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Politicians Cause Downsizing

A Commentary By Howard Rich

Saturday, June 12, 2010

Of all the myths helping to sustain the unsustainable status quo in Washington, D.C., among the most widely accepted is the belief that a politician’s seniority translates into tangible economic benefits for his or her district.  In fact, this perception works hand-in-glove with another central government myth – the one about politicians being able to create private sector jobs with your tax dollars in the first place.

Perpetuated by aspiring elected officials at all levels of government (and parroted by an intellectually incurious mainstream media), these Keynesian pillars have gone virtually unchallenged for years – allowing government to continue devouring additional chunks of private sector industries it claims to be strengthening.

In recent years, however, public distrust of government has fueled renewed skepticism regarding these two myths – although the academic appetite to challenge them theoretically has been predictably lacking.

In fact, the research that could end up blowing these myths out of the water seems to have come about accidentally – or at least as an afterthought.  Three professors at Harvard Business School – Lauren Cohen, Joshua Coval and Christopher Malloy – were examining the correlation between politically-connected firms and powerful legislative committee chairmen when they stumbled upon something “unexpected.”

What did they discover?  Something free market advocates have known for years: Government spending kills jobs.

“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,” says Coval. “Indeed, the firms significantly cut physical and R&D spending, reduced employment, and experienced lower sales.”

The study – which examined government earmark and budget data from the past four decades – found this trend to be consistent across all variables.  Specifically, it affected both large and small firms in large and small states, and it followed the ascension of committee chairmen in both the House and Senate. Also, the study found that the damage to the private sector was “partially reversed” when the committee chairmen either lost their seats or gave up their gavels.

Talk about turning conventional Washington “wisdom” on its ear.

“Fiscal spending shocks appear to significantly dampen corporate sector investment and employment activity,” the researchers state plainly.

In other words, government spending directly supplants private sector investment – substituting expensive, cumbersome bureaucracies where efficient, profit-driven companies would have otherwise operated.  Needless to say, this “crowding out” of the private sector not only costs jobs – it also comes at a tremendous up-front cost to the taxpayers.

Unlike other studies into the effects of government spending on private sector activity, this research’s focus on committee chairmanships provides a unique “exogenous” (or independent) variable.

“We show that becoming a powerful committee chair results in a significant increase in federal funds flowing to the ascending chairman’s state,” the report reveals. “Thus, a congressman’s ascension to a powerful committee chair creates a positive shock to his or her state’s share of federal funds that is virtually independent of the state’s economic conditions.”

That critical consideration has been routinely ignored by numerous prior studies – most of which have returned “inconclusive” findings regarding the extent to which government growth has been cannibalizing the free market.

These results could not have come at a more opportune time for limited government champions.

Across America, hundreds of incumbent politicians are currently facing the fight of their political lives.  In years past, these incumbents would have no doubt relied on their seniority and their ability to secure government funding for their districts as central planks of their reelection platform.  Fortunately, the scales are falling from the public’s eyes regarding these so-called “economic development” expenses.

In fact, a recent Rasmussen Reports poll found that only 18 percent of voters believe additional government spending will improve the economy.  Conversely, two out of three American voters believe that cutting taxes is the best way to stimulate economic growth.

Voters clearly no longer want politicians who promise to “create jobs,” they want politicians who promise to get out of the private sector’s way.

Howard Rich is chairman of Americans for Limited Government .

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Views expressed in this column are those of the author, not those of Rasmussen Reports.

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