In the Long Run, We Are All Crowded Out

Abstract

Since the Great Recession began in December 2007, the United States federal government has spent over $1.2 trillion on direct stimulus measures. The positive effects of this spending have been obvious: cars have been purchased, teachers have remained employed, and infrastructure has been built. However, job creation and economic growth are affected not only by the easily observed results of policy, but also by the less-obvious results, many of which negatively impact the economy. What is more, these negative effects can last long after current policy makers have left office. To the extent that these less-conspicuous results are ignored or underestimated, policy is biased in favor of government spending. This paper examines one of the most important unseen effects of fiscal policy: crowding out.