Report: Political Pork Causes Corporate Downsizing

Published July 20, 2010

The tens of billions of dollars of political pork that congressional lawmakers serve to folks back home kill private-sector jobs, according to three Harvard University researchers who asked, “Do Powerful Politicians Cause Corporate Downsizing?”

That’s the title of the paper by professors Lauren Cohen, Joshua Coval, and Christopher Malloy, who answer the question with a resounding “YES!”

‘Surprised by Results’
“We were surprised by the results, by the magnitude and consistency across different measures: capital expenditure, labor, research and development, sales. . . . The declines line up with what you would expect if government spending is crowding out private spending,” said Cohen, an assistant professor of business administration at the Harvard Business School and a faculty research fellow at the National Bureau of Economic Research.

“It’s crowded out most where this government spending is the most, and it is most concentrated in firms that operate in only one state,” he said, because those firms cannot escape or spread the impacts of government spending across other states.

More Hurt Than Helped
The crowding out hurts businesses and individuals more than the government spending helps, he said.

Cohen cited West Virginia, where the recently deceased Sen, Robert Byrd (D) became a legend for pork-barrel spending. Citizens Against Government Waste dubbed Byrd “King of Pork” and tallied more than $4 billion of earmarked federal spending by him—and that amount dates only to 1991.

During Byrd’s record-setting tenure as a federal lawmaker, which began in 1952 and ended with his death in late June, the inflation-adjusted billions no doubt are in the double digits.

Nonetheless, Cohen noted, “West Virginia is the state lowest in per-capita income.”

‘Spending Shock’
“Fiscal spending shock” is the professors’ term to describe the spending that a powerful committee chairman directs to his or her state.

“Fiscal spending shocks appear to significantly dampen corporate sector investment and employment activity,” they wrote.

The professors reviewed the 232 instances over the last 42 years when a senator or representative became chairman of a powerful congressional committee. They related those events to earmarked spending and government money transfers in the representative’s home state and compared them with business activities at 16,000 publicly traded firms headquartered where the government largesse went.

Private-Sector Cutbacks
“We realized this was the closest we could get to testing what would happen if the government were to drop money from a helicopter,” Cohen said. “People basically thought if the government were to drop $10 billion, there would be $10 billion more spending.”

Instead, said Cohen, “We found the private sector on average is pulling back by $3 billion to $4 billion. The net gain is $6 billion to $7 billion. To the extent we think there might be better or worse ways to use money, we need to take this into account.”

The 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. 

More Harm from Senators
“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 chairmanships have similar though weaker effects, the report notes, because “a congressional representative may have less impact on federal spending directed towards other districts within his state.”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.

Internet Info

“Do Powerful Politicians Cause Corporate Downsizing?” Harvard Business School: