Surprise - Government stimulus can reduce private sector spending


If you are wondering if your tax dollars can re-build the economy, I recommend reading more about this fascinating study by HBS which confirms that government spending skews opportunities for private businesses.  I like it when we can separate out the social rhetoric and see the economic factors clearly, particularly with well-meaning government interventions. Central planning has been shown to be far less effective in the many political forms it has tried over the past century.  If you are running your own business and having to meet payroll, you will already be aware of these findings even thought the researcher, Joshua Coval, was surprised.


Executive Summary:

New research from Harvard Business School suggests that federal spending in states appears to cause local businesses to cut back rather than grow. Read the full article here - A conversation with Joshua Coval.
Key concepts include:
  • 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.
  • 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.

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