“Crowding out” is a concept that is well engrained into the current language of economists. It is very simple and has an historic context as “crowding out” first became popular in the middle 1970s.
Whenever the federal government borrows money, holding many other considerations constant, the supply of federal government securities is increased. This causes their price to fall and their corresponding interest rate to rise.
As a result, private borrowing, competing with the government for the limited supply of investment dollars, becomes more expensive given the need to now pay higher returns. As such, some private projects, and their associated underlying borrowing, now become less profitable and, as a result, not undertaken. This is to say, federal government borrowing has “crowded out” private investment.
The crowding out of private investment is an unintended consequence of having a government that borrows. As investment dollars move from private projects that are regulated by market processes and profit and loss, to public projects that are regulated by nothing really other than political processes, the economy becomes less efficient and more wasteful in the use of limited investment dollars.
Budget deficits largely occur for two reasons. The first is the business cycle. Periods of economic decline or expansion alter federal tax collections and federal government spending patterns. In some instances deficits result, but in others, a budget surplus could result.
If you look at a time-series graph of the federal budget deficit over the years 1950-1973, you will see that it bounces around zero — periods of deficits and surpluses tended to off-set each other.
However, starting in 1974, that pattern has been replaced with constant deficits. The Budget Impoundment and Control Act of 1974 changed the rules by which a federal budget is created. The pre-1974 process focused on only one federal government budget — the president’s. Budget creation was centrally controlled and fiscal discipline was the result. A part of this was that expenditures and tax collections were both jointly part of the process. In building the budget, the president, the cabinet and congressional leaders considered both spending and taxes and balance budgets were regularly negotiated.
In contrast, the post-1974 process allowed virtually any elected federal official to offer a budget. Partisan processes, political coalitions, interest groups, etc. now became important focus points in budgeting. The treasury became, in some sense, a common property resource accessible by any political actor. As a result a disconnect occurred between spending and taxation. In this setting of no accountability continual deficits ruled the day. In such a fiscal world “crowding out” became a concept of intense interest and study.
Crowding out is not just operative in the federal budget process. Whenever the government spends money on anything, something is crowded out. There are always unintended consequences associated with government spending.
A useful definition of social capital is that it represents the network of voluntary relationships among people who live and work in society that enables those in the society to function effectively. The family is a wonderful example of social capital. The words “voluntary” and “effectively” suggest that social capital is something that people choose to do because it is efficient in making people better off.
Furthermore, the word “voluntary” suggests that private forms of social capital are chosen over alternatives that might be available. Again, people are attempting to make themselves better-off and, as a result, they choose private solutions over public/governmental solutions. This is very important.
Many current presidential candidates are offering public solutions for many of the problems we face. It is important for them to realize that, if left alone, many individuals would not voluntarily choose these alternatives knowing that they will be possibly neither voluntary nor efficient.
Many studies note social crowding out in the significant decline in private social capital networks with a concurrent rise in alternatives offered by government. Crowding out is everywhere, as are its unintended consequences.