Crowding out (economics)
[1] Other economists use "crowding out" to refer to government providing a service or good that would otherwise be a business opportunity for private industry, and be subject only to the economic forces seen in voluntary exchange.
[3] One channel of crowding out is a reduction in private investment and accumulation of real resources that occurs because of an increase in government spending.
Increased government spending results in a shift in the distribution of real resources produced within an economy, away from private use and to public use.
In the aftermath of the 2008 subprime mortgage crisis, the U.S. economy remained well below capacity and there was a large headroom of potential production available should investment be made, so increasing the budget deficit put funds to use that would otherwise have been idle.
The resource “crowding out” argument purports to explain why large and sustained government deficits can take a toll on growth; they reduce capital formation in the private sector.
When there is considerable excess capacity within the economy, an increase in government deficit does not crowd out private real capital formation.
"[4] If the economy is in a hypothesized liquidity trap, the "Liquidity-Money" (LM) curve is horizontal, an increase in government spending has its full multiplier effect on the equilibrium income.
Thus, the situation in which a tight monetary policy may lead to crowding out is that companies would like to expand productive capacity, but, because of high interest rates, cannot borrow funds with which to do so.
According to American economist Jared Bernstein, writing in 2011, this scenario is "not a plausible story with excess capacity, the Fed funds [interest] rate at zero, and companies sitting on cash that they could invest with if they saw good reasons to do so.
"[5] Another American economist, Paul Krugman, pointed out that, after the beginning of the recession in 2008, the federal government's borrowing increased by hundreds of billions of dollars, leading to warnings about crowding out, but instead interest rates had actually fallen.
[6] When aggregate demand is low, government spending tends to expand the market for private-sector products through the fiscal multiplier and thus stimulates – or "crowds in" – fixed investment (via the "accelerator effect").
Chartalist and Post-Keynesian economists question the crowding out of nominal funds thesis because government spending has the actual effect of lowering short-term interest rates by injecting liquidity into the banking system in the first instance, not raising them.
More directly, if the economy stays at full employment gross domestic product, any increase in government purchases shifts resources away from the private sector.
New Jersey, supposedly the model for profligacy in SCHIP with eligibility that stretched to 350% of the federal poverty level, testified that it could identify 14% crowd-out in its CHIP program.
Thus, in comparison to Medicare, which allows for near "auto-enrollment" for those over 64, children's caregivers may be required to fill out 17-page forms, produce multiple consecutive pay stubs, re-apply at more than yearly intervals and even conduct face-to-face interviews to prove the eligibility of the child.
[10] These anti-crowd-out procedures can fracture care for children, sever the connection to their medical home and lead to worse health outcomes.
