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Proof! Federal spending depresses economy

Posted By Roger Hedgecock On 05/31/2010 @ 1:00 am In Commentary | Comments Disabled

It can only be described as a bombshell. The Obama stimulus plan promised economic recovery through massive federal borrowing and spending. The result is massive debt and higher unemployment. Now we may know why.

Three professors at the Harvard Business School, in a study titled “Do Powerful Politicians Cause Corporate Downsizing?” have concluded, based on 40 years of data, that federal government spending does not stimulate local business spending. In fact, the opposite occurred. The more federal spending, the less corporate spending.

Professors Lauren Cohen, Joshua Coval and Christopher Malloy specifically studied, over a 40-year period, the increases of federal spending into a state after a representative or senator in that state becomes chairman of a powerful House or Senate committee.

They found that the average state experiences a 40 to 50 percent increase in federal earmark spending if its senator chairs one of the top three committees. In the House, the average was around 20 percent.

In other words, powerful committee chairmen can and do “bring home the bacon.” Sen. Ben Nelson, famous for his vote for health-care “reform” in exchange for increased federal subsidies for Nebraska, just last week bragged about his ability to increase earmark spending in Nebraska.

The Harvard online publication Working Knowledge offers an interview with professor Coval, one of the authors of the study, in which he states “our original goal was to investigate how politically connected firms benefit from increases in the power of their representatives.”

But, the professor said, analyzing the data produced an “enormous surprise.” The study found “that the average firm in the chairman’s state did not benefit at all from the increase in spending.” In fact, the professors found that those “firms significantly cut physical and R&D spending, reduce employment and experience lower sales.”

And the same results show up whether the state is large or small, whether the firms are large or small over a period of 40 years. In fact, the study shows the results “most pronounced in geographically concentrated firms and within the industries that are the target of the spending.” In plain speech, federal “bacon” is toxic to economic growth in the private sector.

Stunned by a conclusion that challenges decades of liberal assumptions about the effects of federal “stimulus” spending, the astonished interviewer then asks Coval to explain “why companies retrench when federal dollars come into their neighborhoods.”

Coval explains first, “Some of the (federal) dollars directly supplant private sector activity – they literally undertake projects the private sector was planning to do on its own.” Then Coval upends one of the sacred monuments to liberal economic thinking by saying, “The Tennessee Valley Authority of 1933 is perhaps the most famous example of this.”

Second, Coval says in other instances, federal dollars “crowd out private firms by hiring away employees.” And, he says, “We suspect that a third and potentially quite strong effect is the uncertainty created by government involvement.”

At this point, my jaw has dropped as far as it can go, and I am researching to verify the authenticity of this study. This has got to be a spoof on Harvard Business School. But no, the study (47 pages) and the interview are real. Read on.

Struggling for composure, the interviewer then asks Coval the key question:

“These findings present something of a dilemma for public policy makers who believe that federal spending can stimulate private economic development. (Ya think?) How would you suggest they approach the problem that federal dollars may actually cause private sector retrenchment?”

To which Coval replies:

“Our findings suggest that they should revisit their belief that federal spending can stimulate private economic development. It is important to note that our research ignores all costs associated with paying for the spending such as higher taxes or increased borrowing. From the perspective of the target state, the funds are essentially free … and in the absence of a positive private sector response, it seems more difficult to justify federal spending”

In other words, if federal spending stimulated the economy, Detroit would be prosperous.

This study says we are wasting trillions of borrowed dollars on “stimulating” the economy when such spending is shown, over 40 years, to produce instead more debt and fewer jobs.

President Obama campaigned to “utterly transform America” by reducing the private sector and increasing the “opportunity” in bigger government. I’ve thought all along that road leads to stagnation and oppression based on the many models around the world. Now, the Harvard Business School has provided some empirical data that should cause American to rethink the left’s assumption (Paul Krugman?) that government spending can lead to economic prosperity.


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