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Economic Definition of crowding out. Defined.

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Term crowding out Definition: A decline in investment caused by expansionary fiscal policy. When government counteracts a recession with an increase in spending or a reduction in taxes (both resulting in an increase in the federal deficit) interest rates tend to increase. Higher interest rates then inhibit business investment in capital goods. Some pointy-headed economists argue that investment crowding out completely offsets any intended expansionary policy, but the jury's still out on this one. To the extend that crowding out occurs, economic growth is reduced if (and this is an important if) government has not seen fit to offset the loss in business investment with public investment in infrastructure, education, or other growth promoting expenditures.

 

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