Filed under: Capitalism, Economy, Politics, Taxes | Tags: Congress, Earmarks, Pork
When your Member of Congress becomes a committee chairman, it is a big deal. It means more power to spend in earmark funds for their home districts. That’s the common wisdom and sometimes the reason for retaining people in office — because they deliver government goodies. According to new research from Harvard Business School, the increased federal spending causes local companies to lose sales and to cut back on research, payroll and other expenses.
Harvard professors Joshua Coval, Christopher Malloy and Lauren Cohen were surprised at the results. They had expected to find that firms with political connections prospered from receipt of federal largesse. According to Mr. Coval, their research showed that federal dollars “directly supplant private sector activity — they literally undertake projects the private sector was planning to do on its own.”
I’ve seen that many times in my state. There is a project, long in the planning, and then the district Representative or a Senator gets interested and comes up with federal money. Senator Patty Murray, sinking in the polls, is suddenly deeply interested in a big project in my district. Not a coincidence.
Public spending seems to increase demand for factors of production like competition for labor and real estate, for example. Federal money comes with federal rules, as well.
Chairmanship of a Senate committee, particularly a powerful one like Finance or Appropriations typically brings an increase of 40% to 50% in earmark spending for the home state. In the House, Chairmen take an average of 20% more to their states. Yet in the first year after the chairman’s accession to the chairmanship, the average firm in his state “cuts back capital expenditures by around 15%. The behavior continues as long as the money keeps flowing, or the Chairman steps down.
The same side effects are demonstrated by funds from the federal stimulus program. In the first quarter of 2010, according to USA Today, private paychecks made up the lowest share of personal income in history as government spending ramped up to the highest levels ever. That trend leads to higher taxes and more economic harm.
Democrats and Republicans have long promised earmark reform, but they don’t really mean it. The closer it gets to election time, the more interested they suddenly are in bringing home the pork. This study suggests that they are really reducing prosperity.