What does "crowding out" mean in economics?

The term "crowding out" in economics refers specifically to the phenomenon where increased government spending leads to a reduction in private sector investment. When the government increases its spending, especially through borrowing, it can lead to higher interest rates as the demand for credit rises. As a result, borrowing costs for private individuals and businesses also increase. This can discourage private investment since higher interest rates make it more expensive for businesses to finance new projects or expansions.

In essence, the increase in government involvement can displace or 'crowd out' private investment in the economy, leading to a challenge where government borrowing may siphon off resources that would have otherwise been available for private entities. Understanding this concept helps illuminate the potential trade-offs that government decisions can create within the broader economic landscape.