Stimulus Surprise: Companies Retrench When Government Spends

[Dave Farber <dfarber () me com>]

Why was anyone surprised. It is in the traditions of US companies. Djf


Begin forwarded message:

> From: David Bolduc <bolduc () austin rr com>
> Date: May 27, 2010 10:08:08 PM EDT
> To: johnmacsgroup () yahoogroups com, Dave Farber <dave () farber net>
> Subject: Stimulus Surprise: Companies Retrench When Government Spends

> Note the mention of the TVA.
>
> <http://hbswk.hbs.edu/item/6420.html?wknews=052410>
>
> Stimulus Surprise: Companies Retrench When Government Spends
> Q&A with:     Joshua Coval
> Published:    May 24, 2010
> Author:       Sean Silverthorne
>
> 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 andretrenched 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?"
>
> "It was an enormous surprise, at least to us, to learn that the average firm in the chairman's state did not benefit 
> at all from the unanticipated increase in spending," Coval reports.
>
> Over a 40-year period, the study looked at increases in local earmarks and other federal spending that flowed to 
> states after the senator or representative rose to the chairmanship of a powerful congressional committee.
>
> We asked Coval about the relationship between the government and the private sector, and how policymakers should 
> critically evaluate federal stimulus plans to help local companies.
>
> Sean Silverthorne: First, a little bit about your empirical approach to the research. Why did you decide to study 
> changes in congressional committee chairmanships?
>
> Joshua Coval: Our original goal was to investigate how politically connected firms benefit from increases in the 
> power of their representatives. A benefit in focusing on changes in committee chairmanships is that their timing is 
> largely exogenous from the perspective of the ascending chairman and his constituents. That is, a change in 
> chairmanship can only occur if the incumbent retires or is voted out--both of which are entirely independent of what 
> is currently happening in the ascending chairman's state.
>
> Q: One of your findings was that the chairs of powerful congressional committees truly bring home the bacon to their 
> states in the forms of earmark spending. Can you give a sense of how large this effect is?
>
> A: Sure. The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair 
> of one of the top-three 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.
>
> Q: Perhaps the most intriguing finding, at least for me, was the degree and consistency to which federal spending at 
> the state level seemed to be connected with a decrease in corporate spending and employment. Did you suspect this was 
> the case when you started the study?
>
> A: We began by examining how the average firm in a chairman's state was impacted by his ascension. The idea was that 
> this would provide a lower bound on the benefits from being politically connected. It was an enormous surprise, at 
> least to us, to learn that the average firm in the chairman's state did not benefit at all from the increase in 
> spending. Indeed, the firms significantly cut physical and R&D spending, reduce employment, and experience lower 
> sales.
>
> The results show up throughout the past 40 years, in large and small states, in large and small firms, and are most 
> pronounced in geographically concentrated firms and within the industries that are the target of the spending.
>
> Q: Although you didn't intend to answer this question with the research, what does your team suspect are some of the 
> causes that could explain why companies retrench when federal dollars come into their neighborhoods?
>
> A: 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. For instance, our 
> effects are strongest when unemployment is low and capacity utilization is high. But we suspect that a third and 
> potentially quite strong effect is the uncertainty that is created by government involvement.
>
> Q: These findings present something of a dilemma for public policymakers who believe that federal spending can 
> stimulate private economic development. How would you suggest they approach the problem that federal dollars may 
> actually cause private-sector retrenchment?
>
> A: Our findings suggest that they should revisit their belief that federal spending can stimulate private economic 
> development. It is important to note that our research ignores all costs associated with paying for the spending such 
> as higher taxes or increased borrowing. From the perspective of the target state, the funds are essentially free, but 
> clearly at the national level someone has to pay for stimulus spending. And in the absence of a positive 
> private-sector response, it seems even more difficult to justify federal spending than otherwise.
>
> Q: What do you think your research has brought to the literature?
>
> A: The literature has had difficulty empirically identifying the effect of government spending on the private sector. 
> Because spending both influences and is influenced by developments in the private sector, disentangling the two has 
> proven challenging. We think our approach offers a rare opportunity to identify the private-sector response to 
> government spending increases that are essentially random.
>
> Q: What are you working on next?
>
> A: Our next project will be to ask a similar question of the private sector: Does private-sector economic activity 
> create or crowd out additional private-sector opportunities? Put differently, did Bill Gates's decision to relocate 
> Microsoft to the Seattle area in 1979 increase the likelihood that Amazon.com, Starbucks, and Costco would emerge 
> from there a decade or so later? If so, this has strong implications for policymakers interested in, say, improving 
> Detroit's economic prospects. <tack-wk.gif>



-------------------------------------------
Archives: https://www.listbox.com/member/archive/247/=now
RSS Feed: https://www.listbox.com/member/archive/rss/247/
Powered by Listbox: http://www.listbox.com