The Myth of Crowding Out

Modern Money Mechanics

This is the final blog post of the Deficit Spending 101 series, it immediately follows the Central Bank Role blog.

We now know that it is a myth to perpetuate the idea that a currency-issuing government is financially constrained. This myth underpins arguments by orthodox economists against government activism in macroeconomic policy. There is another persistent myth that needs to be dispelled – that government expenditures crowd out private expenditures through their effects on the interest rate.

We have seen that the central bank necessarily administers the risk-free interest rate and is not subject to direct market forces. The orthodox macroeconomic approach argues that persistent deficits reduce national savings … [and require] … higher real interest rates and lower levels of investment spending. Think back to the 7.30 Report transcript I provided.

Unfortunately, proponents of this logic which automatically links budget deficits to increasing debt issuance and hence rising interest…

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