Desplazamiento

What Is Desplazamiento?

"Desplazamiento" is the Spanish term for crowding out, an economic theory asserting that increased government involvement in financial markets or a particular sector can reduce, or "displace," private sector activity. This often occurs when expanding government spending, particularly when financed by borrowing, leads to higher interest rates, making it more expensive for private investment to occur. It is a key concept within Public Finance and Economic Policy, frequently debated for its impact on overall economic growth.

History and Origin

The concept of crowding out has roots in classical economics, though the modern understanding and debate largely solidified with the rise of Keynesian economics. John Maynard Keynes himself acknowledged the possibility of government spending displacing private investment if the economy was near full capacity²⁵, ²⁶. However, it was later economists, particularly Robert Barro in the 1970s, who formalized and widely discussed the theory of crowding out, often in relation to "Ricardian equivalence." David Ricardo, an early 19th-century economist, had previously explored the idea that the method of financing government spending (through taxes or debt) might not affect aggregate demand, implying a form of offset.²⁴

A detailed exploration of the concept, including its Keynesian and Neoclassical interpretations, was presented in a 2003 Federal Reserve Bank of San Francisco Economic Letter, which highlighted how increased government borrowing could shift resources from private to public use.

Key Takeaways

• Desplazamiento, or crowding out, describes how increased government spending or borrowing can reduce private sector economic activity.
• This typically happens as government demand for funds in capital markets drives up interest rates, making private borrowing and investment more costly.
• The impact of crowding out is most pronounced when an economy is operating at or near full employment, with limited idle resources.
• The effect implies an opportunity cost associated with public sector expansion, as it can displace potentially productive private initiatives.
• The extent of crowding out is a subject of ongoing debate among economists, with different schools of thought emphasizing varying conditions under which it might occur.

Formula and Calculation

The concept of "Desplazamiento" (crowding out) does not have a universally accepted quantitative formula in the same way a financial ratio might. Instead, it is typically understood through economic models that illustrate its mechanics. In simplified terms, it can be conceptualized within the market for loanable funds, where government borrowing increases the demand for funds, thereby influencing the equilibrium interest rates.

A theoretical representation of this interaction in the loanable funds market might be:

$I(r) + G = S(r)$

Where:

• (I(r)) = Private Investment (a negative function of the interest rate, (r))
• (G) = Government Spending (or borrowing)
• (S(r)) = National Savings (a positive function of the interest rate, (r))

An increase in (G) (government spending/borrowing) for a given level of (S(r)) and (I(r)) would necessitate an increase in (r) to restore equilibrium. This rise in (r) would then lead to a reduction in (I(r)), demonstrating the displacement. The precise magnitude of displacement depends on the elasticities of savings and investment with respect to the interest rate.

Interpreting Desplazamiento

Interpreting the concept of Desplazamiento involves understanding its implications for resource allocation and economic efficiency. When government borrowing leads to higher interest rates, it effectively reallocates available capital from the private sector to the public sector. This can manifest as businesses postponing or canceling expansion plans, reducing innovation, or simply finding it too expensive to raise funds in the capital markets.

The significance of Desplazamiento is often debated in relation to the state of the economy. In times of recession, when there is excess capacity and unemployment, government spending might "crowd in" private activity by stimulating overall demand, rather than displacing it. Conversely, in a fully employed economy, increased government borrowing is more likely to compete directly with private sector needs, leading to more pronounced crowding out.

Hypothetical Example

Consider the hypothetical country of Economia, where the government decides to undertake a large-scale infrastructure project, such as building a new high-speed rail network. To finance this project, the government issues a significant amount of new bonds, adding to its existing public debt.

Before this initiative, the market for loanable funds in Economia had a stable equilibrium between the demand for and supply of funds. With the government entering the market as a major borrower, the overall demand for funds increases. Lenders, seeking the highest possible return, can now charge higher interest rates on loans.

Suppose a private manufacturing company in Economia was planning to build a new factory. The initial projected return on their new factory project made it financially viable at the lower, pre-government borrowing interest rates. However, with the government's increased demand pushing interest rates up, the cost of borrowing for the private company rises. This increase in borrowing costs might make the factory project unprofitable, forcing the company to postpone or cancel its investment. In this scenario, the government's rail project has "crowded out" the private factory project, an example of Desplazamiento. This effect highlights how an increase in a budget deficit can impact private sector decisions.

Practical Applications

Desplazamiento is a critical consideration in economic policy, especially concerning fiscal policy and debt management. Policymakers consider its potential impact when deciding on the scale and financing of government programs. For instance, when the U.S. government issues large quantities of Treasury bonds to finance its operations, including a national debt that has exceeded $34 trillion as of early 2024, it increases the overall demand for loanable funds.²¹, ²², ²³ This can lead to upward pressure on interest rates, potentially affecting borrowing costs for businesses and consumers across the economy.²⁰

Organizations like the Congressional Budget Office (CBO) regularly analyze the implications of government borrowing and its potential to displace private investment. Their reports often project future public debt levels and associated interest payments, highlighting the trade-offs involved in government fiscal decisions. For example, the CBO's 2025-2035 outlook projects federal debt to rise significantly, surpassing historical highs, with implications for economic growth.¹⁹

Limitations and Criticisms

Despite its theoretical coherence, the practical extent and significance of Desplazamiento are subject to considerable debate among economists. One major criticism is that the theory often assumes the economy is operating at or near full employment¹⁸. In a recession, when there are abundant idle resources (labor and capital), increased government spending may not displace private activity but rather stimulate overall economic growth and even "crowd in" private investment by boosting aggregate demand.¹⁴, ¹⁵, ¹⁶, ¹⁷

Another critique revolves around the assumption that government borrowing directly increases interest rates. Some argue that monetary policy responses or changes in global capital flows can mitigate this effect. For example, if a central bank implements an accommodating monetary policy, it might offset the upward pressure on interest rates from government borrowing. Furthermore, the theory of Ricardian Equivalence posits that if individuals are rational and forward-looking, they will anticipate future tax increases to pay for current government debt and will increase their savings to offset this future liability, thereby negating the crowding out effect. However, the real-world applicability of Ricardian Equivalence is debated due to factors like imperfect rationality and short-sightedness among consumers.⁶, ⁷, ⁸, ⁹, ¹⁰, ¹¹, ¹², ¹³

Moreover, the type of government spending matters. Investment in productive infrastructure or research and development might enhance the private sector's productivity, leading to higher returns on private investment and thus "crowding in" rather than crowding out.⁴, ⁵ A 2017 Federal Reserve Bank of San Francisco Economic Letter explored these nuances, discussing conditions under which crowding in or no significant effect might occur, challenging a simplistic view of displacement.

Desplazamiento vs. Crowding In

While Desplazamiento (crowding out) describes the reduction of private sector activity due to increased government involvement, crowding in represents the opposite phenomenon. Crowding in occurs when increased government spending actually stimulates or encourages private investment rather than displacing it.

The key difference lies in the underlying economic conditions and the nature of government intervention. Desplazamiento is typically a concern when the economy is near full capacity, and government borrowing competes directly with the private sector for a limited pool of loanable funds, pushing up interest rates.

In contrast, crowding in is more likely to occur during economic downturns or recessions. In such periods, there is often significant idle capacity and unemployment. Government spending, particularly on infrastructure, education, or research, can boost overall demand and improve the long-term productivity of the economy, creating new opportunities and incentives for the private sector to invest. This can lead to increased confidence and a more favorable environment for businesses to expand, even potentially leading to lower real interest rates if the government's investment is seen as stimulating economic growth.¹, ², ³

FAQs

Q: Does Desplazamiento always happen when the government borrows?

A: Not necessarily. Desplazamiento, or crowding out, is more likely to occur when an economy is operating at or near its full capacity, meaning resources are already largely employed. In such a scenario, increased government borrowing might indeed compete with private sector needs for available savings, pushing up interest rates and reducing private investment. However, during a recession with unused resources, government spending might stimulate demand and "crowd in" private activity instead.

Q: How does inflation relate to Desplazamiento?

A: Inflation can indirectly relate to Desplazamiento. If increased government spending leads to higher aggregate demand in an economy already at full capacity, it can contribute to inflationary pressures. To combat inflation, a central bank might then raise interest rates through its monetary policy. These higher interest rates, intended to cool inflation, could in turn make private borrowing more expensive, contributing to the crowding out effect on private investment.

Q: What is the main concern about Desplazamiento for long-term economic growth?

A: The main concern about Desplazamiento for long-term economic growth is that it can reduce the amount of private investment in an economy. Private investment is often seen as a crucial driver of innovation, productivity gains, and the expansion of a nation's productive capacity. If government borrowing consistently displaces this private investment, it could lead to slower capital accumulation, hindering the long-term potential for economic growth and leading to a higher opportunity cost for the economy.