Crowding out.
In plain English
Crowding out is the argument that a government competing for the same pool of savings as businesses and households raises the price of borrowing for everyone, which trims private investment. The effect is strongest when the economy is already near capacity and savings are fully employed. In a deep downturn, with idle resources and weak private demand, the same borrowing may crowd little or nothing out. Economists also describe crowding in, where public investment in things like roads makes private projects more profitable. How much of each happens is an empirical question, and the evidence is mixed.
01Why it matters
If crowding out is strong, government borrowing shows up in your mortgage rate and in your employer's cost of capital, not just in a deficit figure you never see.
02The math, step by step
Suppose an economy has $500 billion of savings available in a year. Government borrowing takes $200 billion, leaving $300 billion for private borrowers. To ration what is left, rates rise from 4 percent to 5 percent, and business projects that worked at 4 percent no longer do.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Crowding out is about the loan market, not about the size of government. It requires borrowing to actually push rates up. When capacity sits idle and rates stay flat, the mechanism does not fire, which is why the argument is stronger in a boom than in a slump.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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