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Government spending and crowding out

The Congressional Budget Office (CBO) in the US has just revised a forecast it made for the effect of the government deficit and debt on the crowding out of investment.

They were taken to task for figures which seemed to overstate the relationship, which had given ammunition to some commentators who are in favour of severe cutbacks in government expenditure.

Below is the statement from Dean Baker, co-director of the Center for Economic Policy and Research in Washington, which had earlier published a policy paper on what they considered to be a major error. It is worth reading the policy paper and there is a link in the text below.

“The Congressional Budget Office (CBO) is widely regarded as an impartial source of sound economic and policy analysis. Both parties have come to look to the economists and analysts at the CBO for projections and forecasts devoid of a partisan agenda. Therefore, it is reassuring that when errors were found in the latest Long-Term Budget Outlook released on June, 30, 2010, the CBO promptly issued a revised version correcting these mistakes. 

“The issue in question concerns the impact of deficits and debt on private investment. As discussed in a recent issue brief from the Center for Economic and Policy Research (CEPR), the CBO’s report suggested that projected deficits would greatly reduce private investment and lower GDP. Advocates of prompt deficit reduction had already seized on these erroneous projections to advance their agenda.

The revision to the Long-Term Budget Outlook shows that the effects of crowding out are significantly smaller than in the projections released in June. As well, the revision includes the effects of crowding out on GNP, also discussed in the CEPR issue brief.

“By acting quickly and revising the June projections, CBO has demonstrated that the agency is committed to careful and thorough analysis.”

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Posted in crowding out, government spending, Investment, US economy

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