Harvard: Free Federal Dollars Hurt State Economies

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Often when a member of a State’s Congressional delegation holds a powerful committee seat in Washington, the lawmaker can count himself safe from voter wrath come election season. After all, what voter wants to lose a powerful earmark-happy legislative ally in the Nation’s capitol? A new study by Harvard Business School challenges this way of thinking.

The Harvard researchers found that people who favor laissez-faire economic policies are likely correct in believing that when government money is pumped into a region, private enterprise suffers.

In a study published in the Journal of Political Economy authors Lauren Cohen, Joshua Coval and Christopher Malloy contend that when a Senator gains more earmarking power as a chairman, publicly traded firms in his home State scale back employment growth by 3 to 15 percent. On average a State experiences a $48 million per year drop in capital expenditures and a $44 million per year drop in research and development spending by publicly traded companies. Some firms that are direct beneficiaries of government money do grow, but the researchers say that Federal funds mostly hurt private enterprise.

The study tracks only money that came with no strings attached, negating the popular argument that stimulus funds have to be paid for with higher taxes, thus hurting private sector business revenues.

“These findings argue that tax and interest rate channels, while obviously important, may not account for all or even most of the costs imposed by government spending,” the researchers write. “Even in a setting in which government spending does not need to be financed with additional taxes or borrowing, its distortionary consequences may be nontrivial.”

The authors offer an explanation of why “free money” from the Federal government actually hurts State economies and use the creation of the Tennessee Valley Authority which drove private companies out of the electrical business across the South in the 1930s.

“Some of the [government] dollars directly supplant private-sector activity—they literally undertake projects the private sector was planning to do on its own,” says Coval. “The Tennessee Valley Authority of 1933 is perhaps the most famous example of this.”

The authors also say that the government money also raises the cost of doing business for private sector business because of inflation.

Despite the findings, when Congressional elections roll around, Americans will undoubtedly be bombarded with promises to “take care of the State with Federal funds, because big government will spend the money anyway.”

“The jobs created from federal transfers are generally much easier to identify and quantify than those lost—indeed Senators often tout the number of jobs that their earmarks have been able to create in their home states,” the authors speculate. “Identifying and measuring those that have been lost is not as easy. When a firm shuts down because labor costs have become prohibitive, it can never be cleanly tied to the wage pressure produced by federal transfers.”

Sam Rolley

Sam Rolley began a career in journalism working for a small town newspaper while seeking a B.A. in English. After covering community news and politics, Rolley took a position at Personal Liberty Media Group where could better hone his focus on his true passions: national politics and liberty issues. In his daily columns and reports, Rolley works to help readers understand which lies are perpetuated by the mainstream media and to stay on top of issues ignored by more conventional media outlets.