does government budget deficit crowd out investment? true/ uncertain/ false?

Answer 1

Yes - the budget deficit means that the government is borrowing (in this case, heavily) which crowds out private borrowing (and investment).


The statement is true.

Answer 2

If that's a test the "correct" answer is Yes, but in the real world the answer is no. The above comment is a good explanation of the "crowding out" theory, which is perfectly logical as far as it goes.

The only problem is, in the real world that is simply not what happens. In fact, the real-world correlation is the opposite: interest rates tend to fall as deficits increase, and then they rise when deficits fall. Certainly a look at the last 30 years shows this. Even more so for Japan - for 15 years Japan has been running enormous, growing deficits and building huge debt, yet its interests rates have fallen to zero in that time.

I believe there are two reasons for this:

1) By far the dominate influence on interest rates is the fear of inflation. This is a far, far more powerful factor than any "crowding out" effect.

2) The deficits the US gov't runs are much too small to crowd anything out. Considering the amounts of capital that flow around, considering the multi-trillion dollar world bond markets, it just has no impact when the gov't sells a measly $200 or $300 billion in bonds to the public (it's much less than $200 billion and falling, this fiscal year).

Answer 3

When a government borrows money (usually in large sums compared to businesses) in order to finance their budget (ie runs a deficit) what happens to interest rates?
The money market is run by supply and demand like any other market. When the demand for money is high, they ask a higher price to borrow (interest rate). This raised interest rate affects private investors negatively. Some who might have borrowed money before the government borrowing increased the interest rate are 'crowded out' of the market.

Peace

Answer 4

No, you can still invest when in a deficit, its just common sense not to dig yourself into a deeper hole when you already owe.

Answer 5

Government doesn't 'do' investment. It simply draws lots of fat salaries. The STATE does. (Gov't is it's little puppy, its glove-puppet, its window display, its 'rubber-stamp'!)

But refer your Q. to Yahoo politics and see.

See you there soon,

Chantelle x

PS: 'The State' is not some unified, 'thinking' entity. Simply a group of interest-groups.