Businesses: Beware Pols Bearing Earmarks

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Trying to save his political career last weekend, Utah Senator Bob Bennett touted his seniority on key Senate committees to delegates of his state's Republican convention. Bennett's obvious intention was to suggest that he could bring home the bacon for his state, but it didn't resonate with delegates, who dumped him. Perhaps they instinctively understood something about earmarks that economists have long suspected but that politicians, journalists and even many businesses don't appreciate, namely that pork can smother private investment and enterprise.

That's the conclusion of an innovative new study by a handful of Harvard economists and fellows at the National Bureau of Economic Research. Their working paper, posted on NBER last month and entitled "Do Powerful Politicians Cause Corporate Downsizing?", takes an unusual approach to investigating the question of how a sudden surge in government money influences the behavior of private firms. To do so, the three economists, Lauren Cohen, Joshua Coval and Christopher Malloy, studied the private economy of states where a senator or member of Congress had just assumed the chairmanship of a powerful committee. Such appointments, driven by politics, are followed by huge swings in earmarks toward the state (often at the expense of the place which lost the key chairmanship), making the appointments a way to determine how the private sector reacts to big government spending surges.

Focusing on 232 instances over the last 42 years where senators or representatives have assumed the chair of a major committee, the economists found, not surprisingly, a big increase in earmark spending: an average gain of 40 percent to 50 percent in pork in the new chair's state, and a 10 percent gain in total federal spending. That increase, which materializes almost immediately, amounted to $51 million in new annual earmarks on average and continued throughout the new chair's tenure, only to disappear when he lost his position.

What happens next may seem counterintuitive to some: Drawing on a database of more than 16,000 businesses, the study found that in the year after this big gain in earmarks, firms in a state cut back on capital expenditures by 15 percent, or $39 million, and research and development by 7 percent to 12 percent, or $34 million on average. Sales declined by 15 percent, and employment slumped by anywhere from 3 percent to 15 percent. The impact was most intense on firms that have much of their operations in a state and can't easily shift production elsewhere. The effect was also greater when the economy is good and unemployment is low, for a reason that should be obvious by now: the surge in government funds, an economic shock, most likely set off an intense competition for workers and other resources, like real estate, among firms.

To illustrate how this works, consider the case of Alabama Senator Richard Shelby, who assumed the chairmanship of the Senate Select Intelligence Committee in 1997, the first major committee chair for the state in more than two decades. The appointment proved a federal pork boon for the state. Whereas before Shelby's chairmanship, Alabama typically received some $6 million a year less than the national average in earmarks, afterward it typically received $90 million a year more.

Good news, right? Not for a local homebuilder, it seems. Among the big increases was some $15 million in earmarks for construction of subsidized housing. Not surprisingly, at least one large Alabama manufacturer of low-cost fabricated homes contained in the study's database sharply cut its employment (by 30 percent) and its capital expenditures (down 80 percent) once the earmarks started, numbers that were far higher than what other construction firms experienced nationwide. A coincidence in this case? Perhaps. But the pattern repeats itself across decades and over thousands of firms, the study found, with one important exception. Firms that contract with government on average do not cut back when the earmarks start flowing.

Little of this is reflected in the way earmarks have been treated by politicians, local media and lobbyists for state and local interests, who all tend to see pork as something to celebrate (except when some other area of the country is getting it). It is a staple of local journalism, for instance, to enumerate all the ways that a powerful committee chairmanship will bestow goodies on a state or district. And politicians love the ribbon cuttings that often ultimately follow earmarks.

Those photo opportunities before gleaming new projects are what the 19th century French economist Frédéric Bastiat would describe as the visible effects of a government policy. But as Bastiat also observed, "Other effects emerge only subsequently; they are not seen. We are fortunate if we foresee them." Usually, we don't, which is what produces lots of bad policies with perverse unintended consequences.

Voters are starting to figure this out and have gradually soured on earmarks, seeing them increasingly as a sign not of political clout but of fiscal irresponsibility. That's one reason why some four dozen members of Congress from both parties are not requesting earmarks this session.

Now, perhaps, voters and members of Congress have another reason to sour on federal pork.


Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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