Crowding Out

What is crowding out?

Crowding out is a term used to describe a situation where expansionary fiscal policies decrease, or “crowd out,” private spending.

What happens when the federal government increases spending to build new infrastructure?

Well, they would need to hire workers and tie-up some capital. When there’s a recession, this can help stimulate an economy in the short run. But, if an economy is at full employment when this happens, some of those resources in the private sector will be taken away for use in the public sector.

In this video, we’ll also cover how government borrowing and spending affects the market for loanable funds.

Interested in learning more about these topics? Check out our Macro sections on GDP, Business Fluctuations, and Fiscal Policy.