Crowding out

The basic mechanism

Every dollar lent to the government is a dollar not lent to a business building a factory or a family buying a home. When the government borrows heavily, it competes with private borrowers for a limited pool of savings. To attract enough lenders, interest rates rise, and some private projects that would have been worthwhile at lower rates no longer go ahead.

Over time, less private investment means fewer machines, buildings and new technologies than the economy would otherwise have, and so lower productivity and incomes. This slow, long-run effect is one of the main reasons economists worry about persistently high debt even when no crisis is in sight.

When it does not happen

Crowding out is not automatic. In a deep recession, businesses are not investing anyway, savings pile up unused and interest rates are already very low. Government borrowing then puts idle money to work instead of displacing private projects, which is the core argument for deficit spending during downturns.

International capital matters too. The United States borrows from the whole world, and strong foreign demand for Treasury securities eases the pressure on domestic savings. The dollar’s role as the main reserve currency makes that demand unusually deep.

How it shows up in forecasts

The Congressional Budget Office builds crowding out into its long-term projections: higher projected debt means lower projected private investment and slightly slower growth in national income. The effect is gradual rather than dramatic, but it compounds over decades.

Rising interest costs are the budget’s version of the same process. As a larger share of federal revenue goes to lenders, less is available for everything else — sometimes called fiscal crowding out.