Back in 1971-72, the Wall Street Journal ran a pair of editorials on how the government was crowding out the private sector. Back then, it was the “massive” official National Debt plus Unfunded Liabilities – together about $4 Trillion then compared to today approaching $250 Trillion.
The Wall Street Journal noted that all of that spending beyond Uncle Sam’s means (deficit spending) had to be financed through borrowing.
As that borrowing took money out of the US Economy, it left much less capital available for the private, productive sector of the Economy. The shortfall was evident in the high interest rates of the day.
The newspaper recognized that Capital can come only from savings – from peoples’ and businesses’ earnings that were put aside for future benefit.
Back then, “Inflation” still referred to the government, through the FED, debasing the Dollar by running the printing presses. People knew that paper Dollars created just by expanding the money supply – as opposed to actually saving part of your earnings – was NOT capital, since the new Dollars only got their value by stealing part of the value that all Previous Dollars had. Printing paper – then as now – causes the value of the Dollar to go down, and prices rise.
Two generations later, most Americans don’t have the same economic understanding, partly because public education teaches Keynesian socialism and partly because our government screws with the price numbers. Compare today’s “official” less than 2% CPI rises with the number based on how it would have been calculated back in 1972 (pre-1980) of over 8% (From http://www.ShadowStats.com).
Recently, the Foundation for Economic Education (www.FEE.org) has resurrected the term crowding out. However, they use it with a somewhat different meaning. Yes, government still is crowding out the private, productive sector, but now it’s government spending rather than just borrowing to spend.
Here is what FEE has to say:
The size and scope of government in the United States today would have been beyond the imagination of the American founders. For more than a century after the Constitution’s ratification, Americans took limits on government power seriously.
At the start of the 20th century, total government spending was less than 10 percent of GDP, with the majority of spending taking place at the state and local levels. In 1900, federal spending was a mere 2.8 percent of GDP compared to 21.1 percent in 2014. Meanwhile, state and local spending stood at 5 percent of GDP in 1900, but reached 11.5 percent in 2014. Overall government spending now stands at nearly 33 percent of GDP.
That tectonic shift is largely due to the growth of entitlements and the regulatory state. Nearly half of federal spending goes toward Social Security, Medicare, and Medicaid; government imposes huge regulatory costs on the private sector; and the higher taxes needed to finance big government erode economic incentives to work, save, and invest.
How big is too big?
There is a growing body of evidence that bigger government means slower growth of real GDP. Once the level of total government spending as a percentage of GDP reaches a tipping point, estimated to be from 15 percent to 25 percent of GDP, additional expansion crowds out private productive investment and slows economic growth. An overreaching government diminishes economic freedom and limits private exchange opportunities, restricting the range of choices open to individuals.
In a pioneering study of the link between government growth and national wealth, which appeared in the fall 1998 issue of the Cato Journal, economists James Gwartney, Randall Holcombe, and Robert Lawson found that a 10 percentage point increase in government spending as a percentage of GDP decreases real GDP growth by 1 percentage point. Thus, if government spending went from 25 percent of GDP to 35 percent, real GDP growth would slow over the longer term by a full percentage point. They also found that a 10 percentage point increase in the government’s share of GDP lowered private investment by 1.6 percentage points.