Crowding Out

In: Business and Management

Submitted By smlounsbury
Words 454
Pages 2
Crowding Out
The term “crowding out” often refers to the action of one organization dominating resources so that another organization cannot benefit from those resources. In terms of macroeconomics, this term is used when describing the United States government’s spending of loanable funds hindering a private company’s ability to obtain loans for their own investment purposes. In Schaum's Outline of Theory and Problems of Principles of Economics, crowding out is defined as “when a fiscal stimulus pushes up the rate of interest, which in turn results in a lower level of investment spending (Salvatore and Diulio, 1996).” Recent economic turmoil has brought the concept of crowding out into focus as the government tries to stabilize this crisis by offering stimulus packages to encourage consumer spending as well as help prevent larger companies from failing. The heart of the issue of crowding out is control of loanable funds. When there is overabundance of loanable funds, interest rates are normally low. This relates to the concept of supply and demand where the supply is abundant and the demand is seemingly low. When the government demands these loanable funds, the supply of loanable funds is directly impacted sometimes driving interest rates up. Alvin H. Hanson writes, “according to the loanable-fund theory, the rate of interest is determined by the intersection of the demand-schedule for loanable funds with the supply-schedule (Hanson, 1951).” (See chart below)
In recent years, our country has faced a significant economic down turn resulting in “the deepest recession in the United States since the Great Depression (Reuss, 2009).” As a result, President Barack Obama proposed significant government spending to stimulate the economy and create jobs while cutting taxes. This stimulus plan must be funded by some means, and ultimate restricts funding available…...

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