Deficit Financing: Crowding Out, Multipliers, and Sustainability

The government proposes a $100 billion per year infrastructure investment package, deficit-financed (no offsetting tax increases). The spending multiplier measures the total GDP boost per dollar of spending: ΔGDP = Multiplier × ΔSpending Standard estimates: - CBO: spending multiplier ~1.0 in normal times - FRB/US calibrated: ~1.4 in year 1, decaying over time - At zero lower bound (recession): 1.5-2.0 Estimate the year-1 GDP boost and the 10-year cumulative boost from a $100B/year spending increase using a multiplier of 1.4.

When the government borrows, it competes with private borrowers for loanable funds, potentially "crowding out" private investment. CBO assumes a "crowding out coefficient" of ~$0.33: each dollar of deficit reduces private capital by $0.33 in the long run. Given: - US private investment is ~$4.5T/year - Current deficit is ~$1.8T/year (6% of $30T GDP) - Proposed policy adds $200B/year in new borrowing Estimate: how much private investment is displaced by the new $200B/year borrowing (using the $0.33 coefficient)?