Wednesday, August 04, 2010

Crowding Out the Crowding Out Argument?

On CNBC the other day, Steve Leisman told Larry Kudlow that he was going to 'crowd out' his 'crowding out' argument.  Last I checked, the textbooks still say that increasing government deficits lead to temporary (short-run) increase in GDP, which disappears when prices adjust in the medium term.  But, sadly, we ARE left with a higher rate of inflation and a higher interest rate in the medium-term.

The higher interest rate obviously leads to less private investment.  Thus, stimulative fiscal policy increases budget deficits which increases the interest rate which decreases private investment.  This is what crowding out is.  So, I'm not sure why Leisman says that he can crowd out Kudlow's crowding out argument. 

I guess I should go back and watch the exchange with more attention.