Do Powerful Politicians Cause Corporate Downsizing?

Three Harvard Business School professors have concluded that government spending does indeed kill private-sector jobs.

Their study reviewed the 232 instances over the last 42 years where the
senator or representative of a particular state became chairman of a powerful  committee, and related those events to earmarked spending and government money transfers, and business activities at 16,000 publicly traded firms headquartered where the government largesse went.

Their report states, “The central finding of this paper is that positive shocks to the seniority of a state’s congressional delegation cause large and persistent increases in government allocated funding to the states, and significant retrenchment on the part of the corporations headquartered in the state.  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,” the report continues. “At the same time, firms residing in the state cut their capital expenditures by 8-15 percent, reduce R&D by 7-12 percent, and increase payout 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%.”

House committee chairmanships have similar, though weaker effects, the report notes, “which one would predict given the fact that a congressional representative may have less impact on federal spending directed towards other districts within his state.”