Crowding Out
Crowding out is when public borrowing or spending raises rates or absorbs real resources so private investment or net exports fall, shrinking the net fiscal impulse.
Definition
Financial crowding out: extra Treasury supply lifts yields and discounts private capex. Real crowding out: government uses labor and materials the private sector wanted. Open-economy version: higher rates appreciate FX and crowd out net exports (Mundell–Fleming).
Why it matters
It is the standard objection to deficit expansions when the economy is tight. At the ELB with slack, crowding-out is weak — the same word in 2009 and 2021 means different math.
Case
1980s US twin deficits: fiscal expansion plus Volcker rates and a strong dollar. 2021–23: large deficits into a tight economy with rising real yields — a crowding-out-adjacent mix.
How to read it
State the spare capacity and the monetary reaction. If the CB is pinning the rate, financial crowding-out is a choice, not a law.