programs quickly. The government regulates itself (via contracting rules, environmental review, community input, grant formulaes, etc.) to a staggering degree.

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