How Government Borrowing Creates a Crowding Out Effect

In episode 50 of Government Spending with Fexingo, Lucas and Luna explore the crowding out effect—how government borrowing can push private investment aside. Using the 2026 US fiscal environment as a backdrop, they examine a Congressional Budget Office projection showing federal borrowing will absorb roughly 80% of net private savings this year. They walk through the mechanism: when the Treasury issues more debt, it competes for capital, raising interest rates and making it costlier for businesses to finance new projects. Lucas cites a recent study from the National Bureau of Economic Research estimating that each percentage point increase in the debt-to-GDP ratio reduces private investment by 0.2% over five years. Luna challenges the conventional framing by bringing up Japan, where government debt exceeds 250% of GDP yet private investment hasn't collapsed—prompting a discussion of when the crowding out effect does and doesn't hold. They also touch on the Federal Reserve's role in offsetting or amplifying the effect through monetary policy. The episode aims to demystify one of the most cited but least understood arguments in fiscal policy debates. #CrowdingOutEffect #GovernmentBorrowing #PrivateInvestment #InterestRates #FiscalPolicy #FederalBudget #Treasury #NationalDebt #CongressionalBudgetOffice #NBERR #Japan #MonetaryPolicy #FederalReserve #CapitalMarkets #Economics #PublicFinance #FexingoBusiness #BusinessPodcast Keep every episode free: buymeacoffee.com/fexingo