Harvard Confirms Obama’s Stimulus Plan a Failure!?

ATLANTA— Researchers at the Harvard Business School published a study in late May of this year that turns recent Obama Administration arguments about the efficacy of stimulus spending on their head.  The Harvard researchers began with the intent of proving that states and communities benefit substantially when their state’s congressional delegation grows in power in Washington and takes leadership roles on key appropriations committees in the House and Senate.  The study was supposed to prove that federal spending in the state would correspondingly increase, and that businesses and the local economies would benefit greatly.  What those researchers learned was almost entirely the opposite, however.

The research went back 40 years and did demonstrate that spending definitely increased when a state’s congressional delegation grew in power.  However, the study demonstrated that on average, “companies experienced lower sales and retrenched by cutting payroll, R&D, and other expenses. Indeed, in the years that followed a congressman’s ascendancy to the chairmanship of a powerful committee, the average firm in his state cut back capital expenditures by roughly 15 percent.”

The researchers considered the causes of their findings, which they found extremely surprising.  They concluded:

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.”

Fascinating study.  But we probably didn’t need Harvard to do a study for us to learn that Keynesian stimulus does little to stimulate lasting private sector economic activity.  There is already abundant evidence of this- and two recent events prove particularly instructive.

Most significantly, Barack Obama’s $787 billion stimulus package failed to stem the rise of national unemployment. In fact, unemployment turned out much worse than the Administration’s projection of an 8 percent maximum if the law was passed.  As we all know, unemployment has been hovering at or very near 10 percent for over a year since the law’s passage.   Not surprisingly, a big part of the reason for this is that companies nation-wide have been doing the very things that the Harvard researchers found local firms doing: hoarding cash, holding back on hiring, cutting expenses, and blaming the overall uncertainty caused by government encroachment into the private sector for their behavior.

Another telling example of this is the career of Robert Byrd, the Senator from West Virginia who passed in June.  Mr. Byrd was long a powerful mover-and-shaker on Capital Hill and was considered the king of pork-barrelling.  He earmarked billions for the beautiful state of West Virginia.  Practically every bridge, road, and monument is named after the man.  Despite all of his spending, West Virginia’s economy remains in perpetual malaise, with some of the highest incidences of poverty in the country.

At any rate, progressives are too thick-headed to see past ideology and recognize that economics is more than simple numbers concerning spending and demand.  All progressives see is diminished demand, and the need for government to step in.

However, the expectations of economic participants are at least as important in determining future economic activity as demand and government spending patterns.   If free people can expect to keep a substantial portion of their own profits; can expect the rule of law to protect private property rights and can expect to be allowed to pursue their economic self-interest without fear that government will play favorites by funding certain industries while demonizing others, then those economic participants will be a whole lot more willing to work, spend and invest.  Unfortunately, in Barack Obama’s America, the opposite is almost all too frequently true.