Harvard Business School: government stimulus doesn’t work

A very recent study out of the Harvard Business School puts the lie to those who still believe in Keynesian economics in general and that the stimulus package was beneficial in particular. The study, titled “Stimulus Surprise: Companies Retrench when Government Spends,” was looking to see how companies benefited when their senator or representative ascended to a committee chairmanship. This ascension typically increases local federal spending by 10-50% with more for senators than /representatives and more for earmarks than broader discretionary spending.

To their great surprise, the authors found corporate revenues and spending shrank despite the increase in federal spending. Here are some reasons why:

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.

Other dollars appear to indirectly crowd out private firms by hiring away employees and the like. For instance, our effects are strongest when unemployment is low and capacity utilization is high. But we suspect that a third and potentially quite strong effect is the uncertainty that is created by government involvement.

Why should we expect anything different when the spending is directed to the entire country ?

Hat tip Larry Kudlow at National Review.

Stimulus Surprise: Companies Retrench When Government Spends


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