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A crowding-out effect occurs when the government borrows: private investment is curtailed because funds are lent to the government rather than to more risky private borrowers. Thus, the effect is to substitute government spending for potentially desirable private investment.
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Interest rates in the United States have been higher than those of other major western nations all through 1970-1980 period. One reason for these high interest rates is the large public debt which needs to be refinanced regularly. The Treasury must offer a high enough return to sell its issues. These high interest rates have been blamed for the slow growth. |
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