Comments on: Will the stimulus package “crowd-out” private investment and reduce long-run growth potential in America? http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/ for students and teachers of Economics Wed, 23 May 2012 04:39:58 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: Samantha Kim http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-4/#comment-23214 Samantha Kim Tue, 24 Apr 2012 02:35:41 +0000 http://welkerswikinomics.com/blog/?p=801#comment-23214 I agree that the long run fiscal stimulus will be bad for the economy. However, I feel as though it is a necessary measure for even if the growth is sluggish in the long run there will still be growth. During a recession growth is falling and that is the most dire situation that should be addressed right away. I agree that the long run fiscal stimulus will be bad for the economy. However, I feel as though it is a necessary measure for even if the growth is sluggish in the long run there will still be growth. During a recession growth is falling and that is the most dire situation that should be addressed right away.

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]]> By: Samantha Kim http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-4/#comment-23213 Samantha Kim Tue, 24 Apr 2012 02:32:43 +0000 http://welkerswikinomics.com/blog/?p=801#comment-23213 In response to your first question, I feel as though it refers more in the long-term. During a recession, however, when much of the thinking if short-term, I do not feel as though it will be a problem. After all, if you were a person with money and wanted to make more money, and in reality that's what all of us want to do, would you want to invest in a failing market. During a recession economic growth cannot happen without government investments especially since private investments are decreasing. In response to your first question, I feel as though it refers more in the long-term. During a recession, however, when much of the thinking if short-term, I do not feel as though it will be a problem. After all, if you were a person with money and wanted to make more money, and in reality that's what all of us want to do, would you want to invest in a failing market. During a recession economic growth cannot happen without government investments especially since private investments are decreasing.

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]]> By: Samantha Kim http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-4/#comment-23212 Samantha Kim Tue, 24 Apr 2012 01:57:38 +0000 http://welkerswikinomics.com/blog/?p=801#comment-23212 •In evaluating the use of expansionary fiscal policy, we learn in IB Economics that the crowding-out of private investment will reduce the expansionary effect of increased government spending. Is crowding-out a problem during a recession? Why or why not? Crowding out of private investment is not a problem during a recession because chances are during a recession there are not enough people to buy stocks and fund a company. Also, corporations will probably try to reduce their investments since there is not enough demand for their product. However, in the long-run crowding out will be a problem when there is increased government spending because too many of the investments Increased government spending is more likely to crowd out private investment in the long-run, but in the short-run it is likely to be helpful. •Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people? The government borrows from the American people through a process of government bonds. People buy bonds and invest in them just as they would stock in the hope that these bonds will result in greater wealth later on. During a recession people’s greatest hope is actually to invest in the bonds since stocks are not doing well and there are no other forms of investments that can hope to be beneficial. •Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss. Fiscal stimulus in the short-run will probably lead to a decreased growth in the long-run. In the short-run government intervention through bonds and deficit spending will aid the corporations. However, in the long-run much of the people’s money will be tied up in the bonds and actually hinder the private investments that could have gone to the corporations. This will result in slower economic growth in the long-run. •In evaluating the use of expansionary fiscal policy, we learn in IB Economics that the crowding-out of private investment will reduce the expansionary effect of increased government spending. Is crowding-out a problem during a recession? Why or why not?
Crowding out of private investment is not a problem during a recession because chances are during a recession there are not enough people to buy stocks and fund a company. Also, corporations will probably try to reduce their investments since there is not enough demand for their product. However, in the long-run crowding out will be a problem when there is increased government spending because too many of the investments Increased government spending is more likely to crowd out private investment in the long-run, but in the short-run it is likely to be helpful.
•Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people?
The government borrows from the American people through a process of government bonds. People buy bonds and invest in them just as they would stock in the hope that these bonds will result in greater wealth later on. During a recession people’s greatest hope is actually to invest in the bonds since stocks are not doing well and there are no other forms of investments that can hope to be beneficial.
•Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss.
Fiscal stimulus in the short-run will probably lead to a decreased growth in the long-run. In the short-run government intervention through bonds and deficit spending will aid the corporations. However, in the long-run much of the people’s money will be tied up in the bonds and actually hinder the private investments that could have gone to the corporations. This will result in slower economic growth in the long-run.

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]]> By: Konstantin Frank http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-4/#comment-23105 Konstantin Frank Wed, 18 Apr 2012 09:31:35 +0000 http://welkerswikinomics.com/blog/?p=801#comment-23105 In evaluating the use of expansionary fiscal policy, we learn in IB Economics that the crowding-out of private investment will reduce the expansionary effect of increased government spending. Is crowding-out a problem during a recession? Why or why not? I think crowding - out might be a problem, as it will reduce the expansionary effect of increased government spending. However, to boost an economy it takes an increased aggregate demand. If firstly, the effect of the government spending will be smaller, thus people will spend less and secondly will already spend less because they "crowded out" their money to the government, the aggregate demand will only increase slightly, if at all. This is not beneficial for economic growth, which is needed during a recession. Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people? A budget deficit occurs, when the government expects more tax revenue than it actually receives. Borrowing money from the private sector can be done by using two schemes. Firstly, by taxing. I adapt this idea from Jessica Kenny. She says that the government takes taxes from the people, however the debt is only created because it tries to improve the average standard of living. Therefore, people are borrowing money to the country, and receive therefore, hopefully, a country that has a fairer distribution of wealth and a higher standard of living. Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss. I think it really depends on the situation. It is hard to predict, whether a fiscal stimulus will have the expected effects, like for example the "trickle down" effect, or if people will put their money aside, even in the long run. However, it should often show increased growth, as for example many fiscal stimuli try to increase the aggregate demand, by smaller taxation. Many people react to these and therefore I would expect an increased growth. Nevertheless, it is questionable, whether the response to the stimuli will come at the right moment. In evaluating the use of expansionary fiscal policy, we learn in IB Economics that the crowding-out of private investment will reduce the expansionary effect of increased government spending. Is crowding-out a problem during a recession? Why or why not?

I think crowding – out might be a problem, as it will reduce the expansionary effect of increased government spending. However, to boost an economy it takes an increased aggregate demand. If firstly, the effect of the government spending will be smaller, thus people will spend less and secondly will already spend less because they "crowded out" their money to the government, the aggregate demand will only increase slightly, if at all. This is not beneficial for economic growth, which is needed during a recession.

Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people?

A budget deficit occurs, when the government expects more tax revenue than it actually receives. Borrowing money from the private sector can be done by using two schemes. Firstly, by taxing. I adapt this idea from Jessica Kenny. She says that the government takes taxes from the people, however the debt is only created because it tries to improve the average standard of living. Therefore, people are borrowing money to the country, and receive therefore, hopefully, a country that has a fairer distribution of wealth and a higher standard of living.

Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss.

I think it really depends on the situation. It is hard to predict, whether a fiscal stimulus will have the expected effects, like for example the "trickle down" effect, or if people will put their money aside, even in the long run. However, it should often show increased growth, as for example many fiscal stimuli try to increase the aggregate demand, by smaller taxation. Many people react to these and therefore I would expect an increased growth. Nevertheless, it is questionable, whether the response to the stimuli will come at the right moment.

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]]> By: Konstantin Frank http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-3/#comment-23104 Konstantin Frank Wed, 18 Apr 2012 09:17:24 +0000 http://welkerswikinomics.com/blog/?p=801#comment-23104 I agree with you that fiscal stimulus may take some time to show effects, however in my opinion it is hard to say, whether it will be successful (lead to economical growth) or not (will not lead to economical growth). I think it really depends on the measurements, and also the will of the government, as well of the people to change something. The European Union started introducing incredibly big fiscal stimuli 3 years ago and though some countries managed to get better, countries like Greece, Spain and Italy are now still struggling, for many reasons. However, you might be right that if the government for example lowers interest rates, that by the time people are willing to lend more money, the economy will already be healthy due to another measurement, so the low interest rates could lead to an inflationary gap instead removing a deflationary gap. I agree with you that fiscal stimulus may take some time to show effects, however in my opinion it is hard to say, whether it will be successful (lead to economical growth) or not (will not lead to economical growth). I think it really depends on the measurements, and also the will of the government, as well of the people to change something. The European Union started introducing incredibly big fiscal stimuli 3 years ago and though some countries managed to get better, countries like Greece, Spain and Italy are now still struggling, for many reasons. However, you might be right that if the government for example lowers interest rates, that by the time people are willing to lend more money, the economy will already be healthy due to another measurement, so the low interest rates could lead to an inflationary gap instead removing a deflationary gap.

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]]> By: smarttikalevi2 http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-4/#comment-23096 smarttikalevi2 Tue, 17 Apr 2012 22:21:48 +0000 http://welkerswikinomics.com/blog/?p=801#comment-23096 You make your points clear, which is very important in these kinds of comments. And I have nothing bad to say about your answers. The point that I myself forgot to mention in my post was the distinction between short and long run effects on the first question, but you have done it very well here and I agree with you that in long run it will result in less growth. You make your points clear, which is very important in these kinds of comments. And I have nothing bad to say about your answers. The point that I myself forgot to mention in my post was the distinction between short and long run effects on the first question, but you have done it very well here and I agree with you that in long run it will result in less growth.

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]]> By: smarttikalevi2 http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-4/#comment-23094 smarttikalevi2 Tue, 17 Apr 2012 22:15:27 +0000 http://welkerswikinomics.com/blog/?p=801#comment-23094 1. I think crowding-out is a problem during a recession. This is because aggregate demand and aggregate supply would be low during a recession. The firms could overcome the recession, by using funds done by private investments, however if the government causes decrease in investment, the firms would have difficulties to recover. 2. The US government sells bonds to the public, in order to gain money, which they then use to invest into economy. American citizens are able to buy these bonds, as the government takes money from banks. This enables the government to pay back to the banks and also to the citizens. 3. Fiscal stimulus for an economy in the short-run will lead to an increase in economic growth. There is a problem though, with the long-run, as the effect of crowding-out can mess up the economic growth. This is because as the government spends on the economy, the interest rates will increase, which then will cause low investments by firms 1. I think crowding-out is a problem during a recession. This is because aggregate demand and aggregate supply would be low during a recession. The firms could overcome the recession, by using funds done by private investments, however if the government causes decrease in investment, the firms would have difficulties to recover.

2. The US government sells bonds to the public, in order to gain money, which they then use to invest into economy. American citizens are able to buy these bonds, as the government takes money from banks. This enables the government to pay back to the banks and also to the citizens.

3. Fiscal stimulus for an economy in the short-run will lead to an increase in economic growth. There is a problem though, with the long-run, as the effect of crowding-out can mess up the economic growth. This is because as the government spends on the economy, the interest rates will increase, which then will cause low investments by firms

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]]> By: nick mindorff http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-4/#comment-23069 nick mindorff Mon, 16 Apr 2012 21:48:47 +0000 http://welkerswikinomics.com/blog/?p=801#comment-23069 1. Crowding out in a recession is not necessarily a problem, as the effects of crowding out tend to be in the long term. As a recession is much shorter than a depression, this would not be an issue. However, should a depression be experienced, then crowding out would become a significant issue. 2. The government borrows from the private sector, also known as the people, through a bond system. The private sector buys a bond, which is in essence a loan to the government. The money is later returned with interest. 3. Short term economic growth is almost always a result of fiscal stimulus. Adding money into anything tends to cause growth. However, in the long run, there can be several problems with fiscal stimulus, as the crowding out effect becomes more prevalent. 1. Crowding out in a recession is not necessarily a problem, as the effects of crowding out tend to be in the long term. As a recession is much shorter than a depression, this would not be an issue. However, should a depression be experienced, then crowding out would become a significant issue.

2. The government borrows from the private sector, also known as the people, through a bond system. The private sector buys a bond, which is in essence a loan to the government. The money is later returned with interest.

3. Short term economic growth is almost always a result of fiscal stimulus. Adding money into anything tends to cause growth. However, in the long run, there can be several problems with fiscal stimulus, as the crowding out effect becomes more prevalent.

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]]> By: rthornton2 http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-3/#comment-22983 rthornton2 Wed, 11 Apr 2012 00:59:28 +0000 http://welkerswikinomics.com/blog/?p=801#comment-22983 I do not see crowding-out as a problem during a recession... I believe that the effects of crowding-out are only long-term. I do not see crowding-out as a problem during a recession… I believe that the effects of crowding-out are only long-term.

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]]> By: rthornton2 http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-4/#comment-22981 rthornton2 Wed, 11 Apr 2012 00:56:53 +0000 http://welkerswikinomics.com/blog/?p=801#comment-22981 1.In evaluating the use of expansionary fiscal policy, we learn in IB Economics that the crowding-out of private investment will reduce the expansionary effect of increased government spending. Is crowding-out a problem during a recession? Why or why not? Crowding-out is not a problem during a recession. Crowding out does not have many short-term effects, hence why it is established during a recession, rather it would have more long-term effects that would be seen a few years after the recession. 2.Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people? The government “borrows” money from the American people through taxation and government bonds. A government bond is seen as a safe investment, as the government usually pays the citizens back, some time afterwards, with interest included. 3.Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss. A fiscal stimulus in the short-run would lead to a decreased growth in the long-run. The fiscal stimulus would cause crowding-out. With crowding-out, interest rates would increase, affecting the amount of investment into firms producing goods. With less investment, there would be less production, resulting in less jobs and economic activity, boosting unemployment, and causing a decreased growth in the long-run. 1.In evaluating the use of expansionary fiscal policy, we learn in IB Economics that the crowding-out of private investment will reduce the expansionary effect of increased government spending. Is crowding-out a problem during a recession? Why or why not?
Crowding-out is not a problem during a recession. Crowding out does not have many short-term effects, hence why it is established during a recession, rather it would have more long-term effects that would be seen a few years after the recession.
2.Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people?
The government “borrows” money from the American people through taxation and government bonds. A government bond is seen as a safe investment, as the government usually pays the citizens back, some time afterwards, with interest included.
3.Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss.
A fiscal stimulus in the short-run would lead to a decreased growth in the long-run. The fiscal stimulus would cause crowding-out. With crowding-out, interest rates would increase, affecting the amount of investment into firms producing goods. With less investment, there would be less production, resulting in less jobs and economic activity, boosting unemployment, and causing a decreased growth in the long-run.

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]]> By: aaxler2 http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-4/#comment-22977 aaxler2 Tue, 10 Apr 2012 19:53:19 +0000 http://welkerswikinomics.com/blog/?p=801#comment-22977 I'm not sure that during recession there is both an increase in AD and As. If this were so wouldn't there just be some inflation and perhaps even economic growth? However, I agree with you that the governments are able to borrow from their citizens through bonds. I'm not sure that during recession there is both an increase in AD and As. If this were so wouldn't there just be some inflation and perhaps even economic growth? However, I agree with you that the governments are able to borrow from their citizens through bonds.

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]]> By: aaxler2 http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-4/#comment-22976 aaxler2 Tue, 10 Apr 2012 19:48:14 +0000 http://welkerswikinomics.com/blog/?p=801#comment-22976 • In evaluating the use of expansionary fiscal policy, we learn in IB Economics that the crowding-out of private investment will reduce the expansionary effect of increased government spending. Is crowding-out a problem during a recession? Why or why not? o Crowding out is not a problem in a recession, because expansionary fiscal policy is generally only used when the economic is contracting or in other words when there is a recession or depression. Recessions or depressions are often times caused by a lack of AD and expansionary fiscal policy a distinctly Keynesian idea aims to increase AD. • Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people? o The above statement is neither entirely true or entirely false. The US government borrows from the American people by issuing bonds or occasionally dipping into funds that are set aside for the American people like social security. However, the Government also just takes money in the form of taxes. Often times when there is a budget deficit taxes are raised to close the gap. • Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss. o The answer really depends on whether one is a follower of the Keynesian versus the Neo-classical economic doctrines. A Keynesian economist was nearly definitely say no and that that fiscal stimulus will jump start growth that would continue in the long run. Will a Neo-classical economist would argue that fiscal stimulus simply is taking money from job creators and would hamper long term growth. • In evaluating the use of expansionary fiscal policy, we learn in IB Economics that the crowding-out of private investment will reduce the expansionary effect of increased government spending. Is crowding-out a problem during a recession? Why or why not?
o Crowding out is not a problem in a recession, because expansionary fiscal policy is generally only used when the economic is contracting or in other words when there is a recession or depression. Recessions or depressions are often times caused by a lack of AD and expansionary fiscal policy a distinctly Keynesian idea aims to increase AD.
• Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people?
o The above statement is neither entirely true or entirely false. The US government borrows from the American people by issuing bonds or occasionally dipping into funds that are set aside for the American people like social security. However, the Government also just takes money in the form of taxes. Often times when there is a budget deficit taxes are raised to close the gap.
• Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss.
o The answer really depends on whether one is a follower of the Keynesian versus the Neo-classical economic doctrines. A Keynesian economist was nearly definitely say no and that that fiscal stimulus will jump start growth that would continue in the long run. Will a Neo-classical economist would argue that fiscal stimulus simply is taking money from job creators and would hamper long term growth.

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]]> By: aaxler2 http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-4/#comment-22975 aaxler2 Tue, 10 Apr 2012 19:44:40 +0000 http://welkerswikinomics.com/blog/?p=801#comment-22975 •In evaluating the use of expansionary fiscal policy, we learn in IB Economics that the crowding-out of private investment will reduce the expansionary effect of increased government spending. Is crowding-out a problem during a recession? Why or why not? •In evaluating the use of expansionary fiscal policy, we learn in IB Economics that the crowding-out of private investment will reduce the expansionary effect of increased government spending. Is crowding-out a problem during a recession? Why or why not?

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]]> By: ahamdock http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-3/#comment-22969 ahamdock Tue, 10 Apr 2012 18:15:55 +0000 http://welkerswikinomics.com/blog/?p=801#comment-22969 You did very well to mention that as the interest plummet then private investors will be encourage to invest, thereby eliminating the opportunity for "crowding out" to occur. Well done! You did very well to mention that as the interest plummet then private investors will be encourage to invest, thereby eliminating the opportunity for "crowding out" to occur. Well done!

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]]> By: Ahamdock http://welkerswikinomics.com/blog/2009/02/14/the-stimulus-package-and-crowding-out/comment-page-4/#comment-22968 Ahamdock Tue, 10 Apr 2012 17:54:18 +0000 http://welkerswikinomics.com/blog/?p=801#comment-22968 1.In evaluating the use of expansionary fiscal policy, we learn in IB Economics that the crowding-out of private investment will reduce the expansionary effect of increased government spending. Is crowding-out a problem during a recession? Why or why not? Crowding out is a problem during recession because consumers and retailers experience an increase in both overall Aggregate Demand and Aggregate Supply, subsequently, the economy is not able to sustain this supply due to crowding out, while firms will suffer from debts. Moreover, people will choose to save rather than consuming their money. Since investment rate decreases, consumption will drop which will cause GDP rate to decrease. 2.Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people? Government will be able to borrow from private sectors through the process of purchasing bonds. The individual private sectors would purchase bonds, and the government will pay them back when they have enough revenue. Also, the government can enforce short term taxation on product goods. 3. Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss. In the long run fiscal stimulus will be bad for the economy. Private sectors will have negative outcomes due to the government borrowing money. In short run, it is helpful since it will meet the demands and supplies. 1.In evaluating the use of expansionary fiscal policy, we learn in IB Economics that the crowding-out of private investment will reduce the expansionary effect of increased government spending. Is crowding-out a problem during a recession? Why or why not?

Crowding out is a problem during recession because consumers and retailers experience an increase in both overall Aggregate Demand and Aggregate Supply, subsequently, the economy is not able to sustain this supply due to crowding out, while firms will suffer from debts. Moreover, people will choose to save rather than consuming their money. Since investment rate decreases, consumption will drop which will cause GDP rate to decrease.

2.Discuss the following statement: “In order to finance its budget deficit, the US government must borrow from the private sector.” How does the government borrow from the American people?

Government will be able to borrow from private sectors through the process of purchasing bonds. The individual private sectors would purchase bonds, and the government will pay them back when they have enough revenue. Also, the government can enforce short term taxation on product goods.

3. Will fiscal stimulus in the short-run lead to increased growth or decreased growth in the long-run? Discuss.

In the long run fiscal stimulus will be bad for the economy. Private sectors will have negative outcomes due to the government borrowing money. In short run, it is helpful since it will meet the demands and supplies.

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