Timothy Taylor writes,
Huntley describes the central estimate about the long-run effects of more government borrowing based on the review of the evidence like this: For each additional dollar of government budget deficit, private saving rises by 43 cents, and the inflow of foreign capital rises by 24 cents. Thus, [e]ach additional dollar of deficit leads to a 33 cent decline in domestic investment.
Jonathan Huntley works for the Congressional Budget Office. Taylor links to the full report. I like the way that Taylor explains the issue.
A few remarks:
1. A Keynesian would be quick to note that crowding out varies over the business cycle. When the economy is weak, there is excess saving, and there is no crowding out.
2. Larry Summers’ hypothesis of secular stagnation says that there has not been crowding out for two decades.
3. I have never heard a conservative economist complain about crowding out during a Republican Administration.
4. I have never heard a liberal economist complain about crowding out, ever. Complaining about (3) does not count.
This report comes out at a time in which the CBO has gotten an unusual amount of negative press. See this WaPo story, for example. Some remarks about this:
1. I think it is difficult for journalists or the general public to understand that some economic estimates are more unreliable than others. For example, estimating the cost of a government program is subject to some error, but most of the time you can get in the ballpark. There is more uncertainty about revenue from tax changes, because of behavioral responses, but one can still arrive at a reasonable range of estimates. On the other hand, estimating the macroeconomic impact of fiscal policy (the so-called multiplier) poses a much higher level of difficulty. You need a macroeconomic model. You need to take a position on the theory of monetary offset. When I was invited to give a lunch talk at CBO, I tried to emphasize that the difference between the uncertainty involved in macroeconomic forecasting and analysis on the one hand and the uncertainty in forecast and estimating the cost of a government program is a matter of kind, not just of degree. And I recommended that CBO should do something to emphasize this to the public. The crowding-out analysis is one that I would put in the high-uncertainty category.
2. It disturbs me that the press takes shots at the CBO only when the analysis raises doubts about progressive policies. If you are not going to raise doubts about CBO analysis of the stimulus, which is based on models that by now are far out of the mainstream, then you should not raise doubts about legitimately mainstream analysis of minimum wages, the employment effects of Obamacare, and, yes, crowding out.
3. Progressives who attack the CBO may be seeking a short-term gain in material at a long-term positional cost. Looking ahead a few moves, I do not think it helps progressives if they convince the public to distrust nonpartisan government experts.