Crowding In
The stimulative effect by which increased government spending encourages additional private investment by boosting demand and business confidence.
What is Crowding In?
Crowding in describes the economic dynamic where an increase in government spending raises aggregate demand sufficiently to encourage private firms to invest more, because higher expected sales justify additional capacity, equipment purchases, and hiring. It is the counterpart to crowding out, in which government borrowing competes with private borrowers and raises interest rates, reducing private investment. Crowding in is most likely when the economy is operating below its potential (a negative output gap), interest rates are near the zero lower bound, and private investment is constrained by weak demand rather than by the cost of capital. Keynesian economists cite crowding in as a key mechanism supporting expansionary fiscal policy during recessions and liquidity traps.
Example
During the 2009 American Recovery and Reinvestment Act, increased federal spending on roads, bridges, and broadband infrastructure boosted demand in construction and materials sectors. Private contractors expanded payrolls and equipment fleets in response to new public contracts — illustrating crowding in of private investment alongside public spending.
Source: Investopedia — Crowding In