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Wednesday, May 26, 2010

Stimulus Surprise

Harvard University recently published the findings of an interesting study about government pork and its effect on local private investment.

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?"

The study looked at the last forty years and considered the states in which their Representative ascended to chairmanship of powerful committees. First, the study found that earmarks went up 40-50% and discretionary spending went up by 10% in those states. Meanwhile, private investment, R&D, and sales went down over those same periods. That puts serious cold water to Keynesian theories.

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