Study Shows Government Spending Slows Job Growth

A new research study by Harvard's Business school professors, Lauren Cohen, Joshua Coval, and Christopher Malloy shows that when government spends money in a Congressional district or state, that businesses stop growing. Imagine that, when your government spends money in your state business don't invest money in either capital improvements or in hiring new employees.

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?"

"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.

Now, what effect did the "stimulus package" and the various bailouts have upon the economy as a whole? When the government, in a 5 month period spent a minimum of $1.5 trillion dollars to, first prop up failing corporations (banks, investment firms, and GM/Chrysler) and then in the hugely ineffective porkulus package, it literally sucked the life out of the credit industry by taking those funds that would have been used by business to grow and expand and sank it into long term government bonds. That had the effect of stifling the ability of small business and then the construction industry who need easily available credit in order to conduct day to day business operations.

Small business need credit for operating capital in order to purchase necessary materials. The construction industry does so even more...for example, a housing construction company (as well as commercial firms) need to borrow money to purchase materials to build homes...when that money is available in much smaller increments, fewer houses are built. It's the same for large construction firms as well. When you build/manufacture less, you need fewer workers...fewer workers mean fewer available jobs, that means less taxes are raised...smaller tax revenue means municipalities/counties/states have less money to operate on...

Their conclusion is simple. The government shouldn't spend money to stimulate the economy. Reducing taxes and the increase in available money for loans will...have a much more positive effect.

Our findings suggest that they should revisit their belief that federal spending can stimulate private economic development. It is important to note that our research ignores all costs associated with paying for the spending such as higher taxes or increased borrowing. From the perspective of the target state, the funds are essentially free, but clearly at the national level someone has to pay for stimulus spending. And in the absence of a positive private-sector response, it seems even more difficult to justify federal spending than otherwise.