Stimulus Spending Costing Jobs?

A new study from Harvard Business School seems to say so, much to the shock of the people behind the study.

Recent research at Harvard Business School began with the premise that as a state’s congressional delegation grew in stature and power in Washington, D.C., local businesses would benefit from the increased federal spending sure to come their way.

It turned out quite the opposite. In fact, professors Lauren Cohen, Joshua Coval, and Christopher Malloy discovered to their surprise that companies experienced lower sales and retrenched by cutting payroll, R&D, and other expenses. Indeed, in the years that followed a congressman’s ascendancy to the chairmanship of a powerful committee, the average firm in his state cut back capital expenditures by roughly 15 percent, according to their working paper, “Do Powerful Politicians Cause Corporate Downsizing?”

“It was an enormous surprise, at least to us, to learn that the average firm in the chairman’s state did not benefit at all from the unanticipated increase in spending,” Coval reports.

This study seems to present a problem to proponents of Keynesian economics.

Q: Perhaps the most intriguing finding, at least for me, was the degree and consistency to which federal spending at the state level seemed to be connected with a decrease in corporate spending and employment. Did you suspect this was the case when you started the study?

A: We began by examining how the average firm in a chairman’s state was impacted by his ascension. The idea was that this would provide a lower bound on the benefits from being politically connected. It was an enormous surprise, at least to us, to learn that the average firm in the chairman’s state did not benefit at all from the increase in spending. Indeed, the firms significantly cut physical and R&D spending, reduce employment, and experience lower sales.

The results show up throughout the past 40 years, in large and small states, in large and small firms, and are most pronounced in geographically concentrated firms and within the industries that are the target of the spending.

HotAir adds:

When private entities (citizens or businesses) retain capital, it gets used in a more rational manner, mainly because the entity has competitive incentives to use capital wisely and efficiently. The private entity also has his own interests in mind, and can act quickly to use the capital to its best application. Private entities innovate and look to create and expand markets, creating more growth.

In comparison, government moves much slower with capital. It generally works to its own benefit and not that of private entities. Lacking competition, there is no incentive for efficiency. Most importantly, it rarely creates new markets or growth but instead creates a spoils system that ends up reorganizing the status quo to favor some and disfavor others.

The best way to achieve growth appears to be to eliminate government interventions and to keep capital in the hands of the private sector. And that’s no shock at all to anyone who pays attention to economics.

I’d like to say we should have learned this lesson with the New Deal and its utter inability to save us from the Great Depression but recent history would indicate otherwise.