Don’t Let Your Senator Become a Committee Chair

Members of Congress take it for granted that they can do their states and districts a lot of good by ascending to the chairs of powerful committees. Indeed, a new study from the Harvard Business School finds that states receive 40 to 50 percent earmark spending when a senator from that state becomes chair of a major committee, while the increase for house chairs is about 20 percent.

At the same time, the researchers were surprised to find that a shift in chairs led to a significant decrease in corporate spending within a state. Companies reduced capital investments by 15 percent and also reduced research and development programs. These reductions continue so long as the senator or representative remains chair, and are only partially reversed when the senator or representative resigns. Both large and small firms reduce their spending, though the largest reductions were found in firms that are geographically concentrated (i.e., had a large share of their operations in a single state or district).

In an interview, one of the professors who wrote the paper suggests several possible reasons why companies reduce their spending when the federal government starts raining money on their home states. One is that the government is doing things that the private companies would have done for themselves, but no longer need to do. Another is that the government spending crowds out private spending by hiring away employees and other resources. “But we suspect that a third and potentially quite strong effect is the uncertainty that is created by government involvement.”

This uncertainty is rarely accounted for by advocates of big government. Amity Shlaes argues that the New Deal prolonged the Great Depression because FDR changed policies so often that companies did not dare make new investments because they didn’t know what the government was going to do from day to day. After all, if you were head of a major energy company, would you invest in an alternative fuel today if you suspected that the federal government was going to throw a few billion dollars at that alternative fuel tomorrow?
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Whatever the reason, it is easy to find examples of government spending crowding out private investment. I recently visited a city that had used tax-increment financing to subsidize several downtown hotels. Meanwhile, private investors had given up on plans to build a hotel. Why compete with the government?

It is also possible that federal funding of expensive rail projects crowds out private construction. A region typically has a limited number of experienced construction firms and employees. Putting a significant portion of them to work building a light-rail line will increase the cost of building factories and offices.

The trade-off between government and private investment might not be important if the two were equally as productive. But while private investors try to draw the line at money-losing projects, the government just keeps on spending. Moreover, that spending often imposes burdens on the local community to keep operating the wonderful toy that was built with federal largess. Rail transit can be a real drag on the economy when hardly anyone rides it and you still have to raise taxes just to keep it going.

As one of the researchers concludes, advocates of stimulus spending “should revisit their belief that federal spending can stimulate private economic development.” Given that the nation has to borrow to provide such stimulus, the real results may be negative for our overall economy.