crowding

crowding - Crowding In or Crowding Out? Crowding...

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Crowding In or Crowding Out? Crowding In or Crowding Out? Macroeconomics I ECON 309 S. Cunningham
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Budget Magic Budget Magic Clinton’s 1994-97 Deficit Reduction Plan (in Billions) Clinton’s 1994-97 Deficit Reduction Plan (in Billions) “Total” Spending Cuts $247 - Increases in spending & new tax breaks -109 Equals $138 Tax increase in Social Sec + fee increases -36 Equals 102 Cuts mandated by Bush 1990 budget accord -94 Equals actual budget cuts by Clinton $8 Tax Increases $246 - less new tax breaks -60 Equals New Taxes (net) $186 New Soc. Sec. Taxes +36 Actual New Taxes $222 Actual deficit Reduction = 102 + 222 = $325
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Do Large Deficits. ..? Do Large Deficits. ..? Force monetary accommodation? Hence inflation, Higher interest rates, Reduced investment, and Slowed growth? (What if there is no accommodation?)
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Benjamin Friedman argues: Benjamin Friedman argues: Even deficits that are not accommo- dated cause inflation. Reason: the “money” that is related to price levels includes short-term government debt (See Gurley & Shaw, 1960) Debt-financed deficits “crowd out” interest-sensitive, private sector spending
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Implications of B. Friedman Implications of B. Friedman Reduced potency of government policy! Government spending replaces, not adds to, private investment What if government spending is not for investment?
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Definitions: “Crowding Out” Definitions: “Crowding Out” If output and resources are fixed and fully employed, government can spend only at the expense of the private sector Real crowding out: non-market situation Price crowding: market situation If government spending stimulated investment in productive capacity, then prices may fall and investment increase: “Crowding in” (perhaps from scale economies) Investment responds to demand (not interest): accelerator process
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More Crowding Out More Crowding Out Financial crowding out Related to money demand and wealth effects on portfolios Results from debt finance Debt-financed deficits need not crowd out any private investment, indeed such deficits may “crowd in”
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Transactions Crowding Transactions Crowding Government increases spending without a
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This note was uploaded on 02/25/2012 for the course CHEM 309 taught by Professor Staff during the Spring '11 term at UConn.

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crowding - Crowding In or Crowding Out? Crowding...

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