The 'crowding out' myth claims government spending reduces private investment by competing for limited savings. This is false because government spending actually creates new money and adds to private sector wealth, providing more funds for investment, not less.
Common Myths · Fundamental
The crowding out myth is the false belief that government spending reduces private investment by competing for a limited pool of savings, when government spending actually creates new financial assets for the private sector.
Showing the general audience (curious adults) level. Rewrites in place at every other depth.
The crowding out myth is the mistaken belief that government spending necessarily reduces private sector investment by competing for a fixed pool of savings or driving up interest rates. This conventional view treats government like a household that must borrow existing money from financial markets. However, MMT shows this is backwards for currency-issuing governments. When the government spends, it creates new money electronically, adding to the total money supply rather than subtracting from it. This spending often increases private sector income and profits, providing businesses with more revenue and making them more creditworthy. Banks create loans based on creditworthy borrowers, not scarce reserves. Government deficits actually add net financial assets to the private sector, potentially crowding in rather than crowding out private investment.
Why it matters
This myth is used to justify austerity policies and opposition to public investment in infrastructure, healthcare, education, and green energy transitions, limiting society's ability to address critical challenges.
Example / analogy
Consider the post-WWII boom: massive government spending during the war didn't crowd out private investment afterward. Instead, it created technological advances, educated veterans through the GI Bill, and built infrastructure that enabled decades of private sector growth.
Detailed explanation
Crowding out theory wrongly assumes a fixed pool of savings that government and private sectors must compete for. In reality, when government spends, it credits bank accounts with new money, increasing private sector financial assets. This additional wealth enhances the private sector's capacity to invest and spend. The myth stems from the false household analogy - treating government finances like a household budget. MMT shows that sovereign currency-issuing governments create money when they spend, so government deficits become private sector surpluses. Rather than crowding out private investment, government spending often 'crowds in' private activity by boosting demand and business confidence.
Common objections
"Government borrowing drives up interest rates, making private investment more expensive" - Interest rates are set by the central bank, not by supply and demand for government bonds. The central bank can maintain low rates regardless of government borrowing levels.
"There's only so much money available for lending" - Banks create new money when they make loans; they don't lend out existing deposits. Government spending adds to bank reserves, increasing lending capacity.
"Government deficits burden future generations with debt" - Government debt represents private sector assets. Future generations inherit both the debt and the corresponding financial wealth.
@misc{sef-concept-crowding-out-myth-2026,
author = {Sovereign Economics Foundation},
title = {Crowding Out (Myth)},
year = {2026},
note = {Version 1, accessed 2026-07-18},
url = {https://knowledge.sovereigneconomics.org/concepts/crowding-out-myth/}
}
AP / Chicago note
Sovereign Economics Foundation. (2026). "Crowding Out (Myth)." SEF Knowledge Graph (v1). Retrieved 18 July 2026 from https://knowledge.sovereigneconomics.org/concepts/crowding-out-myth/.
HTML hyperlink
<a href="https://knowledge.sovereigneconomics.org/concepts/crowding-out-myth/">Crowding Out (Myth)</a> · SEF Knowledge Graph