"Stimulus Surprise: Companies Retrench When Government Spends" Archives

"Stimulus Surprise: Companies Retrench When Government Spends"

Recent research at Harvard Business School began with the premise that as a state's congressional delegation grew in stature and power in Washington, D.C., local businesses would benefit from the increased federal spending sure to come their way.

It turned out quite the opposite. In fact, professors Lauren Cohen, Joshua Coval, and Christopher Malloy discovered to their surprise that 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, according to their working paper, "Do Powerful Politicians Cause Corporate Downsizing?" (47-page PDF)

"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 unanticipated increase in spending," Coval reports.

Over a 40-year period, the study looked at increases in local earmarks and other federal spending that flowed to states after the senator or representative rose to the chairmanship of a powerful congressional committee.

We asked Coval about the relationship between the government and the private sector, and how policymakers should critically evaluate federal stimulus plans to help local companies.

"Stimulus Surprise: Companies Retrench When Government Spends," Q&A with Joshua Coval, HBS Working Knowledge, May 24, 2010

See also

Recession, Depression, Insolvency, Bankruptcy, and Federal Bailouts

Compiled by TheCapitol.Net
Authors: Marc Labonte, Mark Jickling, David H. Carpenter, Craig K. Elwell, Baird Webel, N. Eric Weiss, Edward V. Murphy, Bill Canis, James M. Bickley, Hinda Chaikind, Carol A. Pettit, Patrick Purcell, Carol Rapaport, Gary Shorter, and Orice M. Williams

There is no simple rule-of-thumb to determine when recessions begin or end. Recessions are officially declared by the National Bureau of Economic Research (NBER), a non-profit research organization. The NBER defines a recession as a "significant decline in economic activity spread across the economy, lasting more than a few months" based on a number of economic indicators, with an emphasis on trends in employment and income.
According to the NBER, the U.S. economy entered a recession in December 2007, making it the longest recession of the post-World War II era. One unique characteristic of this recession was the severe disruption to financial markets. Financial conditions began to deteriorate in August 2007, but became more severe in September 2008. While financial downturns commonly accompany economic downturns, financial markets functioned smoothly in previous recessions.

2009, 316 pages
ISBN: 1587331594 ISBN 13: 978-1-58733-159-6
Softcover book: $19.95

For more information, see 1596Recession.com

R40198, RL34412, R40530, R40007, RS22966, RS22956, RS22963, RL34730, R40003

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