Harvard Study: Pork Crowds Out Private Activity

From a study by three Harvard Business School professors titled "Do Powerful Politicians Cause Corporate Downsizing?":

"We show that becoming a powerful Senate or House committee chair results in a significant increase in federal funds flowing to the ascending chairman’s state. Thus, a congressman’s ascension to a powerful committee chair creates a positive shock to his or her state’s share of federal funds that is virtually independent of the state’s economic conditions.

We focus specifically on the 232 instances over the last 42 years where the senator or representative of a particular state ascends to the chairmanship of a powerful congressional committee. During the year that follows the appointment, the state experiences an increase of 40-50 percent in their share of federal earmark spending, and a 9-10 percent increase in total state-level government transfers. The funding increase persists throughout the chair’s tenure and is gradually reversed upon his departure. Because these spending shocks are sufficiently numerous, are spread out across time and different locations, and are economically meaningful, they provide us with significant power to examine the impact of fiscal policy on the private sector."

MP: Wouldn't you think that those increases in federal earmark spending and state-level government transfers would have overwhelmingly positive effects on state economies? Not necessarily, which is why the answer to the question in the paper's title is YES. 

"We find that fiscal spending shocks appear to significantly dampen corporate sector investment activity. Specifically, we find statistically and economically significant evidence that firms respond to government spending shocks by: i) reducing investments in new capital, ii) reducing investments in R&D, and iii) paying out more to shareholders in the face of this reduced investment opportunity set. Further, we find that when the spending shocks reverse (through a relinquishing of chairmanship), most all of these behaviors reverse. Finally, we also find some evidence that firms scale back their employment, and experience a decline in sales growth.  Our findings demonstrate that new considerations may limit the stimulative capabilities of government spending."