Crowding Out occurs when government spending displaces private spending, particularly investment. For example, if the government begins constructing a new suspension bridge, it may drive up the price of steel. The higher cost of raw materials may lead automakers to reduce car production. In this case, higher government spending on the bridge decreases spending in the private economy as fewer cars are built and sold. Keynesians believe that crowding out only happens when the economy is producing at its potential output, because when the economy has unutilized resources government spending will bring them into service instead of pulling resources away from existing production.
Some Classical economists fear that crowding out may happen even when the economy is not at potential output, prompting them to discourage the use of deficit spending. The article Deficits and the Fear of Crowding Out shows that crowding out is not a real concern when an economy is in a recession.