Monday, June 1, 2009

Crowding Out

A reader (Hi Laura) sent a link to this interesting article from The Globe and Mail. The authors contend that government stimulus should not stifle the recovery. One of the more interesting aspects of the article is their counterargument to the "crowding out" idea - government spending replacing private sector spending. It is eloquent and worth reading.

Concern about the stimulus plan resulting in crowding out is not restricted to one ideological group or the other, however. The Congressional Budget Office cited concerns about it as recently as two months ago (note "Long Term Effects"). I don't think the CBO is a conservative think tank. And while they were specifically looking at financial markets, not all markets; the CBO letter does seem to raise legitimate concerns about resource allocation.

My concern remains whether the government is in a position to better allocate unused resources, or whether markets can do it more efficiently.

I look forward to your thoughts.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
and
4. Economic systems influence choices.

1 comment:

Mike Fladlien said...

I agree that crowding out will not be complete. I think the depth of the problem is government spending diverts resources from future uses to current use. What I means is some of the stimulus money goes to save a custodian at a factory whose marginal product is less than his wage instead of building a new school. Also, Paul Krugman estimated the spending multiplier to be 1.