Stimulus "Surprise": Companies Retrench When Government Spends

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    May 27, 2010 10:26 PM GMT
    http://hbswk.hbs.edu/item/6420.html?wknews=052410

    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.

    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.
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    May 28, 2010 3:47 PM GMT

    Think about what happens if you are a business sitting in Nancy Pelosi's or Harry Reid's district. You become a target of every Reid and Pelosi hater who is looking for the largess doled out to the local troops whether in reality you supported the candidate or not.

    The dollars poured out to locate ties betwwen powerful politicians and business in and out of their district or state is huge. How do I know? Because I have written some of those checks. Politicians not only dole funds to support the troops (foot troops) and business entities that supported them, but opposing entities do battle also.

    So, no surprise.
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    May 28, 2010 3:56 PM GMT
    What I think was surprising was that the researchers were looking to prove the opposite originally... but obviously there are significant implications for public policy and the stimulus (and proposed new stimulus/jobs packages that are making their way through today).

    The idea that government "investment" could actually cause unemployment and make businesses less competitive as they invest less in things like r&d should be a troubling one especially as more research comes out suggesting that the first stimulus package did little or nothing despite its costs. Further because the stimulus was based on borrowed funds, this of course also means that the longer term interest payments and higher overall interest costs as a result will likely be a further drag on the economy.

    From the Q&A of the interview:

    Q: These findings present something of a dilemma for public policymakers who believe that federal spending can stimulate private economic development. How would you suggest they approach the problem that federal dollars may actually cause private-sector retrenchment?

    A: 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, but clearly at the national level someone has to pay for stimulus spending. And in the absence of a positive private-sector response, it seems even more difficult to justify federal spending than otherwise.
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    May 28, 2010 6:39 PM GMT
    Q: These findings present something of a dilemma for public policymakers who believe that federal spending can stimulate private economic development. How would you suggest they approach the problem that federal dollars may actually cause private-sector retrenchment?

    A: 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, but clearly at the national level someone has to pay for stimulus spending. And in the absence of a positive private-sector response, it seems even more difficult to justify federal spending than otherwise.

    Needed said again!
    EMPHASIS ADDED
  • Webster666

    Posts: 9217

    May 29, 2010 12:30 AM GMT
    That was exactly my opinion when the federal government started doling out tons of money to businesses in an effort to put people back to work.

    The business executives have no confidence that the economy is strong, so they take the money that is given to them, and they put it in the bank, and just sit on it.

    The only way to get a large number of people back to work is to open new factories in every state. We could be producing electric cars, solar panels, wind turbines, etc. etc.