The Palmetto Insider

The blog of the South Carolina Policy Council

Harvard Study: Pork Barrel Spending Hurts Private Sector Investment

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Pork BarrellAs we wrote last week, public sector hiring is hindering a private sector recovery. (See here for our recent analysis of why South Carolina’s unemployment rate is declining—even though there are fewer private sector jobs available overall.)

Now, a study from Harvard Business School provides additional evidence that government spending reduces private sector investment. The study looked at what impact increased federal earmarks can have on private sector activity. More specifically, the study investigated what happens when a politician becomes chairman of a committee and thus holds the purse strings over pork barrel spending:

“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.”

The results are astounding.

“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.”

Additionally, the study shows the results appear to flip when a politician is no longer chair of his committee:

“Further, we find that when the spending shocks reverse (through a relinquishing of chairmanship), most all of these behaviors reverse.”

It gets worse.

“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.”

In short: more government money means less private sector production.

Although this report is specific to earmarks, the same logic can be applied to all manner of government spending. It creates a crowd-out effect in the private sector. Here in South Carolina, crowd-out from the federal stimulus alone will cost an estimated 24,000 to 35,000 lost private sector jobs.

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Written by Geoff Pallay

July 27, 2010 at 9:42 am

One Response

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