Crowding Out
Plain definition
The reduction in private investment caused when government borrowing raises interest rates, making credit more expensive for businesses and households.
In economics
When the government runs deficits, it competes for loanable funds, pushing interest rates up and pricing some private projects out of the market. This weakens the fiscal multiplier, since public spending partially displaces private spending. Crowding out is strongest near full employment and weakest in deep recessions when idle savings abound.
Example
The government borrows $500 billion to fund new programs, pushing Treasury yields from 3% to 4%. A manufacturer cancels a factory expansion because its loan rate rose too high. Public spending rose, but private investment fell, so total demand grew less than the headline spending suggested.
Crowding out is confused with crowding in and with the multiplier itself. Crowding out shrinks the net effect of fiscal stimulus via higher rates; crowding in is the opposite, where public investment (e.g., infrastructure) encourages private investment. It is a partial offset, not a full cancellation.