Abstract

Crowding-out and Government Budget Restriction: A Critique

The controversy on whether fiscal policy is a suitable instrument of economic policy for exerting a positive influence on employment has been enriched by the crowding-out debate. In that debate, a distinction must be drawn between real crowding out and financial crowding effects. Following the debate on transaction-cash and portfolio crowding effects - crowdingin is also possible - the significance of budget restriction has been brought to the fore. The fiscal multiplier must then be positive over the long run, otherwise the model of a simply economy would not be stable From the stability of the observed economic events, conclusions are drawn (with the help of the correspondence principle) with respect to the multiplier. In this article, the significance of the stability constraint is discussed. Causality and the adaption process also have to be examined. It is established that the observed stability of economic events does not necessarily lead to a positive fiscal multiplier (as in the Blinder/Solow theory). An investigation of real crowding out is more relevant than financial crowding out. In a real model, government budget restriction no longer plays a role. The investment multiplier of increased government spending proves to be an important factor. If that multiplier is positive, price increases occur, which then guarantee real growth. Higher government expenditure coupled with simultaneous combatting of inflation has an inhibiting effect on the level of employment and may even result in a decline in real income and hence in increased unemployment