Can government spending that causes crowding out to be detrimental to long run economic growth?
Yes it can. By crowding out investments, the economy is experiencing short-term growth at the cost of long-run expansion. With growth due to consumption, the interest rates rise and savings go down, so businesses find it more difficult to borrow money for long-run projects because they’re suddenly competing with regular individuals buying ordinary items. Investment is normally for R&D or other projects that will increase labor efficiency, so in the long run, crowding out will hamper economic growth. In fact, some economists credit the savings rate to why China is growing at a much faster rate than North American nations which rely on credit for personal uses. Crowding out in simple terms would be the effect of opting to borrow for personal use (buying a car, a house, or that brand new cutting edge PC) instead of saving and letting corporations borrow for productive uses.
