American economist John Cochrane
if the government borrows a dollar from you, that is a dollar that you do not spend. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories but fiscal stimulus can’t help us to build more of both
In his first budget George Osborne talked about an overblown state crowding out our private endeavour
From the ‘Geddes Axe‘ after the First World War, through John Maynard Keynes‘ attack on the ‘Treasury View‘ in the interwar years, down to the ‘monetarist’ assaults on the public sector of the 1970s and 1980s, it has been alleged that public sector growth in itself, but especially if funded by state borrowing, has detrimental effects on the national economy.” Much of the debate in the 1970s was based on the assumption of a fixed supply of savings within a single country, but with the global capital markets of the 21st century “…international capital mobility completely undermines a simple model of crowding out”
The extent to which crowding out occurs depends on the economic situation. If the economy is at capacity or full employment, then the government suddenly increasing its budget deficit (e.g., via stimulus programs) could create competition with the private sector for scarce funds available for investment, resulting in an increase in interest rates and reduced private investment or consumption. Thus the effect of the stimulus is offset by the effect of crowding out. On the other hand, if the economy is below capacity and there is a surplus of funds available for investment, an increase in the government’s deficit does not result in competition with the private sector. In this scenario, the stimulus program would be much more effective. In sum, changing the government’s budget deficit has a stronger impact on GDP when the economy is below capacity. In the aftermath of the 2008 subprime mortgage crisis, the U.S. economy remained well below capacity and there was a large surplus of funds available for investment, so increasing the budget deficit put funds to use that would otherwise have been idle.
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