Federal Spending and Private Investment

Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.

Tyler Cowen points today to some interesting new research on government spending. Three researchers at Harvard took a look at what happened to federal earmarks when a state’s senator or congressman took over chairmanship of a key appropriations committee. Answer: the state’s earmarks went up a bunch (by 50% for senators and 20% for House members). No surprise there. So what happens to economic activity after this bounty starts pouring in? From the paper:

Seniority shocks result in economically and statistically significant declines in firm capital expenditures. Across all measures of seniority, the declines are large and highly significant….The coefficient implies a 1.2% drop in scaled capital expenditures []. Since firms have average capital expenditures of 8 percent of assets, Senate chairmanship causes a roughly 15 percent reduction in the representative firm’s capex.

Italics mine. So when federal spending goes up in a random way (committee chairmanships are generally unrelated to broader economic activity), capital expenditures by private industry goes down. A lot. Researcher Joshua Coval takes a crack at explaining 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.

Italics mine again. These are interesting results. But they need some followup. Even if you believe that government spending crowds out private spending in a serious way, the effect here is enormous. How can you possibly get an 8% drop in private sector capital expenditures from the relatively trivial increase in federal spending that comes from earmarks? There has to be something more to this story.

On the other hand, it makes perfect sense that whatever effect there is, is more pronounced when unemployment is low. That’s exactly when you’d expect government spending to crowd out private sector spending. However, it probably doesn’t tell us much about current stimulus spending, which is taking place in an environment of zero-bound monetary policy and extremely high unemployment. We haven’t had an environment like that since the Great Depression, which means that empirical evidence one way or the other on this kind of federal spending is just very hard to come by. I’d certainly be surprised if the 2009 stimulus bill provoked any significant private sector crowding out.

WE'LL BE BLUNT:

We need to start raising significantly more in donations from our online community of readers, especially from those who read Mother Jones regularly but have never decided to pitch in because you figured others always will. We also need long-time and new donors, everyone, to keep showing up for us.

In "It's Not a Crisis. This Is the New Normal," we explain, as matter-of-factly as we can, what exactly our finances look like, how brutal it is to sustain quality journalism right now, what makes Mother Jones different than most of the news out there, and why support from readers is the only thing that keeps us going. Despite the challenges, we're optimistic we can increase the share of online readers who decide to donate—starting with hitting an ambitious $300,000 goal in just three weeks to make sure we can finish our fiscal year break-even in the coming months.

Please learn more about how Mother Jones works and our 47-year history of doing nonprofit journalism that you don't find elsewhere—and help us do it with a donation if you can. We've already cut expenses and hitting our online goal is critical right now.

payment methods

WE'LL BE BLUNT

We need to start raising significantly more in donations from our online community of readers, especially from those who read Mother Jones regularly but have never decided to pitch in because you figured others always will. We also need long-time and new donors, everyone, to keep showing up for us.

In "It's Not a Crisis. This Is the New Normal," we explain, as matter-of-factly as we can, what exactly our finances look like, how brutal it is to sustain quality journalism right now, what makes Mother Jones different than most of the news out there, and why support from readers is the only thing that keeps us going. Despite the challenges, we're optimistic we can increase the share of online readers who decide to donate—starting with hitting an ambitious $300,000 goal in just three weeks to make sure we can finish our fiscal year break-even in the coming months.

Please learn more about how Mother Jones works and our 47-year history of doing nonprofit journalism that you don't find elsewhere—and help us do it with a donation if you can. We've already cut expenses and hitting our online goal is critical right now.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate