Harvard study finds increased gov’t spending results in unemployment

[bik0]

The right wingers are all over this... no mention in the liberal blogs though...

Recent research at Harvard Business School began with the premise that as a state’s congressional delegation grew in stature and power in Washington, D.C., local businesses would benefit from the increased federal spending sure to come their way.

It turned out quite the opposite. In fact, professors Lauren Cohen, Joshua Coval, and Christopher Malloy discovered to their surprise that companies experienced lower sales and retrenched by cutting payroll, R&D, and other expenses. Indeed, in the years that followed a congressman’s ascendancy to the chairmanship of a powerful committee, the average firm in his state cut back capital expenditures by roughly 15 percent, according to their working paper, “Do Powerful Politicians Cause Corporate Downsizing?”

“It was an enormous surprise, at least to us, to learn that the average firm in the chairman’s state did not benefit at all from the unanticipated increase in spending,” Coval reports.

http://hbswk.hbs.edu/item/6420.html


From the report...


VI. Conclusion

This paper provides a new empirical approach for identifying the impact of
government spending on the private sector. Using changes in congressional committee
chairmanship as a source of exogenous variation in state-level federal expenditures, 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. Further, we find
that when the spending shocks reverse (through a relinquishing of chairmanship), most all
of these behaviors reverse. 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 — quite apart from the standard
interest rate and tax channels — may limit the stimulative capabilities of government
spending. Whether they are sufficient to lower the multiplier on fiscal stimulus in a large
economy such as the US remains an open but important question.

the report...

https://docs.google.com/viewer?url=http://www.people.hbs.edu/cmalloy/pdffiles/envaloy.pdf

[aquart]

1. Harvard Business School?

Please.

[bik0]

3. I guess they just made it up.

They do that kind of stuff at Harvard.

[Cant trust em]

4. Shhh...business isn't popular here. nt

[blogslut]

2. And you bring it here

[villager]

5. Yeah -- sure worked that way after the private sector crash of '29....

If only FDR had been more like Hoover!

[bik0]

12. WW II is what pulled the U.S. out of the Depression...

The unemployment rate in 1940 was 14%.

[Commie Pinko Dirtbag]

17. Ah, I see you have the complete set of talking points, not just one.

And you use them with gusto.

I'm waiting for "welfare queens" to make an appearance.

[villager]

21. Apparently, he does -- a pro-war, anti-New Dealer!

though actually, World War II might count as "government spending" in some books, too! ;-)

[bik0]

22. Standard DU retort when confused and disoriented by facts...

label 'em as a wingnut.

[Commie Pinko Dirtbag]

23. See #19 and #20. -nt

[Commie Pinko Dirtbag]

32. Oh, and #30 too.

But I see you're having some difficulty cooking up report to those ones.

[villager]

26. Yes, because of the recession of 1937 due to.. a cutback in government spending!

But the larger government spending of WW II apparently helped...

[beardown]

27. WW II was FDR on steroids.

And FDR was president during WW II and he had a major hand in ramping up US military production before the war. It was more government spending. The unemployment rate was 14 percent in 1940. What was it in 1932? I'm thinking that it was around twice as bad so improvements had been made.

Although I don't see the direct connection between the local effects of a congressional chairman's govt spending and the national economy and government spending.

[laughingliberal]

35. It must be true. I was hearing it from Faux noose viewers a lot right during the stimulus debate. nt

[EFerrari]

6. It's Harvard. What else are they going to "find"?

[bik0]

9. Cite me a study that refutes their conclusion.

[Echo In Light]

28. In an era of info-wars, "studies" can reveal truth to be whatever those backing it want.

[EFerrari]

41. Why not search "The New Deal"? And, no thanks.

I'm not wading through ten feet of right wing spew to find a study for the self - evident.

[villager]

7. "U.S. Growth Slows as Stimulus Wears Off"

http://business.timesonline.co.uk/tol/business/economics/article7138179.ece

Gosh. Somebody forget to tell the Business School!

[laughingliberal]

36. +1 nt

[joeybee12]

8. They're making an assumption if A=B, then D=E...what are the

other factors? What was the economy in general like, what was the state of the businesses they surveyed...sounds like a bunch of BS to try and a prove a point they wanted to prove.

[bik0]

10. They were not expecting the results..

"It was an enormous surprise, at least to us, to learn that the average firm in the chairman's state did not benefit at all from the unanticipated increase in spending," Coval reports.

[joeybee12]

14. So, what he says is the truth, yeah, I'd never heard anyone not tell the

truth, have you?

Even if this is a comprehensive and thorough, unbiased study (which appears, on the face of things, to be dubious) gonna take more than one such study to actually "prove" something.

[laughingliberal]

37. Yes. They were diligently preparing their shocked faces before releasing the results. nt

[Peacetrain]

11. Harvard Business,, isn't that the same school that gave Bush his MBA

and GOD knows how great a businessperson he turned out to be..and what he did to every buisness he touched much less the United States..

Think I will take that one with a grain of salt

[KonaKane]

15. Good point. So much for their credibility.

[JHB]

13. This study is over a 40-year period...

...some 30 of which has been a period of general payroll cutting, deregulation-spurred financial shocks, and increased corporate influence in politics.

Follow the links and check out the study itself, not just the summary, nor other peoples' reporting of the summary.

[RUMMYisFROSTED]

16. .

[gratuitous]

18. Questions suggest themselves

Sorry, I don't have the time to read the whole thing, but some questions based on the excerpt suggest themselves.

First, what is a "fiscal spending shock"? Is that a sudden increase in federal expenditure in a locality?

Second, does the study consider all "fiscal spending shocks" or only those they can identify as being tied to a change in congressional committee chairmanship? Presumably, when a local politician takes over a committee, some of the money that committee can direct will make its way to the home state or district of that politician. Do the paper's findings hold true for "fiscal spending shocks" that come about simply through an infusion of federal cash unaccompanied by a change in a committee chairmanship? Or was this not considered?

Third, are there other factors that might contribute to companies reducing investments in new capital and research and development? Were these factors identified and considered? What is the length of time under consideration for the study? Does it account for changes in the majority party? That is, does the pattern they notice hold true whether it's Democrats or Republicans in charge of committees? And what sort of changes are we talking about? Committee chairs, once appointed, tend to stay the same while one party maintains control of that house of Congress.

Fourth, what does it mean when companies are "paying out more to shareholders in the face of this reduced investment opportunity set"? Instead of companies spending on capital improvements and research and development, they're spending their money on enriching their shareholders. Is that necessarily bad? A "fiscal spending shock" might provide federal money for companies to spend on or for themselves that they don't have to spend out of the corporate coffers. And, rather than pay taxes on those new profits, companies decide to pay a dividend to shareholders.

I can see why this might be a study that conservatives would like to make some hay on. However, there are many questions that should be addressed, but which I am sure will go unasked in order to fashion a narrative pleasing to conservatives.

[Raineyb]

19. Businesses. I'm pretty sure that if the money is spent on INDIVIDUALS

it gets spent.

I'm not at all impressed by this study. Harvard business school has swallowed the Chicago school swill. It's no surprise they'd put out a study emphasizing spending on business when the spending is best spent on individual.

[Commie Pinko Dirtbag]

20. That's what Brazil did. And it worked.

Thanks for spotting where exactly the disingenuity lies.

[laughingliberal]

38. It worked? Heaven forbid we'd try that! nt

[JHB]

45. In fact, the three authors are all Univ. of Chicago economics alumni...

From links at the HBS page:

Professor Cohen received a Ph.D. in finance and an MBA from the University of Chicago in 2005, and a B.S.E. from Wharton and a B.A. in economics from the University of Pennsylvania in 2001. He serves on the academic advisory board of Quadriserv, Inc.

***

Joshua received his B.A. and M.A. in Economics from the University of Chicago in 1992 and his Ph.D. in Business Economics from the Anderson School at UCLA in 1996.

***

Professor Malloy received a PhD in Finance and an MBA from The University of Chicago Graduate School of Business, and a BA in Economics from Yale University. Before beginning his doctoral studies, he worked at the Board of Governors of the Federal Reserve System in Washington, DC in the Monetary and Financial Studies Section.


Of course, that alone is not a critique of the study. What really has my warning radar pinging is that anybody outside of economic academic circles is bandying about the findings of a paper that apparently hasn't actually been published yet. That smacks of it being used politically no matter what it actually says or or whether their analysis holds any water. As science The Bell Curve was very expensive and uncomfortable toilet paper, but it was used to push a political agenda.

I haven't had a chance to read it thoroughly yet, and even when I do economics isn't my field of expertise, but I can think of a few things that could influence the results and I'd like to see if the paper addresses them.

What I'd really like to see is some knowledgeable critique from a variety of economists. Right now all we have is the HBS page, which is as much a promotional piece as anything else.

[nichomachus]

24. Please reread the article or, better still, have someone read it to you

It doesn't say what you have read into it.

Private sector employment may drop, but only because more money is being spent in the public sector -- and people are hired away. This usually occurs at a time of low unemployment.

So -- the right-wing assessment is ignorant bullshit

But, otherwise, good catch.

Welcome to DU and enjoy your stay.

[bik0]

29. People hired away? nice try...

"It was an enormous surprise, at least to us, to learn that the average firm in the chairman's state did not benefit at all from the increase in spending. Indeed, the firms significantly cut physical and R&D spending, reduce employment, and experience lower sales.

The results show up throughout the past 40 years, in large and small states, in large and small firms, and are most pronounced in geographically concentrated firms and within the industries that are the target of the spending."

[ieoeja]

40. The "firms" reduce employment.

But the study never looked at unemployment rates except as a cause for firms cutting down. When unemployment is high, the study found that existing firms did *not* reduce employment. They only do so when unemployment is low.

Why would that be unless their people are being hired away?

The poster to whom you respond said this was because they were being hired away by the gov't. However, since this study ignored new businesses created as a result of the increased spending, the old businesses could just as well have lost their employees to those new businesses during good economic times.

That the Tennessee Valley Authority was the idiotic example they gave is pretty much prove positive of the bankruptcy of your view. The TVA drove out exactly *one* business: the electric company that kept prices artificially high because of their monopoly and that kept labor prices low because they were one of the few companies in place creating more competition for an employer than for employees. Conversely, the TVA caused the creation of massive amounts of industry and jobs. So "your" conclusion couldn't be any further from what really happened.


Chew on this fact: the United States experienced an economic depression every 12 to 15 years prior to the New Deal and not a single such depression in the 70 years since. You can argue why if you like, but you can not argue that simple fact.

[izzybeans]

25. They could be responding to the same forces, meaning there are some confounding

factors that lie outside of the data they collected (unmeasured). If so their findings make sense. I want to look to see if they controlled for the local economic climate. "Positive shocks" as they call them would increase during economic downturns, thus there would also be a corresponding decrease in business investment during this period. So, despite there being a uniform increase in earmarks after a chair switch, the effects of a uniform government increase remains uncontrolled for. They don't control for it in their regression analysis and only mention it twice, once as an aside to the research literature and another time indicating that when the economy is flat or the employment rate is low then their relationship disappears.

Even if this relationship is a direct one, I can see our ideologically rigid business community responding irrationally to government investment. "Oh noes! The gumit plopped money down to my competitor. I better skeedattle." Though in the one real example they gave it appeared that the only business impacted was the largest in the market (Home Inc.). The rest remained unchanged.

In other words storks and babies may arrive during the same season, but the storks aren't responsible for the babies. Keep digging you'll find your answer.

At worst, you'll find that earmarks are nothing more than pay offs to local buddies in the business communities and At best, they are rational responses to local market shocks. The latter is not happening according to these data, that much is for sure.

[villager]

30. Early critique of study on Mother Jones blog:

http://motherjones.com/kevin-drum/2010/05/federal-spending-and-private-investment

<snip>

These are interesting results. But they need some followup. Even if you believe that government spending crowds out private spending in a serious way, the effect here is enormous. How can you possibly get an 8% drop in private sector capital expenditures from the relatively trivial increase in federal spending that comes from earmarks? There has to be something more to this story.

On the other hand, it makes perfect sense that whatever effect there is, is more pronounced when unemployment is low. That's exactly when you'd expect government spending to crowd out private sector spending. However, it probably doesn't tell us much about current stimulus spending, which is taking place in an environment of zero-bound monetary policy and extremely high unemployment...

<snip>

[laughingliberal]

39. Ah, sanity. Thank you. nt

[anigbrowl]

42. No, stupidity.

The $ value of earmarks as a percentage of federal spending is utterly irrelevant to the matter under examination. That's like asking whether a study of cancer medication is flawed because more money is spent on painkillers and cold remedies.

Next, MJ points out that we're suffering a large recession, which is true but ignores the fact that this study examines corporate reinvestment over a 40 year period.

As for more study being required, the authors plan a follow-up examining the effect of large-scale corporate spending (eg Microsoft setting up in Seattle) on local competitors to see if its the size of the investment amounts or the source which matters.

DUers might like to consider that this study's biggest impact will be on corporate welfare, especially the kind beloved of defense contractors.

[laughingliberal]

43. Good luck with that. I don't expect anything to EVER cut into defense contractor's gravy train

or corporate welfare. This study will be used to justify cutting spending that helps people.

[ieoeja]

31. Nothing like talking up the exact OPPOSITE result of this study.

1. The study ignored new employment by new businesses and the gov't.
2. The study ignored results of gov't spending on employment rates (which invalidates your title).
3. The study concluded that employment by pre-existing businesses only go down during good economic times.

Because during good economic times the old businesses face more competition for labor from all the new business growth spurred by the gov't spending!



From your link:

"Some of the dollars directly supplant private-sector activity—they literally undertake projects the private sector was planning to do on its own. The Tennessee Valley Authority of 1933 is perhaps the most famous example of this."


I am shocked they actually used this example given that the rest seems to be anti-government spin on the results. But this specific demonstrates point #1 above wonderfully well.

While the creation of the TVA did push Wendell Wilkie out of business, it also spurred massive amounts of growth in all other sectors. So while a handful of people were hurt by the TVA, massive numbers of businessmen and laborers benefited.

[Commie Pinko Dirtbag]

34. Excellent female-dog-slap!

:thumbsup:

[ddeclue]

33. This is the same Harvard Business School that granted George W. Bush an MBA..

think about it..

:rofl:

[Joanne98]

44. The same Harvard who lost more endowment money than anyone else? LOL

Harvard endowment leads others down
2009 was bad year for complicated investment strategies
By Beth Healy, Globe Staff | January 28, 2010

Harvard University suffered the largest decline in endowment funds of any major US college last year, as the financial crisis crippled the sophisticated but risky investment models that in prior years have made it the biggest and often best-performing endowment.

The total value of Harvard’s endowment fell nearly 30 percent in the fiscal year ended June 30, 2009, to $25.7 billion, according to a national survey of college and university funds released today. Much of that decline is from investment losses - 27 percent; the fund’s balance also went down because the university needed to spend money on school programs. The Yale University endowment, the nation’s second-largest, dropped 28.6 percent, to $16.3 billion, while Stanford University’s fell 26.7 percent to $12.6 billion. The average drop for endowments across the country was 23 percent, based on a survey of 842 colleges and universities by the National Association of College and University Business Officers and Commonfund, an investment firm for endowments.

It was a year in which the conventional wisdom of the investing world was turned on its head: Large, sophisticated endowments fared worse, overall, than smaller funds. The big endowments invested more of their money in hedge funds and other alternative investments, and keep less in cash. Smaller funds, meanwhile, had more of their money in plain-vanilla bonds, which performed better than stocks and more exotic investments, helping those endowments to stave off the worst of the losses.

“It’s very unusual to have large endowments underperform small endowments,’’ said Verne O. Sedlacek, chief executive of Commonfund. “This is a very unusual outcome.’’

http://www.boston.com/business/markets/articles/2010/01/28/harvard_endowment_leads_others_down/

I think people with such poor judgement should just STFU!

[Commie Pinko Dirtbag]

46. Kick for the thorough debunking the OP had in the replies (#19, #20, #30, and others)