crowding out

Syllable breakdown

Dictionary meaning

the economic phenomenon in which increased government borrowing raises interest rates, thereby reducing private investment and consumption as borrowing becomes more expensive for businesses and households; the crowding-out argument holds that deficit-financed government spending displaces an equivalent or greater amount of private activity, limiting or negating the stimulative effect of fiscal expansion; the strength of crowding out depends on the state of the economy and the degree to which interest rates respond to government borrowing — in a liquidity trap with near-zero rates and abundant savings, crowding out is minimal; in economies operating near full capacity, government borrowing may significantly crowd out private investment; the concept is central to debates between Keynesian expansionists and fiscal conservatives about the effectiveness of deficit spending