A topic I've been hearing from some of my conservative friends is a refrain often found in mainstream macroeconomic textbooks - crowding out. Crowding out is the theoretical idea that there is a fixed pot of gold from which to finance investment, so if the government all of a sudden wants to draw from that pool, it must mean it has to take funds from the private sector (because there's only so much gold to go around).More on loanable funds versus endogenous money.
Reviving Economics
Crowding Out And Its Relation To Bullshit
Garth Brazelton
Even if there was a fixed amount of money it's incorrect. Money lent, just becomes a deposit in another account ready to loan out again. The entire money supply could be lent out in one day and be available the next.Otherwise total loaned principle would never exceed money supply.
ReplyDeleteUnlike Robert Murphy's cocoanut, money is not either consumed or saved. Money is used or saved, but never consumed.Except for that guy that eats nickles.
I don't think crowding out has anything to do with money. It's about resources. In an economy running near capacity, the government might only be able to command additional resources if the private sector commands fewer resources. Crowding out can happen; but not in the kind of economy we are living in right now with massive underemployment of resources - at least not unless the government makes its investment decisions in the wrong area.
ReplyDelete
ReplyDeleteThe old style home loans would be sit upon by banks and not spammed into worldwide debt distribution.
Payments against these loans are still redistributed unless the bank must have reserves on hand.
Dan,
ReplyDeleteI don’t agree that because there are excess unemployed resources, that therefor crowding out cannot happen. In fact it strikes me that if government borrows $X, spends that money and gives bonds worth $X to lenders, there’ll definitely be a finite crowding out effect: the latter borrowing will raise interest rates. (I’d guess that OVERALL, the effect is stimulatory because private sector net financial assets rise by $X and cash is taken off the rich and spent into the economy. But that’s a separate point).
As to the above crowding out effect of any interest rate rise, the real reason that never crowds out is that in a recession, the central bank just won’t let interest rates rise.
They think there is a finite supply of "money" a la 'gold standard thinking' and then as "S=I" is causal in their moron minds, Treasury issuance depletes Savings and hence Investment is reduced...
ReplyDeleteGreenspan and Kernan had this EXACT conversation when Greenspan was on with the CNBC people yesterday morning but the video of that portion of the Greenspan segment is not on the CNBC website or I would have posted that segment up here too...
They are all morons...
rsp,
Government can crowd out real resources and often does in wartime. The US in WWII is a good example, when government essentially commandeered industry and agriculture to support the war effort. Obviously, extraordinary means also had to be taken to prevent supply side inflation.
ReplyDeleteOne or the other Tom...
ReplyDeleteBUT, the remedy for either condition is VERY different...
rsp,
In fact it strikes me that if government borrows $X, spends that money and gives bonds worth $X to lenders, there’ll definitely be a finite crowding out effect: the latter borrowing will raise interest rates.
ReplyDeleteRalph, that can only happen if the central bank allows it to happen. The central bank can always set the interest rate on treasury bonds/gilts by participating in the secondary market for those securities at whatever level of aggressiveness is needed. If the bank allows the rates to rise that is because it is deciding as a policy matter to allow the market for funds to be set entirely by the existing private sector supply. That's inexcusable in a depressed economy where capitalist calculations of the marginal return on investment have allowed investment to settle into a low employment equilibrium.
Right, Matt. "Crowding out" usually means government competing in the "loanable funds" market, driving up interest rates, which are the cost of capital, thereby discouraging productive investment.
ReplyDeleteWhat MMT would say about "crowding out" of real resources is that the prices are set by what government bids. But beyond that, government can commandeer both real resources and the means of production as the US government did in WWII in order to ramp up quickly for a conflict on two fronts. As result rationing and price controls were imposed domestically.