How Government Crowds out Private Investment


The phenomenon of crowding out is one of the
key things to understanding accounts of public spending. Ultimately, there’s only a certain
amount of investment capital around. To the extent that the government is using that money,
whether for investment or for current spending, it’s not available to other people. So,
if the government sells lots and lots of bonds to private investors and uses the money it
gets from selling the bonds to fund its current spending, those private investors are not
investing in other kinds of economic activity which might well be more productive than investing
in government debt, given that the government activity may not be very productive. The question of whether or not government
money is always going to be less productive than private spending is, ultimately, an empirical
one. We can say that, in principle, we would expect this to be the case. That’s because,
generally speaking, if you’re spending your own money on yourself, you’re going to do
it very carefully. If you’re spending somebody else’s money on yourself, you’re also
going to be reasonably careful about it. However, if you’re spending somebody else’s money
on somebody else, which is what is the case with governments, then you have no real incentive
to use that money effectively or efficiently. And there are many, many examples from history
that bear this out. There is a case for saying that there are
certain kinds of spending which are more efficient when carried out by government because of
the economies of scale that government possesses. However, this is almost always outweighed,
and I would argue in fact, always outweighed by the huge inefficiency costs that come with
the less productive public management and the fact that public provision does not face
the profits and loss incentives which lead private providers to constantly look to improve
the quality of their service and cut out wastes and unnecessary costs.

Maurice Vega

22 Responses

  1. @Fusionx916 I believe he is referring more to money (and the corresponding capital) taken through taxation, rather than investment in government bonds. You are right that the private purchase of government bonds is a choice made by investors, but it is not the same as payment of taxes, which (I believe) is the primary source of government revenue and thus the capital that government allocates.

  2. Government maybe inefficient, but this simple zero sum game explanation of how bonds diverting investment capitol away from private industry is absurd. Investors choose where to put their money based on their own needs, and the private sector is certainly not suffering for lack of capitol.

  3. @Fusionx916 you are correct, but thats the problem. The investors are choosing to buy bonds because the government can just print the money to give guaranteed returns. The bonds are safe investments because the burden is placed on the backs of the people. A real investment doesnt have that security. The bonds provide artificial reassurance because they can always be liquidated at the sacrifice of purchasing power. Good for Government and bond holders, bad for everyone else.

  4. @whoo689 What he does include is logical. The government does not spend money efficiently, at least right now. But the government is not crowding out other investors. He just assumes that point. They made the choice to invest there.

  5. in the video he mentions that there and many examples of government spending inefficiently and I've heard this repeated before but I never see anything site that supposedly extended list of failed government spending

    now with our obvious failed government spending in recent history in the US and Europe, where else in history has inefficient government spending occurred? I ask this so that I can't site these instances in history when I debate anti-capitalists not rhetorically to refute this vid.

  6. @PhantomFedora "But the government is not crowding out other investors. He just assumes that point. "
    Think of investment capital as one big pie, the more the govt consumes the less there is for everyone else_ If govt did not borrow the money, it stands to reason that the money would still be available for someone else to borrow_ Of course our govt has the option to counterfeit money, which steals from anyone holding dollars_

  7. @myeyesarebored Well I guess that depends where the government is spending the money. When the government supports bailouts, the money goes to support companies and industries who have structures that inefficiently use precious resources. When the money goes to subsidies it is used to support businesses that produce goods that would not normally be demanded for the cost it takes to make them. When the government spends it on the military, it goes to creating the destruction of wealth.

  8. I believe that this assertion of "quality of government spending" as opposed to private spending can be linked to a moral question of the condition of Society as a whole. I believe truthfulness and integrity are the main issues here. Self intrest can be altruistic or it can be subjectivly egotistical. Unfortunatly I would have to admit that the "safe " position is to assume that all mankind as a catagory are intrinsically subjective egoists in regaurds to self-intrest. Prudence pushes altruism.

  9. @jetboyJ22 Even though you're right mechanically, you fail to remember that if fewer government bonds are issued, the price of purchasing a bond by an investor will be greater (or they'll get a lower interest rate) which means they'll be more likely to put the money into some other investment that provides a greater yield. Thus, the less government spends, the more money investors will put their capital elswhere.

  10. @keithradamsstatus It is not a myth, it is a fact. Intervention caused the Depression. Accept it, bitch. Even one of FDR's aides said that spending money wasn't working and was in fact making things worse.

  11. Why would corporations want lobbyists to bribe government officials if the government didn't have the ability to allot trillions of dollars of extorted and borrowed capital?

  12. The questions still remains. Since you could not answer it. Again, if the gov did not have the ability to hand out billions of stolen cash to select industries, then corporations would focus on satisfying the marketplace, and not a bureaucrats campaign funds.

  13. Taxes are not stolen money. You are in theory paying for a the public services you use every day; public safety, national defense, infrastructure. If you dont want to pay taxes, move to other countries who do not have a high tax system. Many businesses and people would gladly pay taxes for political stability and promote economic activitity that provide positive externalities.

  14. Of course we do need security and national defense. How much tax does that really take tho?
    Given the history of this country, I think we can get away with government 3~5% of GDP spending.
    Today, government spending is 40% of GDP. Not only through taxation, but with money printing and debts. This is insane.
    And the money isn't very well spent at all. They're mostly wasted on favors to big guys such as bankers, auto, and agriculture.
    I believe that's what BS meant when he said corps own gov't.

  15. So what is the $1800 billion in Excess Reserves idle in US banks doing right now? It's a fun theoretical framework to assume that banks won't sit on money, but that's what they do in slumps like these.

  16. Loanable funds does not exist for neither governments nor banks. There is no such market whatsoever. The bank of England refuted that myth back in 2014 with its paper on money creation.

    Banks create money when they lend to or purchase assets from the non-banking sector. You don't feed them any money. The central bank accommodates the reserves through its open market operations and standing facilities. If investors need money they can easily borrow from a bank regardless of whether the bank is a primary dealer as long as the borrower is credit worthy.

    As for government borrowing, they issue bonds on a rigged primary market design guarantee bond sales. The central bank will guarantee the system liquidity to ensure sales. Otherwise the central bank won't be able to implement it's policy rate. Bond sales drain reserves.

    Can governments compete for the same resources as the private sector? Yes. But that's entirely different from crowding out investment. I love how these fools who know nothing about banking can freely spew lies with impunity. Have some shame.

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