Keynesianism Questioned by Harvard Researchers

Contrary to the Keynesian theory that government spending can spark economic growth in times of recession, a new study demonstrates that pork, at least, may damage corporations within the states that receive these federal dollars. The three Harvard Business School (HBS) researchers, Lauren Cohen, Joshua Coval, and Christopher Malloy, surveyed the 232 times in the last 42 years that a Senator or Representative on capitol hill obtained a chairmanship on a “powerful congressional committee” and then measured the impact the corresponding increase in earmarks had on publicly-traded firms in that senator or representative’s district.

Their study cites Senator Richard Shelby, R-Ala., as a prime example: “…while Alabama averaged 6 million dollars less in annual earmarks than the average of other US states before Shelby’s appointment, they averaged over 90 million dollars more than other states after his appointment,” they write.

According to the 2010 Citizens Against Government Waste Pig Book summary, Sen. Shelby earmarked at least $61.6 million for “30 projects” in his position as the ranking member of the Senate CJS Appropriations Subcommittee, including,

• “$14,000,000 for the Cooperative Institute and Research Center for Southeast Weather and Hydrology at the University of Alabama;
• “$6,000,000 for six projects for the Marshall Space Flight Center in Huntsville;
• “$1,000,000 for the Tools for Tolerance program at the Simon Wiesenthal Center in Los Angeles, California;
• “$250,000 for a wireless area network for the city of Hartselle (population 13,888);
• “$200,000 for the Cherokee County Methamphetamine and Marijuana Reduction program;
• “and $150,000 for Zelpha’s Cultural Development Corporation for the University of Alabama’s After-School Delinquency Prevention program.”

In addition, reports CAGW, $1.8 million was earmarked “by Senate Energy and Water Appropriations Subcommittee member Richard Shelby (R-Ala.) and Sen. Jeff Sessions (R-Ala.) for a climate model evaluation program.” (The HBS authors integrated CAGW earmark data into their working paper.)

According to the authors, each of whom is affiliated with the National Bureau of Economic Research (NBER), the local economic impact of earmarks may not have been so positive for companies such as Homes Inc., which was “a large manufacturer of lower-cost fabricated homes headquartered in northern Alabama.”

They write that this company reduced its capital expenditures by 79.5%, its employment by 30.2%, and its sales by 38.2% after Sen. Shelby’s appointment to the Senate Select Intelligence Committee in 1997. At the same time, they write, the overall industry increased its capital spending and experienced much smaller drops in sales (-3.1%) and employment (-7.9%).

“We show that the events in this example represent a much more systematic pattern across the universe of U.S. firms,” they write.

In a recent interview with HBS Working Knowledge editor-in-chief Sean Silverthorne, Prof. Coval recently argued that their research should cause policy members to “revisit” the impetus behind the stimulus. “Our findings suggest that they should revisit their belief that federal spending can stimulate private economic development,” he said in the interview.

In fact, their study showed that companies retrench in the face of earmarked federal dollars. They write,

“This retrenchment appears to be a response to the large and persistent increase in federal funding that the state receives following the shock. Following the appointment of a senator to the chair of a powerful committee, we estimate that his state experiences, on average, a 40-50 percent increase in its share of congressional earmark spending, and a 9-10 percent increase in its share of total state-level government transfers. At the same time, firms residing in the state cut their capital expenditures by 8-15 percent, reduce R&D [research and development] by 7-12 percent, and increase payout [to shareholders] by 4-13 percent. Employment and sales growth are also impacted, as corporations scale back employment growth by 3-15%, and sales growth falls by up to 15%.”

This conclusion was unexpected, asserted Prof. Coval in the interview. “Our original goal was to investigate how politically connected firms benefit from increases in the power of their representatives,” he claimed (emphasis added).

Bethany Stotts is a staff writer at Accuracy in Academia.