Wednesday, 8 September 2010

The Myth of Crowding Out...

In trying to justify their austerity Budget, ConDem Ministers tend to speak about the higher interest rates  they believe will inevitably result from running a high government deficit. These higher interest rates will crowd out' private sector investment. This an obscure, boring subject to most people and Ministers rarely try to explain the transmission mechanism by which the deficit will lead (inevitably) to higher interest rates.

Robert Skidelsky among others has explained the reasons why 'crowding out' is not a problem when the economy is running so far below capacity. But this post from Ryan Avent (the only Economist writer worth reading on a regular basis) is particularly helpful in setting out the issues; he demolishes the arguments of those who raise 'crowding out' as a reason not to introduce another stimulus package in the US. 

Remember that the situation is very similar in the UK: low yields on government debt, high unemployment, an output gap of around 5% and high levels of individual and household deleveraging. Crowding out is manifestly not a problem - nor is it likely to become one in the forseeable future. Another myth exposed.

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