Crowding Out

Crowing out was a term I became familiar with in the 80-81 recession where Paul Volcker saved the future. The tenet is that government spending crowds out private spending. In other words, there are only so many dollars in the world and when the government spends them, they are not there for private enterprise to spend.

It's a simple concept and almost intuitively true. It also doesn't matter if we're talking about dollars taxed today or dollars borrowed against the future. There is a finite pool of capital (current or borrowed against the future) and private enterprise gets the leftovers.

Now, here's evidence that this is also a short-term phenomenon. If other research backs this up, this pretty-much blows Keynesianism out of the water.

The entire study is here.

Spending as a Percent of GDP

I've long felt that those (particularly what I'll call "no-nothing" conservatives) who carp continuously on the federal deficit are missing the main point. In the press, you continuously hear laments that the federal (or state, or local) deficit is the highest ever recorded.

That may be true but it's not the point. What matters is the level of deficit as a percent of Gross Domestic Product (GDP). If the economy grows then the deficit can also grow. It's almost exactly like a business borrowing money to invest in future growth. As long as the business can service the debt, then borrow away.

Having said that, this graphic is still pretty sobering. The federal government historical spends between 15 and 20 percent of GDP. But in the future? Something has to give here.