Here in Washington, two of the hottest words on the economic circuit are “capital shortage.” Academic economists shy away from the phrase because, they say, it is misleading. In theory, there is always enough capital to meet demand as long as investors are paid a sufficient return on their money. The higher the rate of return, the more money people will save—i.e., the more they will make available for investment. Thus the market is counted on to bring things into a natural balance.
“Capital shortage” does have a special meaning for policy-makers, however, and they are growing increasingly concerned about the prospects for just such a shortage in the future. In their minds, the “shortage” would mean a gap between the level of investment that we need to meet future economic goals and the amount of money that will actually be invested. There is good reason to fear that the shortfall could be substantial and that our economy would thus be operating below potential for some years to come.
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