fatvegan

The idea of crowding out investment is when governments borrow money, which raise the interest rate, with means that business will borrow less. The argument goes that the government shouldn't borrow, because investment drops and the economy suffers. This might be true if the government borrowed money and then kept it in a box, although even then it wouldn't really be true, since that would cause deflation. But I suspect it's fairly uncommon for governments to put loan money in a box, because as economists will tell you, all governments do is spend as much money as they can.

So if private business invests a little bit less, and the government invests a little bit more, what happens? Nothing. Depending on how well you think the government spends its money compared to how well business spends its money. I tend to think the governments spends it better, whilst others think the opposite. Regardless of what you think, one thing that doesn't happen is that the economy suffers. At least not from lack of investment. Over the long term, maybe the investment is more or less effective than it would have otherwise been, but that's something of a different issue. So the term "crowding out" is a little misleading. Perhaps, "displacement" is a better one, give how similar the replacement is.

The other interesting thing is that when government investment raises the interest rate, people are more likely to save money. So there is more saving/investment, and less consumption. That's something that economists usually like. The government doesn't mind so much borrowing at higher interest rates, because the money tends to stay in the economy anyway and they tax the interest income.

I'm not sure about crowding out at all. Maybe I need to have it explained to me better. But it doesn't seem to be like a very good reason for governments not to borrow. I can think of other reasons for them not to, but they're not as popular. Things like inter-generational equity and such.