Crowding out refers to a reduction in private investment caused by increased government borrowing. This phenomenon occurs when higher government spending shifts real resources away from private use toward public use.
Economic historians trace the core idea of crowding out back to debates in the 18th century. The specific term did not exist during that period, but modern scrutiny brought the role of debt into focus.
Laura D'Andrea Tyson wrote in June 2012 that if an economy operates near capacity, government borrowing causes interest rates to rise and reduces private investment growth. These responses aim to prevent inflation when resources are fully employed.
International capital mobility allows funds to flow across borders rather than remaining fixed within a single country. Global markets allow funds to move freely across borders, changing how national fiscal policies interact with international trade.
New Jersey testified it could identify 14% crowd-out in its CHIP program despite eligibility stretching to 350% of the federal poverty level. This shift occurred during expansions to Medicaid and the State Children's Health Insurance Program in the late 1990s.