Talk:Crowding out (economics)

Deficit spending and tax-cuts

Are tax-cuts necessarily associated with deficit spending as indicated in the opening paragraph of the page?

T. Rates 11:10, 16 November 2006 (UTC)

Linking this page to its French alter ego

I have no idea how to add the French tag on the left bar, but this article exists in the French wikipedia (effet d'éviction). It would be great if someone adds the link. Yobaranut 00:21, 6 May 2007 (UTC)

Crowding out has much wider scope than implied here

Crowding out is a far more general term than is implied here. Consider two behaviors A & B that achieve some end. Efforts to encourage A are said to crowd out B. This maybe a hypothetical concern, a substantive one, or a proven effect; but in most cases the term is used to raise the concern and often to cast doubt on the efficacy of encouraging A. The example given is a good case study in all that.

Another example is the well documented effect that intrinsic motivations are crowded out by the introduction of extrinsic motivations. If you pay somebody to read it will tend to reduce how much they read. This is an economic issue since the application of financial motivations can be presumed to crowd out intrinsic ones. The classic and extensively studied example is the profit v.s. nonprofit blood donation economy.

The crowding out effect is also seen in the standards setting space, where setting a standard set of practices will crowd out other practices. Which can be good or bad depending on where you stand. Again since standards are key to shaping how the supply chain functions this is an economic issue.

The existing article isn't particularly economic, it's in the intersection of politics and economics; Libertarian even in it's tone. Bhyde 16:30, 13 June 2007 (UTC)

Like NASA? VTNC (talk) 04:24, 1 July 2008 (UTC)

The citation given to challenge "crowding out" in SCHIP is a ridiculous link. For one thing it refers to many commentators but only cites one. For another, the citation doesn't actually challenge the idea of crowding out, just the size of the estimated effect. For another thing, this is hardly an authoritative source. I've deleted the footnote but placed a tag that a citation is needed. —Preceding unsigned comment added by 128.36.208.152 (talk) 20:39, 1 December 2009 (UTC)

Do they have this right?

"If increased borrowing leads to higher interest rates by creating a greater demand for money and loanable funds and hence a higher "price" (ceteris paribus), the private sector, which is sensitive to interest rates will likely reduce investment due to a lower rate of return."

-I don't mean to be picky, but I thought higher interest rates lowered demand for money because people would rather invest. Or did I just read that wrong? —Preceding unsigned comment added by Owen2re (talk • contribs) 23:13, 13 July 2008 (UTC)

you are both correct. the increased borrowing (from government) will increase overall demand for money. This will increase the interest rate and after a while private sector demand for funds will fall.

It may help if you remember the assumption of ceteris paribus, it implies that all else remains equal until one phase it complete. stepwise: - government increases borrowing <pause> - rates rise <pause> - private sectors starts curbing money demanded <pause>

ofcourse real-life is not this slow, and the processes occur a little quicker —Preceding unsigned comment added by Gautit (talk • contribs) 02:20, 4 December 2009 (UTC)

The assumption of ceteris paribus is that all other things will be equal. In the example given in the article and taught in most economics courses, an increase in government borrowing (arising from either increased spending not offset by tax increases or from tax cuts not offset by spending cuts) raises the demand for loanable funds. Absent ANY other changes to the supply/demand factors (ceteris paribus) in the market for loanable funds, this will tend to raise the price of funds in the market (the interest rate) due to increased demand with no associated change in the supply. The demand is said to shift to the right, the supply remains constant and the equilibrium price rises. The increased cost of funding "crowds out" borrowing by firms who are less willing to borrow to fund investments since they must now achieve greater returns from their capital investments to cover the higher cost of funding.

However, ceteris paribus is rarely a real-world occurrence. This can best be shown through example. If a government suddenly finds itself at war, it would (likely) need to access the credit markets to fund war-time expenditures, increasing the demand for loanable funds in the market. But the prospect of a war would also affect firms' economic outlook, changing their demand for funds as well, often unpredictably. Firms fearing that their home markets might be invaded would be less willing to invest in new plants and equipment, whereas firms supplying war materiel might seek to increase their investments, shifting the demand curve in unpredictable ways. Similarly, patriotic feeling among citizens might increase the supply of loanable funds as citizens might be more willing to loan their governments money to conduct the war. In any of these cases ceteris paribus would be violated, and the extent (if any) of crowding out would be difficult to determine since all other things are not equal.

Another problem with the model is that potential macro-economic effects from crowding out would vary with the prevailing economic outlook. As Krugman correctly points out, if firms are predicting a recession they are already unwilling to invest, thus mitigating the potential crowding out effects on capital accumulation and long term economic growth. Conversely crowding out effects would tend to be magnified at full output.

One source of the controversy over the concept of crowding out is that it is often used in politics as an absolute prediction, rather than a model. Those who wish to see policies that result in less borrowing tend to lionize it and those who advocate policies that require more borrowing tend to discredit it. Crowding out implications should be considered in determining policy, but the model does not automatically dictate that one policy is best in all circumstances since it is just that, a model. — Preceding unsigned comment added by 75.27.12.255 (talk) 05:53, 1 November 2011 (UTC)

Treasury View merge

I've suggested that Treasury View be merged into this article because the "treasury view" is just a period term used for a group of people that rested their arguments on crowding out. The material from treasury view should be incorporated here as historical context for the economic concept of crowding out.--Bkwillwm (talk) 04:14, 11 February 2009 (UTC)

They shouldn't be merged, as they are distinctly different terms. Crowding out is a widely accepted phenomenon, whereas the Treasury View is widely seen as incorrect. To put it simplistically, the Treasury View supposes that crowding out is 100% for all spending at all times. LK (talk) 07:59, 26 February 2009 (UTC)

Interaction with laffer curve

The following only applies to austrian, rational-actor economics(which means I don't really believe it): I've always implicitly understood that government spending through debt diminishes the overall performance of the economy to the exact same extent that government spending through taxes does. That is the ideal GDP of an economy is fixed, and government spending either inflates(through crowding out), or redirects (through taxation) spending, either way subsuming a given amount of productivity, and robbing it from elsewhere where it would be more efficient.

This isn't a question, as I am not seeking new information. What I want to find out is if there have been any austrian economists who published on the interaction between government debt and the so called "laffer curve". Is it zero-sum? Would such information be appropriate for incorporation into this article? I only really have a 101 level of understanding of economics, and I wouldn't know what to search for in scholarly publications. Where whould I get started with a search for that information? i kan reed (talk) 17:34, 27 June 2011 (UTC)

Look out for possible copyright violations in this article

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Help Needed

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Fatal Flaw

The problem with the crowding out concept is that it is based on the fatally flawed belief that any committee can know the optimal level of funding for any organization. Has anybody ever run across this argument before? I don't think it has ever been made...given that it's a double edged sword. It simultaneously discredits a cherished libertarian belief (crowding out) and a cherished liberal belief (the tax allocation decisions of government committees). Does anybody dispute the truth of this argument? --Xerographica (talk) 08:13, 11 March 2012 (UTC)

Continuity in Language?

I can't translate the non-English portion of this article. But it would be great if someone could translate it and either get rid of it, or fit it into the text. — Preceding unsigned comment added by 142.244.171.93 (talk) 00:47, 17 April 2012 (UTC)

Flawed Concept Based on a Flawed Understanding of the Monetary System

The Federal Government sets the interest rate irrespective of spending. There is no correlation between Federal deficits and interest rates. Japan has been running massive deficits for decades and interest rates have been close to zero. In the US, for the last 30 years interest rates have fallen from a high near 30% right down to zero at the same time as budget deficits have steadily increased reaching the massive levels seen today. Federal deficit spending adds net financial assets to the system, and increases, not decreases from the amount of funds available for investment. This is true for any nation that issues its own free floating currency. Vilhelmo (talk) 16:23, 26 December 2012 (UTC)

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