This study examines the existence of crowding out in the United States by determining to what degree the proportion of actual GNP that was devoted to investment was affected by the proportion of GNP devoted to federal government spending. The empirical results in the regression estimation tentatively indicate that private investment in new capital is in fact crowded out by federal government outlays.  Nevertheless, the evidence in this regression indicates also that although crowding out does occur, it is incomplete

Cebula, Barbara

Cebula, Richard

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MPRAMunich Personal RePEc ArchiveA Note on ”Crowding Out” in the UnitedStatesRichard Cebula and Barbara CebulaJacksonville University, Jacksonville University7. January 1979Online at http://mpra.ub.uni-muenchen.de/56991/MPRA Paper No. 56991, posted 1. July 2014 16:39 UTCA NOTE ON “CROWDING OUT” IN THE UNITED STATES  R.J. Cebula and B.A. Cebula  I. Introduction  In recent years, there has been a growing debate over the effectiveness of contra cyclical fiscal policy.  A good part of this debate has centered around the so-call <<crowding out>> effect of fiscal policy.  Although conceptual contributions to this literature continue to be encountered [e.g., Buiter (1977), Friedman (1978), and Floyd and Hynes (1978)], there has been a recent trend in the literature to appraise the degree of <<crowding out>> in empirical terms.  The beginnings of this empirical literature can be traced back to the studies by Anderson and Jordan (1968) and Keran (1969) and (1970).  These studies appear to have provided evidence of complete crowding out in the United States.  By contrast, a more recent study by Cebula (1978) of the United States and Canada finds strong evidence of crowding out is incomplete in both cases.  The later finding is obtained as well in a study Ostrosky (1979), which extends the model used in Cebula (1978).  Similarly, Zahn (1978) finds evidence strongly suggesting incomplete crowding out in the United States.  Finally, a recent study by Arestis (1979) of the United Kingdom also finds strong evidence of incomplete crowding out. These empirical studies tend either (a) to measure crowding out indirectly through the examination of various multipliers or (b) to measure crowding out directly by treating private-sector spending (especially investment) as a function of government deficits or spending levels per se. The purpose of this note is to provide an alternative means by which to determine whether (a) crowding out occurs and, if so, (b) to what degree.  In particular, this study examines the existence of crowding out in the United States by determining to what degree the proportion of actual GNP that was devoted to investment was affected by the proportion of GNP devoted to federal government spending.  Hopefully, this new approach to the empirical dimension of crowding out will provide further insight into whether or not the crowding out issue is substantive.  Moreover, it may also help us to better appraise or partially resolve the rather different findings of earlier studies [Anderson and Jordan (1968) and Keran (1969) and (1970), on the one hand, versus Arestis (1979), Cebula (1978), Ostrosky (1979), and Kahn (1978), on the other hand].  II. The Basic Model  The basic model to be examined is given by:  (1) It/Yt   =   It/Yt (Gt/Yt, Pt, Rt)  where   It/Yt = ratio of actual real investment expenditures during quarter t to actual real GNP during quarter t  Gt/Yt = ratio of actual real federal government expenditures during quarter t to actual real GNP during quarter t  Pt = consumer price index during quarter t  Rt = corporate profit rate, after taxes, during quarter t, expressed as a percentage rate of return on stockholders’ equity   The base year is 1972.  The data in this regression cover the period from quarter 1 of year 1969 through quarter 3 of year 1978.  Data sources for variables It, Yt, Gt, and Pt were issues 1971 through 1979 of The Economic Report of the President.  The data source for the variable Rt was The Business Conditions Digest, September, 1979.  The crowding out phenomenon is well known.  As government spending rises, this may lead to a budget deficit, which leads to higher interest rates and diminished credit availability.  In turn, these results lead to diminished credit availability.  In turn, these results lead to diminished private expenditures.  Moreover, the existence of any deficit which may accompany the increased government spending may lead to adverse expectations by business and hence to less investment.  Finally, via an <<ultra-rationality>> phenomenon [see Carlson and Spencer (1975)], private spending may be diminished by government spending increases.    If crowding out does occur, we would expect that the greater the proportion of GNP devoted to government spending, the lesser the proportion of GNP devoted to private investment outlays, i.e., the greater the degree to which government spending crowds out investment, ceteris paribus:  (2) Ƌ(It/Yt) ______   <  0  Ƌ(Gt/Yt)   To examine the crowding out thesis,  the following regression is to be examined:   (3) It/Yt = a0 + a1(Gt/Yt) + a2P1 + a3Rt + μ  where  a0 = constant μ = stochastic error term  The OLS estimate of equation (3) is given by:  (4) It/Yt = +9.15066 – 0.04340 (Gt/Yt) – 0.01031 Pt – 0.00405 Rt,                                    (-2.47)                      (-5.58)         (-0.81)                DF = 35,   R2 = .66,   F = 22.80264  where terms in parentheses are t-values.   The results in the above regression indicate that private investment in new capital is in fact crowded out by federal government outlays.  Nevertheless, the evidence in this regression indicates also that although crowding out does occur, it is incomplete.  This result is qualitatively compatible with the studies by Cebula (1978).   III. Summary  This note has addressed the empirical issue of crowding out by examining the proportion of GNP devoted to private investment as a function of the proportion of GNP devoted to federal government outlays.  The evidence provided here of incomplete crowding out is at odds with the extreme monetarist position; the existence of a definite crowding out effect, however, is also at odds with the extreme Keynesian (fiscalist) position.  Fiscal policy walks on, but alas with a can….       REFERENCES  Anderson, D.L. and Jordan, J.L., Monetary and Fiscal Actions: A Test of Their Relative Importance in Economic Stabilization, in Federal Reserve Bank of St. Louis Review, November, 1968.  Arestis, P., <<Crowding Out>> of Private Expenditure by Fiscal Actions: An Empirical Investigation, in Public Finance/Finances Publiques, 1, 1979.  Buiter, W. H., Crowding Out and the Effectiveness of Fiscal Policy, in Journal of Public Economics, June 1977.  Carlson, K. M. and Spencer, R. W., Crowding Out and Its Critics, in Federal Reserve Bank of St Louis Review, December, 1975.  Cebula, R. J., An Empirical Analysis of the <<Crowding Out>> Effect of Fiscal Policy in the United States and Canada,  in Kyklos, 5, 1978.  Floyd, J. E. and Hynes, J. A., Deficit Finance and First Round Crowding Out: A Clarification, in Canadian Journal of Economics, February, 1978.  Friedman, B. M., Crowding Out or Crowding In? Economic Consequences of Financing Government Deficits, in Brookings Papers on Economic Activity, 3, 1978.  Keran, M. W., Monetary and Fiscal Influences on Economic Activity: The Historical Evidence, in Federal Reserve Bank of St. Louis Review, November, 1969.  Keran, M. W., Monetary and Fiscal Influences on Economic Activity: The Foreign Experience, in Federal Reserve Bank of St. Louis Review, February, 1970.  Ostrosky, A., An Empirical Analysis of the Crowding Out Effect of Fiscal Policy in the United States and Canada: Comment and Extension, in Kyklos, 4, 1979.  Zahn, F., A Flow of Funds Analysis of Crowding Out, in Southern Economic Journal, July, 1978.  

A Note on "Crowding Out" in the United States

Munich Personal RePEc Archive

MPRA
Munich Personal RePEc Archive
A Note on ”Crowding Out” in the United
States
Richard Cebula and Barbara Cebula
Jacksonville University, Jacksonville University
7. January 1979
Online at http://mpra.ub.uni-muenchen.de/56991/
MPRA Paper No. 56991, posted 1. July 2014 16:39 UTC
A NOTE ON “CROWDING OUT” IN THE UNITED STATES 
 
R.J. Cebula and B.A. Cebula 
 
I. Introduction 
 
In recent years, there has been a growing debate over the effectiveness of contra 
cyclical fiscal policy.  A good part of this debate has centered around the so-call <<crowding 
out>> effect of fiscal policy.  Although conceptual contributions to this literature continue to be 
encountered [e.g., Buiter (1977), Friedman (1978), and Floyd and Hynes (1978)], there has been 
a recent trend in the literature to appraise the degree of <<crowding out>> in empirical terms.  
The beginnings of this empirical literature can be traced back to the studies by Anderson and 
Jordan (1968) and Keran (1969) and (1970).  These studies appear to have provided evidence of 
complete crowding out in the United States.  By contrast, a more recent study by Cebula (1978) 
of the United States and Canada finds strong evidence of crowding out is incomplete in both 
cases.  The later finding is obtained as well in a study Ostrosky (1979), which extends the model 
used in Cebula (1978).  Similarly, Zahn (1978) finds evidence strongly suggesting incomplete 
crowding out in the United States.  Finally, a recent study by Arestis (1979) of the United 
Kingdom also finds strong evidence of incomplete crowding out. 
These empirical studies tend either (a) to measure crowding out indirectly through the 
examination of various multipliers or (b) to measure crowding out directly by treating private-
sector spending (especially investment) as a function of government deficits or spending levels 
per se. 
The purpose of this note is to provide an alternative means by which to determine 
whether (a) crowding out occurs and, if so, (b) to what degree.  In particular, this study 
examines the existence of crowding out in the United States by determining to what degree the 
proportion of actual GNP that was devoted to investment was affected by the proportion of 
GNP devoted to federal government spending.  Hopefully, this new approach to the empirical 
dimension of crowding out will provide further insight into whether or not the crowding out 
issue is substantive.  Moreover, it may also help us to better appraise or partially resolve the 
rather different findings of earlier studies [Anderson and Jordan (1968) and Keran (1969) and 
(1970), on the one hand, versus Arestis (1979), Cebula (1978), Ostrosky (1979), and Kahn (1978), 
on the other hand]. 
 
II. The Basic Model 
 
The basic model to be examined is given by: 
 
(1) It/Yt   =   It/Yt (Gt/Yt, Pt, Rt) 
 
where  
 
It/Yt = ratio of actual real investment expenditures during quarter t to actual real GNP during 
quarter t 
 
Gt/Yt = ratio of actual real federal government expenditures during quarter t to actual real GNP 
during quarter t 
 
Pt = consumer price index during quarter t 
 
Rt = corporate profit rate, after taxes, during quarter t, expressed as a percentage rate of return 
on stockholders’ equity 
 
 The base year is 1972.  The data in this regression cover the period from quarter 1 of year 1969 
through quarter 3 of year 1978.  Data sources for variables It, Yt, Gt, and Pt were issues 1971 through 
1979 of The Economic Report of the President.  The data source for the variable Rt was The Business 
Conditions Digest, September, 1979. 
 The crowding out phenomenon is well known.  As government spending rises, this may lead to a 
budget deficit, which leads to higher interest rates and diminished credit availability.  In turn, these 
results lead to diminished credit availability.  In turn, these results lead to diminished private 
expenditures.  Moreover, the existence of any deficit which may accompany the increased government 
spending may lead to adverse expectations by business and hence to less investment.  Finally, via an 
<<ultra-rationality>> phenomenon [see Carlson and Spencer (1975)], private spending may be 
diminished by government spending increases.   
 If crowding out does occur, we would expect that the greater the proportion of GNP devoted to 
government spending, the lesser the proportion of GNP devoted to private investment outlays, i.e., the 
greater the degree to which government spending crowds out investment, ceteris paribus: 
 
(2) Ƌ(It/Yt) 
______   <  0 
 
Ƌ(Gt/Yt) 
 
 To examine the crowding out thesis,  the following regression is to be examined: 
 
 
(3) It/Yt = a0 + a1(Gt/Yt) + a2P1 + a3Rt + μ 
 
where  a0 = constant 
μ = stochastic error term 
 The OLS estimate of equation (3) is given by: 
 
(4) It/Yt = +9.15066 – 0.04340 (Gt/Yt) – 0.01031 Pt – 0.00405 Rt, 
                                   (-2.47)                      (-5.58)         (-0.81) 
               DF = 35,   R2 = .66,   F = 22.80264 
 
where terms in parentheses are t-values. 
 
 The results in the above regression indicate that private investment in new capital is in fact 
crowded out by federal government outlays.  Nevertheless, the evidence in this regression indicates also 
that although crowding out does occur, it is incomplete.  This result is qualitatively compatible with the 
studies by Cebula (1978).  
 
III. Summary 
 
This note has addressed the empirical issue of crowding out by examining the proportion of GNP 
devoted to private investment as a function of the proportion of GNP devoted to federal government 
outlays.  The evidence provided here of incomplete crowding out is at odds with the extreme monetarist 
position; the existence of a definite crowding out effect, however, is also at odds with the extreme 
Keynesian (fiscalist) position.  Fiscal policy walks on, but alas with a can…. 
 
  
 
  
REFERENCES 
 
Anderson, D.L. and Jordan, J.L., Monetary and Fiscal Actions: A Test of Their Relative Importance 
in Economic Stabilization, in Federal Reserve Bank of St. Louis Review, November, 1968. 
 
Arestis, P., <<Crowding Out>> of Private Expenditure by Fiscal Actions: An Empirical 
Investigation, in Public Finance/Finances Publiques, 1, 1979. 
 
Buiter, W. H., Crowding Out and the Effectiveness of Fiscal Policy, in Journal of Public Economics, 
June 1977. 
 
Carlson, K. M. and Spencer, R. W., Crowding Out and Its Critics, in Federal Reserve Bank of St 
Louis Review, December, 1975. 
 
Cebula, R. J., An Empirical Analysis of the <<Crowding Out>> Effect of Fiscal Policy in the United 
States and Canada,  in Kyklos, 5, 1978. 
 
Floyd, J. E. and Hynes, J. A., Deficit Finance and First Round Crowding Out: A Clarification, in 
Canadian Journal of Economics, February, 1978. 
 
Friedman, B. M., Crowding Out or Crowding In? Economic Consequences of Financing 
Government Deficits, in Brookings Papers on Economic Activity, 3, 1978. 
 
Keran, M. W., Monetary and Fiscal Influences on Economic Activity: The Historical Evidence, in 
Federal Reserve Bank of St. Louis Review, November, 1969. 
 
Keran, M. W., Monetary and Fiscal Influences on Economic Activity: The Foreign Experience, in 
Federal Reserve Bank of St. Louis Review, February, 1970. 
 
Ostrosky, A., An Empirical Analysis of the Crowding Out Effect of Fiscal Policy in the United 
States and Canada: Comment and Extension, in Kyklos, 4, 1979. 
 
Zahn, F., A Flow of Funds Analysis of Crowding Out, in Southern Economic Journal, July, 1978. 
 


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