Has President Obama’s Stimulus Made the Private Sector Lazy and Hurt Job Growth?

President Obama has been trying to tamp down the maelstrom of
ridicule that greeted his claim last week that the private sector
was doing just fine — but the public sector needed to be propped
for robust job creation. Whether his remark was a political gaffe
of the order of Mitt Romney’s “I enjoy firing people” or “I don’t
care about poor people” remains to be seen. But Obama’s comment
accurately summarized prevailing Keynesian thinking on job
creation, namely, that public sector spending complements –not
crowds out — private sector economic activity.

But a fascinating study
by Harvard Business researchers Lauren Cohen, Joshua Coval and
Christopher Malloy last year debunks this notion. The study
examined the economic activity in 232 instances over the last 42
years when a senator or representative ascended to the chairmanship
of a powerful congressional committee and then used his position to
divert federal resources to his home state in the form of federal
earmarks, contracts and transfers. 

If the Keynesians were right, this “exogenous government
spending shock” should have resulted in greater private sector
activity, especially since this spending constituted “free money”
that wasn’t financed by greater state taxes or borrowing. But,
alas, the exact opposite happened:

 Increased resources from the government that are not
expected to be funded by taxes or borrowing induce individuals to
increase their consumption and leisure. The resulting decline in
the marginal productivity of capital compels companies to scale
back investment and output…

Focusing on the investment (capital expenditure), employment,
RD, and payout decisions of these firms, we find strong and
widespread evidence of corporate retrenchment in response to
government spending shocks. In the year that follows a
congressman’s ascendency, the average firm in his state cuts back
capital expenditures by roughly 15%. These firms also significantly
reduce RD expenditures and increase payouts to their
investors. The magnitude of this private sector response is
nontrivial: in the median state (which receives roughly $452
million per year in increased earmarks, federal transfers, and
government contracts as a result of a seniority shock), capex and
RD reductions total $48 million and $44 million per year,You can read the rest of this article at: http://reason.com/blog/2012/06/11/has-president-obamas-stimulus-made-the-p

Short URL: http://www.txwclp.org/?p=11087

Posted by rbutler on Jun 11 2012. Filed under Libertarian News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry