Study finds increased gov’t spending results in unemployment

posted at 10:56 am on May 27, 2010 by Ed Morrissey

Don’t color Veronique de Rugy shocked, shocked to find that government spending crowds out private investment, but the results of the new study by Harvard Business School will certainly shock some Keynesian academics — and high-ranking government officials.  Instead of providing a stimulating effect to the economy, government spending creates pressures on private industry to reduce staff and investment.  The study’s authors count themselves as among the shocked:

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 surprising result does not come from a misapprehension about pork and its relation to the chairmanships of the committees.  Indeed, the study shows that pork dollars flow in mighty streams from those chairs to home districts and states.  It’s not just earmarks, either, but also legislative expenditures that increase:

The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair of one of the top-three congressional committees. In the House, the average is around 20 percent.

For broader measures of spending, such as discretionary state-level federal transfers, the increase from being represented by a powerful senator is around 10 percent.

And yet:

In the year that follows a congressman’s ascendancy, the average firm in his state cuts back capital expenditures by roughly 15 percent.

There is some evidence that firms scale back their employment and experience a decline in sales growth.

If this seems counterintuitive, it might be from marinating too long in Beltway conventional wisdom.  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.

All of that is certainly true in the long-term sense.  It now appears true in the short-term sense as well, despite the immediate application of government funds to specific areas.  If this study is true, it calls into question the entire concept of Keynesian stimulus, and it shows that the Obama administration has gone in an entirely wrong direction both in concept and in practical terms in attempting to create economic growth.  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.


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It was done by Harvard business school so the Libs can’t knock down this study. . . .or can they?

Notorious GOP on May 27, 2010 at 10:59 AM

I also just learned that apparently a stab to the head can be fatal.

abobo on May 27, 2010 at 11:00 AM

but the results of the new study by Harvard Business School

It’s a biased study… if they wanted something unbiased they should have asked the Harvard Kennedy School…

ninjapirate on May 27, 2010 at 11:00 AM

Duh!

cmsinaz on May 27, 2010 at 11:01 AM

A NSS moment, for sure.

Next they will find that substantial debt hurts solvency.

In a decade or five they may determine that for best results income must be greater than or equal to outgo.

Don’t hold your breath on that.

ajacksonian on May 27, 2010 at 11:04 AM

Where can I get funding to studing something completely, blindingly obvious?

crazy_legs on May 27, 2010 at 11:04 AM

Duh. We didn’t spend enough money. /

rogerb on May 27, 2010 at 11:06 AM

It’s all those right-wing teabaggers at Harvard Business School.

forest on May 27, 2010 at 11:06 AM

The best way to achieve growth appears to be to eliminate government interventions and to keep capital in the hands of the private sector.

Unfortunately our Liberal friends would assume the above statement meant that conservatives and Libertarians desire anarchy i.e. no government. Of course that’s preposterous.

Economic illiteracy is a cornerstone of the Progressive ideology.

visions on May 27, 2010 at 11:10 AM

Study finds increased gov’t spending results in unemployment

That headlines is raaaaacist.

Physics Geek on May 27, 2010 at 11:10 AM

New study stuns government experts, water is wet.

jukin on May 27, 2010 at 11:10 AM

After ripping out their guts, researchers were shocked to find that increased food inputs didn’t result in gained weight.

GnuBreed on May 27, 2010 at 11:11 AM

Wow, if it wasn’t for this Harvard Business School study, we would NEVER have been able to figure this out ourselves.

Unless you’ve taken any kind of Economics class and have an IQ above that of an earth worm. *Jesh*

PappaMac on May 27, 2010 at 11:12 AM

Next thing you know they’ll do a study that discovers that running a giant welfare state with unsecured borders actually causes taxes and crime rates to go up, not down.

Of course, they won’t publish that study, because it might offend the sensibilities of some “undocumented immigrant.”

AZCoyote on May 27, 2010 at 11:12 AM

Economic illiteracy is a cornerstone of the Progressive ideology.

visions on May 27, 2010 at 11:10 AM

FIFY.

either orr on May 27, 2010 at 11:16 AM

Study finds 2010 elections will show increased gov’t spending results in unemploymen

Get our resumes in order, Corruptocrats!

ya2daup on May 27, 2010 at 11:17 AM

Wait a tic-aroo,isn’t the entire Team Of Hope,from
Harvard,how can this happen,I..I..mean,there creme
de le creme of the cream of the crop in super smarts!!

canopfor on May 27, 2010 at 11:17 AM

Great analysis Ed, kind of puts all the positive spin about stimulus in a new light eh? With the spin from the last couple days (“we are spending it, therefore it’s working”), this is an important reality check. But does this mean that Harvard BS is racist?

JusDreamin on May 27, 2010 at 11:17 AM

Wow, imagine that. It’s like the opposite of … tax cuts result in more money in the Federal Treasury.

Southwest doesn’t charge for bags, that brings in more customers which means more money

Forcing companies to pay a higher minimum wage means people are gonna get fired.

It’s amazing how simple these things are and how many people don’t get it.

Tony737 on May 27, 2010 at 11:17 AM

I hope one day soon a Harvard study finds that American citizens don’t react well to being overtaxed and brutalized by their own federal government.

Bishop on May 27, 2010 at 11:18 AM

Over a 40-year period, the study looked at increases in local earmarks and other federal spending that flowed to states after the senator or representative rose to the chairmanship of a powerful congressional committee.

Probably why the economy still stinks in most of PA-12.

forest on May 27, 2010 at 11:19 AM

Does this mean Paul Krugman has to give back his Nobel prize?

Mallard T. Drake on May 27, 2010 at 11:20 AM


will certainly shock some Keynesian academics

These people have been screwing up this country for decades. Why does ANYBODY still listen to them?

Publik edjucayshin?

Tony737 on May 27, 2010 at 11:21 AM

Ivory tower + Beltway = epic fail.

Look to those with real world experience.

rbj on May 27, 2010 at 11:21 AM

It’s all those right-wing teabaggers at Harvard Business School.

forest on May 27, 2010 at 11:06 AM

Didn’t GWB get an MBA from Harvard Business School? If so, maybe he had a hand in undermining the study.

BuckeyeSam on May 27, 2010 at 11:21 AM

Employment is increased in China when gov’t spending is decreased. A firm does not spend capital for US jobs unless there is no way around it.

PrezHussein on May 27, 2010 at 11:21 AM

Look at Africa; look at Greece…

Even when a Socialist black hole is being fed by an outside source of funds, it results in decay and stagnation.

But somehow, magically, liberals believe that when you have enough of those black holes all feeding on each other, it’ll all work perfectly to generate unlimited wealth and create a “Worker’s Paradise.”

Every religion depends on belief in at least one miracle. I have no evidence whatsoever that a wrongly executed man didn’t rise from the grave 2000 years ago in order to forgive his murderers. And there is no conceivable scientific test to prove that the spirits of our anscestors are not re-incarnated in farm animals….

But liberalism is by far the craziest cult ever invented.

Economic collectivism conclusively and patently demonstrates itself EVERY SINGLE DAY to be destructive even in the short term and on a small scale. Throughout world history, every single time it has been taken to its logical apex, the result has been not simply failure but horrific catastrophy.

And with every failure, with every destroyed economy, and even with every genocide, the belief grows stronger.

logis on May 27, 2010 at 11:23 AM

Gee, you don’t say. Does anyone at Harvard teach history? When Gov’t commandeers capital it reduces the pool from which productive activity can tap into. If you live in the desert and your well/water table only supplies “X” amount of gallons and you use it to fill your swimming, your garden will suffer for it. Hence this headline in the UK Telegraph,

“US money supply plunges at 1930s pace as Obama eyes fresh stimulus”

What our own elites ignore is this, the obvious similarity of Obama taking us down the disasterous road that FDR took us,

A Lost Decade Ahead?

http://www.realclearpolitics.com/articles/2009/02/a_lost_decade.html

Archimedes on May 27, 2010 at 11:23 AM

Once again Obama’s administration and Congressional Democrats engage in behavior that – if committed by a corporation – would land them in prison.

gwelf on May 27, 2010 at 11:24 AM

Isn’t this as assine as having the rescue ship
pull along side the Titanic and force-feeding
her engines with cash,as they make a mad dash
at getting all the cash off the rescue ship,in
hopes that the Titanic pulls out of its slippage
beneath the waves,on its way down,

to Obama’s Abyss!!!!

canopfor on May 27, 2010 at 11:25 AM

Too bad the left doesn’t care about this. Economic malaise is just something that they try to spin and lie about during their quest to reduce individual liberty in favor of a statist agenda with the ultimate goal being to acqire as much centalized govt power as possible. In other words it’s all about power not economic growth to them. In fact, economic downturns are good for them because they faciltate a culture of dependence.

Zetterson on May 27, 2010 at 11:26 AM

Oops forgat a link, fixed it.

Gee, you don’t say. Does anyone at Harvard teach history? When Gov’t commandeers capital it reduces the pool from which productive activity can tap into. If you live in the desert and your well/water table only supplies “X” amount of gallons and you use it to fill your swimming, your garden will suffer for it. Hence this headline in the UK Telegraph,

“US money supply plunges at 1930s pace as Obama eyes fresh stimulus”

http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html

What our own elites ignore is this, the obvious similarity of Obama taking us down the disasterous road that FDR took us,

A Lost Decade Ahead?

http://www.realclearpolitics.com/articles/2009/02/a_lost_decade.html

Archimedes on May 27, 2010 at 11:26 AM

Once again Obama’s administration and Congressional Democrats engage in behavior that – if committed by a corporation – would land them in prison.

gwelf on May 27, 2010 at 11:24 AM

gwelf: And the union would be looking at being tarred
and feathered by the workforce as well!!:)

canopfor on May 27, 2010 at 11:27 AM

Studies also show the longer Zero’s Empty Suit regime remains in office, the more the economy tanks, unemployment rises and the hubris stinks to high Heaven.

SeniorD on May 27, 2010 at 11:28 AM

Thank goodness we have bona fide intellectuals running the show now.

I stole that

franksalterego on May 27, 2010 at 11:28 AM

A Lost Decade Ahead?

http://www.realclearpolitics.com/articles/2009/02/a_lost_decade.html

Archimedes on May 27, 2010 at 11:26 AM

Archimedes:Excellent intel.Isn’t it interesting to go back
a year,and see how optimistic the Left was!!:)

canopfor on May 27, 2010 at 11:31 AM

Al we have to to is look back historically and look at the FDR administration. His own treasury secretary Morganthau admitted that the policies and spending put in place extended the depression another 10 yrs

xler8bmw on May 27, 2010 at 11:32 AM

Depleting the wealth of a nation makes it poorer?

Inanemergencydial on May 27, 2010 at 11:33 AM

It was done by Harvard business school so the Libs can’t knock down this study. . . .or can they?

Notorious GOP on May 27, 2010 at 10:59 AM

Sure they can; they just cast aspersions at the research method, saying that it’s validity is questionable. There are ways that they can discredit the report, but to do so would put them in an untenable situation. They are going to have a hard time criticizing the same Harvard University at whose teat our Precedent nursed. At the same time, I noticed that Lauren Cohen is merely an Assistant Professor, which means his tenure is now in jeopardy. Amazing how the truth just screws up the narrative, isn’t it?

College Prof on May 27, 2010 at 11:34 AM

Duh. We didn’t spend enough money. /

rogerb on May 27, 2010 at 11:06 AM

Nor did we spend it fast enough. Double duh.

/

stvnscott on May 27, 2010 at 11:34 AM

BTW, to the Harvard researchers, thank you, Captain Obvious.

College Prof on May 27, 2010 at 11:35 AM

Truly, unlike the blather from the economic nitwit Pelosi (during the O-care debates), government spending does NOT lead to “choice and competition.” Too much government regulation and taxation, as well as misguided funneling to government-controlled entities, lead to economic stagnation or negative consequences.

onlineanalyst on May 27, 2010 at 11:37 AM

From everyone I hear that works in/for the government, if you (i.e. a department or program) don’t use the gov’t $$ allocated to you per fiscal year, you will lose it in your next budget. Therefore, there was ZERO incentive to cut costs EVER.

Renwaa on May 27, 2010 at 11:39 AM

BTW, to the Harvard researchers, thank you, Captain Obvious.

College Prof on May 27, 2010 at 11:35 AM

While it is quite obvious to us, it can’t be repeated oft enough to those not educated in basic economics, which is most of the country. So keep this stuff coming!

stvnscott on May 27, 2010 at 11:39 AM

Hmmm…

“The best way to achieve growth appears to be to eliminate government interventions and to keep capital in the hands of the private sector.”

In other news…

“Water is wet!”

… Who knew?

Seven Percent Solution on May 27, 2010 at 11:40 AM

Didn’t Adam Smith have something to say about mercantile interest using their influence with powerful court officials to secure for themselves an advantage over their rivals?

Has history never recorded human inclination for a few to enrich themselves while in service to a powerful emperor at the expense of less well connected rivals?

Skandia Recluse on May 27, 2010 at 11:40 AM

Does this mean that the oceans aren’t swelling and the planet won’t be healed, or something?

txag92 on May 27, 2010 at 11:45 AM

Because history so clearly illustares the folly of progressive policies is why I think the progressive Dept of Ed replaced history with social studies.

Archimedes on May 27, 2010 at 11:50 AM

It was an enormous surprise, at least to us

What? Where did you get your econ degree, Moscow University?

PattyJ on May 27, 2010 at 11:50 AM

Huh. Another myth about FDR’s New Deal exposed?

A: Some of the dollars directly supplant private-sector activity—they literally undertake projects the private sector was planning to do on its own. The Tennessee Valley Authority of 1933 is perhaps the most famous example of this.

Buy Danish on May 27, 2010 at 11:51 AM

“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.

Unanticipated? The very idea that these professors thought an increase in spending would be “unanticipated” shows they are clearly out of touch with reality.

ButterflyDragon on May 27, 2010 at 11:56 AM

BTW, to the Harvard researchers, thank you, Captain Obvious.
College Prof on May 27, 2010 at 11:35 AM

While it is quite obvious to us, it can’t be repeated oft enough to those not educated in basic economics, which is most of the country. So keep this stuff coming!
stvnscott on May 27, 2010 at 11:39 AM

I remember back when the MSM crucified Newt Gingrich for teaching “scandalous” economic theories to college students.

I watched some of the tapes. The only thing scandalous about the class was that economic common sense HAD to be taught to college students in the first place. It should be illegal to graduate freaking third freaking grade in America without understanding this stuff.

Instead, America’s education system is geared toward doing everything in its power to indoctrinate children into believing the opposite of what their own eyes tell them every day about how a free market works.

It’s been an uphill battle. But after co-opting tens of trillions of dollars, the fanatical efforts of thousands of Communist wanna-be’s have managed to make an appalling amount of headway in befuddling the youth of this country.

logis on May 27, 2010 at 11:57 AM

Reid…we need another stimulus. Also higher taxes so we can support the entitled until all the libs currently in power retire. Sweet deal for them.

Kissmygrits on May 27, 2010 at 11:57 AM

I hope they have protected their counter-intuitive discovery with a provisional patent application!

tomg51 on May 27, 2010 at 11:59 AM

Renwaa on May 27, 2010 at 11:39 AM

True!

The last day of the FY is typically the single busiest for government agencies on the spending front as they desperately try to spend all their cash so as to turn nothing back into the Treasury. You do get cut if you don’t spend it all… and for all the ‘efficiency’ programs I have ever seen inside government, no matter how much you ‘save’ in any one place it is only spent elsewhere.

Of all the things that were asinine about my time in the bureaucracy, that was the worse: everything driven by FY so even if your program was long-term, you had insane budget problems if a contractor slipped a bit on schedule or a key person or two got sick during the crucial AUG timeframe. You waste money to keep the program alive because you can’t get it spent in a sane and reasonable fashion due to the budget cycle.

ajacksonian on May 27, 2010 at 12:06 PM

Someone, please staple this report to Paul Krugman’s forehead.
Thanks.

stevezilla on May 27, 2010 at 12:11 PM

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’m SHOCKED! Those Harvard people will be burned at the stake for this heresy!

GarandFan on May 27, 2010 at 12:21 PM

it shows that the Obama administration has gone in an entirely wrong direction both in concept and in practical terms in attempting to create economic growth.

Has anyone in the Obama admin ever held a real job? Processed payroll? Hope & Change will not and can not put people to work. BTW, the Stimulus jobs “saved/created” may fool the profs at Harvard, but the rest of us know a sham when it shows up as jobs at fake congressional districts.

TN Mom on May 27, 2010 at 12:26 PM

Islam is a peacefull religion
Krugman is an accurate economist
Obama created millions of jobs.

I bring truthbalance to this right wing blog.

seven on May 27, 2010 at 12:35 PM

economics 101: misallocation of resources.

WordsMatter on May 27, 2010 at 12:46 PM

As long as there is slop in the trough, the pigs will gorge, but they wont hunt.

Voyager on May 27, 2010 at 12:48 PM

The Republicans made a big to do about foresaking any “earmarks” for the rest of this sessions of Congress. If the RNC had more than rocks for brains, they would be waving this all over the floor in both the Senate and the House. I won’t hold my breath, however; a lot of Repubs are just as addicted to pork as the Dems.

LOL, Chucky Schumer: Everybody likes a little pork!

Bob in VA on May 27, 2010 at 12:55 PM

This is probably the biggest story of the year, if not the decade. Keynes is now decisively refuted, empirically, in terms that can’t be argued against any more than the existence of dinosaur bones can be argued against. From this point forward, any human being who suggests that government spending can stimulate private sector economic growth is unequivocally a denier, a flat-earther, or an irrational zealot dedicated to a metaphysical ideal, entirely disinterested in real-world events and/or results. I wish there was some way to popularize such a seemingly dry finding, even if there were sufficient motivation in the religiously Keynesian press.

Blacklake on May 27, 2010 at 1:11 PM

I think we’ll eventually learn that economic stagnation in areas leads to conditions that favor incumbency and political power. This leads to seniority. Seniority leads to being committee chairman.

Companies in stagnant areas were likely to cut back on capital expenditure anyway. Leaving the same politicians in power makes it pretty clear to companies that these stagnant areas won’t be revitalizing themselves any time soon. Capital leaves for places where there is youth and opportunity.

Kohath on May 27, 2010 at 1:21 PM

It was done by Harvard business school so the Libs can’t knock down this study. . . .or can they?

Notorious GOP on May 27, 2010 at 10:59 AM

They knock whatever they want, when they want. They point the finger at Wall Street, but they’re major contributors. They decry the priveleged elite, even though many leaders in the party would count themselves in that group. And of course they fund most of the programs that are failing the communities they claim to want to help.

hawksruleva on May 27, 2010 at 2:08 PM

This is probably the biggest story of the year, if not the decade. Keynes is now decisively refuted, empirically, in terms that can’t be argued against any more than the existence of dinosaur bones can be argued against.

Keynes made two assumptions that, while perfectly logical, simply do not happen in the real world:

1. Governments can hold onto tax surpluses gained during economic growth, for use during economic downturns;

2. Governments can accurately pinpoint where those resources should be allocated.

I think the last eighty or so years of Social Security surpluses funneled into the general fund (and replaced with unsold T-Bills) pretty much disproves those assumptions.

economics 101: misallocation of resources.

WordsMatter on May 27, 2010 at 12:46 PM

The only phrase you need to refute Keynesian economics.

TheMightyMonarch on May 27, 2010 at 2:08 PM

The obvious arrives in Cambridge.

burt on May 27, 2010 at 2:27 PM

Christopher Malloy discovered to their surprise that companies experienced lower sales and retrenched by cutting payroll, R&D, and other expenses.

Funny thing I’m seeing here in California (unemployed five months with a graduate degree, ten years in sales). Maximum unemployment benefits translate to roughly $12 a hour. Most of the job postings I see with my skill set and education are paying roughly that amount or slightly higher.

So let’s see…get paid $12 an hour to do nothing (for at least two years), or $15 an hour working 40+ hours a week, the extra $3 going to pay for gas I otherwise wouldn’t need?

As for a company that would otherwise like to hire me, what are their choices? Get by with a skeleton staff, or hire people coming off of two years’ unemployment at fast food wages? The first choice runs the risk of losing competitive advantage, the second choice results in high turnover and wasted capital.

Dragging out what should have been a harsh three-to-five year downturn and spreading it out over a generation of stagnation…this is what our government does. Call it Incumbency Insurance.

TheMightyMonarch on May 27, 2010 at 2:32 PM

Note to Hah-vahd Bizmess School:

Duh!

MJBrutus on May 27, 2010 at 2:52 PM

Well I was going to comment, but ya’ll have it covered.
Thanks for the laughs.

ColdWarrior57 on May 27, 2010 at 3:42 PM

Nothing to see here. Move along. Proceed with the Program.

“Am I going to believe the voices in my head, or my own lying eyes?”, thought congressmen and economicist.

AnotherOpinion on May 27, 2010 at 5:35 PM

So… let me see if I get this…

When you’re represented by a regular ol’ congressman, a typical company puts their time, effort, and money into serving their customers/marketplace…

But when that congressman gets powerful, many companies instead turn to the guaranteed, easy money gotten by lobbying for gov’t. contracts, subsidies, tax exemptions, and general rent-seeking?

Why do I suspect many will find no problem with this? After all, a god must have his supplicants; the don’s ring must be kissed.

Besides, isn’t everybody’s first rule of good government “Congress knows best.”?//

stevieray on May 27, 2010 at 10:48 PM