What happens when a state is lucky enough to have one of their Senators ascend to one of the three most powerful committee chairmanships? According to a new study by three Harvard Business School the average state then experiences a 40 to 50 percent increase in earmark spending (the figure is a smaller 20% for powerful House committees). So this new government spending is then a boon to the state right? The public spending stimulates economic growth right? Wrong. Turns out, increased federal spending is connected with a decrease in corporate capital expenditures and employment. Study co-author Joshua Coval explains why:
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. Other dollars appear to indirectly crowd out private firms by hiring away employees and the like. … But we suspect that a third and potentially quite strong effect is the uncertainty that is created by government involvement.
The Harvard Business School blog finds this “surprising.” We at Heritage do not. We’ve been documenting government spending’s impact on the economy for years (see, The Impact of Government Spending on Economic Growth and Why Government Spending Does Not Stimulate Economic Growth). And we are not the only ones. In his 1994 book Government’s End, Jonathan Rauch wrote:
Economic thinkers have recognized for generations that every person has two ways to become wealthier. One is to produce more, the other is to capture more of what others produce. The former is a productive activity. The latter is redistributive activity – transfer-seeking, an investment of time or energy in transferring wealth from other people to oneself.
By definition, the power of government to solve problems comes from its ability to reassign resources, whether by taxing, spending, regulating, or simply passing laws. But that very ability energizes countless investors and entrepreneurs and ordinary Americans to go digging for gold by lobbying government.
A great follow up to this Harvard study would be to see if those businesses that cut investment and employment in their home state’s productive economy, then reinvested those resources in Washington D.C.’s lawyers and lobbyists economy.