Crowding out (economics)

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In economics, crowding out is a phenomenon that occurs when increased government involvement in a sector of the market economy substantially affects the remainder of the market, either on the supply or demand side of the market. The most common example of the crowding out effect is when expansionary fiscal policy (involving deficit spending) reduces investment spending by the private sector. Essentially, an increase in government spending "crowds out" private investment, as the government's heightened need to compete with the private stock and bond market for loanable/investable funds requires it to offer higher interest rates to obtain the additional funds. The private market looks less attractive by comparison, and thus the government (seen as substitute by investors) draws funds away from private-sector investment. This basic analysis has been broadened to multiple channels that might leave total output little changed or even smaller. Other economists use "crowding out" to refer to government...

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