The cost of extra state activity is less business, voluntary and household sector activity.
Crowding out began as an economic idea. It referred to two main ways in which government crowds out private activity:
(1) By increasing the level of taxation government takes a larger share of national income. It controls money that individuals and businesses could previously spend or invest. The opportunity cost of the money that government spends on health, education or welfare is money that private citizens cannot spend on similar or different things. Private spending has been crowded out.
(2) Extra government borrowing can make it unaffordable for many private businesses and individuals to borrow. The crowding out effect happens via the interest rate. Extra government borrowing forces up interest rates and makes it more expensive for other people to borrow from banks (who use the interest rate to ration their reduced lending pot).
Does government crowd out superior private and voluntary activity?
For advocates of free enterprise, crowding out isn’t simply about an equal amount of extra public spending elbowing aside an equal amount of private spending. They worry that government crowds out superior private activities. Businesses are faster at responding to changing consumer preferences, for example, whilst initially well-motivated government projects get captured by special interests and civil service bureaucrats.
Many Conservatives believe that the voluntary and private sectors should be given opportunities to deliver free-at-the-point-of-use public services, like health and education. The current insistence that the state monopolises supply of those services has crowded out private and social entrepreneurs. These entrepreneurs could provide superior ways of either helping children learn or providing better medical care. Many faith-based groups could, for example, provide the kind of values-based education that many politically correct educationalists shun. Caring charities like Leonard Cheshire might also provide better-quality healthcare.
Has the feed-and-forget welfare state crowded out the holistic care of people-sized institutions?
The most serious example of crowding out has been caused by the welfare state. As the welfare state has grown the welfare society has either shrunk or been denied opportunities for growth. The 3D welfare society offers holistic care that the feed-and-forget welfare state does not. Young people no longer have to worry about the care of their elderly parents. The government will look after them. Unfaithful fathers no longer have to worry about breadwinning for their children. The state will do that, too. Muscles weaken from disuse and the social ecology decays, too, when it is crowded out by inferior bureaucratised care.
Big business crowding out
Big businesses can also crowd out ‘small is beautiful’ competitors. Strong competition policies are vital to stop the likes of Tesco and other giant supermarkets running every small corner shop and local market out of business.
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