Sorry, Paul Krugman, The Stimulus Is Crowding Out Private Investment

Paul Krugman and his fellow defenders of fiscal stimulus claim that the expanded role of government isn’t crowding out private investment.  But they’re probably just wrong.

“First of all, as I and others have pointed out, fiscal expansion does not crowd out private investment — on the contrary, there’s crowding in, because a stronger economy leads to more investment,” Krugman wrote today.

It’s hard—perhaps impossible—to test this. To really test Krugman claim we’d have to have knowledge of a counter factual—what would the level of private investment be without the stimulus. That’s unquantifiable which makes Krugman’s claim almost unfalsifiable.

But we can test it anecdotally, by the bits and pieces of evidence we come across. And what we’ve seen so far indicates exactly the opposite of what Krugman says is happening.

Just today Dan Primack at PE Hub provided evidence that government spending is crowding private investors out of green tech investments—exactly the kind of thing Obama said he hoped to encourage. Primack spoke with CMEA managing general partner Jim Watson, who told him the company was abandoning plans to launch a $500 million clean tech fund.

From Primack:

He also added that the “green growth” segment is largely being supplanted by the government, and also that CMEA is considering government or corporate partners for even its early-stage investments. “We’re spending more and more or our time with utilities or billion dollar oil companies… It’s now part of our due diligence.”

Of course, we don’t know how widespread this effect is. But it does suggest that the confident announcements by the likes of Krugman are probably misplaced.

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