Zero-Sum Earmarks - A new study finds that pork hurts at home

Zero-Sum Earmarks. WSJ Editorial
A new study finds that pork hurts at homeWSJ, May 27, 2010

For Members of Congress, becoming a committee chairman means more power to spend and thus help for the home district, right? That's certainly the common wisdom. But according to new research from Harvard Business School, the increased federal spending causes local companies to lose sales and cut back on research, payroll and other expenses.

The results surprised Harvard professors Lauren Cohen, Christopher Malloy and Joshua Coval, who expected to see politically connected firms prosper from federal largesse. Instead, the research, which covered 1967 to 2008, found that "strong and widespread evidence of corporate retrenchment" accompanied Congressional seniority. According to Mr. Coval, the research shows federal dollars "directly supplant private sector activity—they literally undertake projects the private sector was planning to do on its own."

The chairmanship of a powerful Senate committee such as Finance or Appropriations typically brings an increase of 40% to 50% in earmark spending for the home state. In the House, top dogs haul an average of 20% more to their states. Yet in the first year after a chairman's rise, the paper notes, the average firm in his state "cuts back capital expenditures by roughly 15%." The behavior typically continues until the Congressman steps down, and it is felt in particular by firms that have the strongest ties to the home state.

Part of the problem is that public money is "crowding out" investment opportunities for firms. "Some of our results point towards the role of competition for state specific factors of production, including labor and fixed assets such as real estates," the authors write. "Public spending appears to increase demand for state-specific factors of production and thereby compel firms to downsize and invest elsewhere." They add that "We also find evidence that the effects are most pronounced in sectors that are the target of earmark spending."

The same side effects may now be observed as the federal stimulus program also ripples through the broader economy: In the first quarter of 2010, USA Today reported, private paychecks made up the lowest share of personal income in history as government spending rose to its highest levels ever. That trend inevitably leads to higher taxes and further economic harm.

Democrats and Republicans have promised earmark reform for years, only to abandon the effort in favor of "bringing home the bacon" and incumbent protection. The Harvard study suggests the Congressmen are really bringing home less economic prosperity.