Crowding out

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Crowding-out (German: displacement effect) describes in economics the displacement of private demand by state demand. The opposite effect is called crowding-in .

Real economic displacement

If the state provides goods itself, it makes private offers unprofitable and suppresses them. This applies to public swimming pools, local public transport and public hospitals. Conversely, through its production activities, the state absorbs production factors such as labor, land and capital, which as a result are no longer available for production in the private sector.

Financial displacement

Financial crowding out describes the displacement of private investments by government spending increases. There are the following explanations for this:

Classic capital market

Classical capital market theory sees investment and saving as real quantities that coincide in a capital market equilibrium. While these two quantities are identical ex post , at least in a closed economy, they can be different ex ante . Their adjustment is brought about by the interest rate: if the planned investments exceed the planned savings, the interest rate rises, which dampens the investments and possibly stimulates the savings.

Government spending financed by loans increases the interest rate and thereby displaces private demand. A distinction must be made between two cases: In the case of non-interest-rate savings, government demand for credit displaces private investments to the same extent. If, on the other hand, savings increase when the interest rate rises, investments decrease to a lesser extent, but in this case private households restrict their consumption. In both cases, private demand (investment plus consumption) falls to the same extent as the credit-financed government demand increases. Due to the total crowding-out, the aggregated demand for goods remains unchanged. From this point of view, Keynesian economic policy is a short-term strategy.

Loanable funds theory

The loanable funds theory , which goes back to Knut Wicksell and Dennis Robertson , extends the classic capital market model to include money and banks. This approach can be found today in numerous macroeconomic standard works.

In the model of loanable funds theory, investments can be financed not only through previous savings, but also through money creation by the central bank and commercial banks. If the creation of money leads to inflation, households have to replenish their cash balances in order to maintain their real value. To do this, they have to refrain from consuming. This theory of forced savings goes back to Jeremy Bentham , who recognized as early as 1804 that printing paper money acts like an indirect tax and lowers private consumption. From this point of view, government expenditures cause a crowding-out even if they are financed by money creation instead of government debt.

If additional government expenditure is financed through government debt and the central bank supports this through an expansionary monetary policy, the interest rate may remain unchanged. In this sense, the Council of Economic Experts sees the measures taken by the Federal Reserve and the Bank of England in the context of quantitative easing as a financial repression in which a covert redistribution of holders of government bonds in favor of the state takes place. This does not produce the effects that would be expected according to the above theory (interest rates in the US and UK have fallen despite rising public debt); rather, the crowding-out takes place via a creeping expropriation of savers.

IS-LM model / neoclassical synthesis

According to Keynes, the state should intervene on the expenditure side if the economy declines. Furthermore, the economist assumes that an increase in income leads to an increase in consumption. Yet not all of the income is consumed.

The crowding-out effect associated with the IS-LM model was / is mostly wrongly attributed to the General Theory of Employment, Interest and Money (1936) by John Maynard Keynes , but is actually based on a Keynesian Interpretation mainly by Alvin Hansen, John R. Hicks (Hicks-Hansen synthesis) and Paul A. Samuelson.

First, the IS-LM model analyzes the interdependencies on goods, money and financial markets with simultaneous equilibrium. Both curves show the combinations of interest rate and income. The goods demand curve IS depicts the relationships on the goods market, the money supply curve LM depicts the relationship on the money market. However, the supply of money is determined solely by the central bank, so that the following representation in the IS-LM model only applies provided that the central bank deliberately does not increase its supply of money in order to increase interest rates. Against this interpretation of his model, John Hicks emphasized that the money supply in the LM function must not be assumed to be constant because those responsible for monetary policy would prefer to expand the money supply in order to prevent interest rates from rising.

Displacement effect in the IS-LM model

The implementation of an expansive fiscal policy goes hand in hand with an increase in government spending or a tax cut. This leads to an increase in consumption and investment activities ( I0 to I1 ), which leads to an increase in the demand for goods. Due to the increase in demand, real income rises ( y0 to y1 ). The goods demand curve IS is thus shifted to the right in a supply-demand diagram. In the monetary or classic area, an increased demand for money has a negative effect on the wealth of cash and sight deposits. This requires a rising interest rate ( E0 to E2 ). With the expiry of additional government spending, even small increases in the demand for money lead to a disproportionately large increase in interest rates ( y1 to y2 or E1 to E2 ), which at the same time leads to a reduction in income and consumption. Furthermore, the rise in interest rates leads to declining private-sector interest-dependent investments ( I1 to I2 ). In an increased number of cases it is simply more lucrative to invest the money in the capital market.

The extent to which the decline in investment will be depends on the interest rate elasticity of investment demand. Since in monetarism , in contrast to Keynesianism , a high interest rate elasticity is assumed in investment demand , a rise in interest rates has a particularly negative effect here. The decline in investment will therefore be particularly strong in monetarist theory.

The problem with this cyclical policy is the dynamics of the processes in this policy. Several years can pass between the recognition of the economic phase and the effect of the displacement effect. With such a delay, the effect cannot take place in the equilibrium of the IS prerequisites, but rather an imbalance between investments, demand and the money markets. According to Keynes, the national debt should be reduced in the boom phase through higher tax revenues in order to achieve a balance again. However, since the government is too late to recognize the boom phase, the subsequent boom phase is not exploited for tax purposes. If taxes are increased (or / or revenues are reduced) in an economic downturn, this has a procyclical effect on the recession, which leads to an increased shift in the imbalance between investment and demand.

The aforementioned connection is the central argument with which, from the point of view of monetarism, fiscal policy is rejected as an instrument of influence.

Dynamic Macro Theory

In modern DSGE models , debt-financed government spending leads to total crowding-out, according to both the New Classics and the New Keynesians . The reason for this is the Ricardian equivalence assumption on which these models are based: ultra-rational individuals see national debts as future taxes and react to every economic stimulus plan by restricting consumption. The additional national debt is offset by additional savings, so that the interest rate remains unchanged. Carl-Ludwig Holtfrerich examines the question of whether future generations will be burdened by additional government debt at all or to what extent, and differentiates with regard to government spending.

Displacement effects on the labor market

In the opinion of liberal economists, government action also suppresses private sector action on the labor market. This creates companies that are partially or wholly dependent on government contracts. Furthermore, the provision of government-financed jobs (for example through job creation measures or one-euro jobs ) leads to a proportional decline in jobs in the private sector. In order to avoid displacement effects, such state subsidies are often only paid out for jobs for which it is assumed that there is no such risk.

Whether this is actually the case, however, is often controversial and difficult to answer (example: displacement of regular companies in the horticultural sector by municipal providers by one-euro jobbers, which allegedly leads to job losses at horticultural companies).


The classic (monetary) crowding-out theory is based on the orthodox credit theory (from before 1920), when an inelastic capital fund that private and state would have to share was assumed. In fact, the supply of funds for the purpose of bank loans is elastic , since in reality loans granted by commercial banks are financed through the creation of deposit money .

Even under the premise that the supply of capital to finance excess spending would be limited by savings, the available capital would not be consumed. Metaphorically, Wolfgang Stützel illustrates the process as follows: “To the extent that the state takes out credit (on balance) (“ sucks up water ”), it creates a surplus of expenditure, which at the same time represents surpluses of income for some other economic agents; these other economic entities thus have correspondingly higher funds that are potentially ready for investment, which thus fall back into the “pond”. ”Which means that the financing needs of companies and private demand for credit (can) decrease overall, as does the credit interest rate according to the supply / demand ratio.


  • Olivier Blanchard , Gerhard Illing: Macroeconomics. 3. Edition. Pearson studies, Munich 2005.
  • Jürgen Kromphardt : Unemployment and Inflation. 1st edition. Vandenhoeck & Ruprecht, Göttingen 1987
  • Gerhard Mussel: Introduction to Macroeconomics. 7th edition. Franz Vahlen Verlag, Munich 2002.
  • Gerhard Mussel, Jürgen Pätzold: Basic questions of economic policy. 5th edition. Franz Vahlen Verlag, Munich 2003.
  • Olivier Blanchard, Daniel Leigh: Growth Forecast Errors and Fiscal Multipliers. January 1, 2013 (IMF Working Paper WP / 13/1) (PDF, 1.1 MB)

See also

Individual evidence

  1. Cf. Gerhard Mussel, Jürgen Pätzold: Basic questions of economic policy. 5th edition. Franz Vahlen Verlag, Munich 2003, p. 48.
  2. See Kromphardt, Jürgen (1987), Unemployment and Inflation, 1st edition, Göttingen: Vandenhoeck & Ruprecht, p. 165.
  3. Gerhard Mussel: Introduction to Macroeconomics. 7th edition. Franz Vahlen Verlag, Munich 2002, p. 183.
  4. Gabler's economic dictionary.
  5. McConnell, Campbell R .; Brue, Stanley L. (2005). Economics. McGraw-Hill Professional. ISBN 0-07-281935-9 .
  6. Mankiw, Gregory N. (2011) Macroeconomics. Schäffer-Poeschel.
  7. Hayek, FA (1932) A Note on the Development of the Doctrine of Forced Saving. Quarterly Journal of Economics 47, pp. 123-133.
  8. Annual report 2012/13, November 2012, p. 84 (point 130).
  9. Demand Policy: Economic and Political Science Perspectives. P. 1.
  10. Olivier Blanchard, Gerhard Illing: Macroeconomics. 3. Edition. Pearson Studium, Munich 2003, p. 96.
  11. ^ Josef Puhani: Economics. Basic knowledge. Oldenbourg Wissenschaftsverlag, Munich 2003, p. 100.
  12. Olivier Blanchard, Gerhard Illing: Macroeconomics. 3. Edition. Pearson Studium, Munich 2003, p. 161.
  13. ^ John Hicks: Mr. Keynes and the "Classics": A Suggested Interpretation. In: Critical Essays. 1967, p. 140.
  14. ^ John Hicks: "IS-LM": An Explanation Source. In: Journal of Post Keynesian Economics. Vol. 3, No. 2, Winter 1980/81, p. 150.
  15. Gerhard Mussel: Introduction to Macroeconomics. 7th edition. Franz Vahlen Verlag, Munich 2002, pp. 185f.
  16. Romer, D. (2012) Advanced Macroeconomics . ISBN 978-0-07-351137-5 , p. 73.
  17. Carl-Ludwig Holtfrerich, July 31, 2015: National Debt: Causes, Effects and Limits (PDF).
  18. Adam Weishaupt: On the state expenditure and requirements. 1817. (online) p. 8.
  19. Ralf Anderegg: Fundamentals of monetary theory and monetary policy. Munich 2007. (online) p. 81.
  20. Deutsche Bundesbank: Money and Monetary Policy (PDF) p. 72: "Commercial banks create money through lending."
  21. ^ Leonhard Gleske: The liquidity in the credit industry. Frankfurt 1954, p. 43:
    "Every credit granted by the commercial banks and the central bank to private economic entities and to the state is, unless a corresponding loan repayment takes place at the same time in another part of the banking system, necessarily associated with an increase in the amount of money: either the deposits increase or the cash flow is increasing. The inevitability is easy to recognize from the principle of double-entry bookkeeping. ”
    And p. 41:“ The term bank loan has a further meaning in this context. It does not only include short-term bills of exchange and overdrafts, but also long-term loans and investments of all kinds in the bank balance sheets, insofar as they are offset by deposits and obligations of the banks not arising from the issue of securities. In this sense, bank loans also include the mortgages and securities listed on the assets side of the bank balance sheet, in particular mortgage bonds, industrial and municipal bonds, government bonds and stocks. It is not customary to include securities in the bank loan volume, but if they are in possession of the banking system, their economic character allows such an interpretation. "
  22. Wolfgang Stützel : On the influence of public debt on the capital market interest rate. In: National Debt Controversy. Cologne 1981, pp. 50–51:
    “In the course of every increase in government net borrowing, ie increased government spending surpluses (compared with the previous period or with previously existing plans), the revenue surplus of all other economic entities increases to exactly the same extent ; for some of them this is reflected in the form of higher revenue surpluses, for others in the form of lower expenditure surpluses. These economic subjects can therefore offer more funds for investment on the capital market than they originally planned to offer (or ask for fewer loans themselves than they originally planned to ask). "
  23. See Wilhelm Lautenbach: Capital formation and saving , Berlin 1938.
  24. Wolfgang Cezanne: Macroeconomic financing problems of German unity - On the macroeconomics of deficit-financed government spending. In: Aspects of the Transformation in East Germany (Eds. Claus Köhler and Rüdiger Pohl). Berlin 1996, p. 129: “Any government deficit increases the financial wealth of private individuals. If private individuals increasingly ask for company investments from their increased financial assets for investment purposes, the liquidity of the companies increases, their need and demand for credit decreases, as does the interest rate, which can even lead to a crowding-in effect . "