Mary: This is Mary Walden with economist MW, welcoming you to the economic perspective. Today’s program asks if crowding-out occurs. Mike, one of the concerns about the proposed federal income tax overhaul is that it will increase federal borrowing. Also, one further worry about increasing federal borrowing is that government borrowing will push aside – or crowd-out – private borrowing and raise interest rates. What is the evidence on the existence of such crowding-out?
Mike: Summary Answer
- The traditional argument was that increased government borrowing raised interest rates paid by borrowers, thereby reducing private borrowing and effectively diverting borrowing from the private sector to the government sector
- However, since 2000 – when modern globalization began – financial markets have become internationalized
- Savings by foreign households can now easily flow to US markets
- The current evidence indicates this clearly happens
- So when US government borrowing increases, foreign savings flow to the US to absorb the borrowing, and there is little impact on interest rates or on private borrowing
- Bottom line – crowding out appears not to be an issue today
- I’m MW
Mary: And I’m Mary Walden for N C State Extension.