The “Crowding Out” of Private Expenditures by Fiscal Policy Actions (October 1970, FEDERAL RESERVE BANK OF ST. LOUIS)

The “Crowding Out” of Private Expenditures by Fiscal Policy Actions
October, 1970
FEDERAL RESERVE BANK OF ST. LOUIS

by ROGER W. SPENCER and WILLIAM P. YOHE

※ 메모:

Pure fiscal actions, which entail changes only inGovernment expenditure and tax programs, are rare; most stabilization actions involve a mixture of :

(1) fiscal (tax-financed Government spending),
(2) monetary(Federal Reserve actions) and
(3) debt management(changes in the maturity or value of thedebt) policies.

For example, the offering of Treasury bonds to finance a deficit constitutes debt management policy (or fiscal policy, by more conventional definitions ) at first, but the subsequent purchasc of such bonds (or perhaps the failure to purchase such bonds) by the Federal Reserve is generally construed to be monetary policy. Thus the existence of Government bonds clouds the distinction between the two basic economic stabilization policies — monetaiy and fiscal.

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The monetarists’ view that Government spendingfinanced by taxes or borrowing from the public merelydisplaces, or “crowds out,” private spending is not anew one. It was, in fact, the dominant view beforethe Keynesian revolution of the 1930’s. Classical economistsincluding Adam Smith and David Ricardo,and neo-classicists including F. A. Hayek and R. C.Hawtrcy, found little usc for fiscal stabilization efforts.Keynes, at first a fairly orthodox neo-classical econonmist,altered his views on many issues prior to thepublication of The General Theory of Employment,Interest and Money, including a downgrading of thefiscal crowding-out concept.” Since it was Keynes’ theory of the proper use of fiscal policy which eventually became the dominant view, we will develop at some length Keynes’ thinking on the subject. Because Keynes was strongly aware of the traditional neoclassical views on fiscal theory, he hedged his arguments more carefully than many of his successors.

Keynes’ General Theory analysis, in contrast to thefocus of the classical school on long-rnn supply factors,was oriented toward short-run demand considerations.Both views were couched preclomimmtly in real ( ratherthan nominal) terms. Consequently, croxvdingoutanalysis derived fronm either of these two approachesdeals primarily with the displacement ofreal private spending by Government spending.

A summary of classical. neo-classical and Keynes’early views on fiscal crowding out will be presentedfirst. Next, ... (continued on: The “Crowding Out” of Private Expenditures by Fiscal Policy Actions)