New evidence on the multiplier

by on May 26, 2010 at 6:05 am in Economics, Political Science | Permalink

Here is an interview with Joshua Coval, of Harvard Business School, about his current research.  I would urge caution on interpreting these results, but this is what the data toss back out at us:

Q: One of your findings was that the chairs of powerful congressional committees truly bring home the bacon to their states in the forms of earmark spending. Can you give a sense of how large this effect is?

A: Sure. The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair of one of the top-three committees. In the House, the average is around 20 percent. For broader measures of spending, such as discretionary state-level federal transfers, the increase from being represented by a powerful senator is around 10 percent.

Q: Perhaps the most intriguing finding, at least for me, was the degree and consistency to which federal spending at the state level seemed to be connected with a decrease in corporate spending and employment. Did you suspect this was the case when you started the study?

A: We began by examining how the average firm in a chairman's state was impacted by his ascension. The idea was that this would provide a lower bound on the benefits from being politically connected. 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 increase in spending. Indeed, the firms significantly cut physical and R&D spending, reduce employment, and experience lower sales.

The results show up throughout the past 40 years, in large and small states, in large and small firms, and are most pronounced in geographically concentrated firms and within the industries that are the target of the spending.

For the pointer I thank Alex Prado.

Addendum: Megan McArdle comments on the difficulty of interpretation.

JohnF May 26, 2010 at 6:55 am

I think it more likely that the correlation is between a state’s deteriorating environment for business growth and the voters’ apathy that results in the reelection of their Congressmen over and over again. The earmarks thing is just a surface manifestation of the latter.

david May 26, 2010 at 10:06 am

The especially surprising detail is the implied lack of capital mobility – that when government spending level in one state increases, capital doesn’t move there from other states.

spencer May 26, 2010 at 11:19 am

Given that earmarks are only some 1-2% of the federal budget it is really hard to believe that marginal shifts in earmarks would have this size of an impact.

I also wonder how much of the results are driven by West Virginia.

Rich Berger May 26, 2010 at 12:32 pm

Sometimes the invisible foot becomes visible just as it kicks you in the ass.

Bill May 26, 2010 at 2:18 pm

I would be a little skeptical of the methodology and conclusions here.

First, did they lag variables. For example, something may be appropriated in year 1, but actual expenditures are in year 3.

Second, did they measure change in committee chairmanships to see an effect. For example, Republican capture of Congress from 2000 to 2008, or account for split congress in 2006.

Third, did they control for capital intensity of business suppported by the earmark. A Star Wars missile defense senator from Alabama who gets a multibillion expansion of Star Wars defense for his state, or a Texas Senator who gets a multibillion aircraft order for his state–that has different employment effects than a less capital intensive, more human resource intensive project, such as building a school, adding teachers, etc.

Fourth, did they consider the opposite: that a minority member might have power in getting earmarks to get a bill through a committee or Congress that is closely divided. Ranking minority members might have more power, particularly if chairmanships change, or dilatory tactics in committee can be used to extract concessions.

jj May 26, 2010 at 4:15 pm

I was in Coval’s presentation, and the results were hard to believe. However, he DID address all the complaints that the audience had, and also all the comments that that commenters here have.

For instance, Bill: They did look at appropriate lag structure, they did look at chairmanship changes. I don’t think they controlled for capital structure (I may be wrong) but what they certainly did is to look at overall state economy vs. industry into which the earmark went. Industry fared worse, and the break came after the earmark.

They did run counterfactual (placebo) experiments that should show no results – and they got no results. They looked primarily at chairmanship changes which are determined by seniority, and so are exogenous to economic situation in the given state. They even specifically looked at sudden deaths that changed the seniority order.

I have no idea how to explain the results. But I could not come up with an econometric critique that would invalidate their results, nor could I come up with an alternative story. Very intriguing.

Ryan Vann May 26, 2010 at 10:07 pm

Perhaps my irony identifier isn’t hooked up properly, but the title doesn’t seem to mesh with the post.

Bill May 27, 2010 at 7:04 am

JJ,

From the link to the post, there is no link to the paper that I could find. All there is is an interview.
But, you can point out a link to the paper or link it here.

Bill May 27, 2010 at 7:29 am

JJ, Was able to google and find the paper and read it. The questions I asked were not asked in the paper, nor were the comments regarding subcommittee chairpersons.

But, I would question the paper’s methodology in assigning and limiting its analysis to corporations headquartered in the state. Lockheed, I believe, moved its HQ from Cal to Md, Boeing from Wa to Ill, yet the base of the employment is in other states. I would have weighted by employment.

On the otherhand, its statement that government spending displaces private spending (eg, government now pays for the firms R&D rather than the firm paying for it) and as a result the firm distributes more money to shareholders does not surprise me. Why else would a firm lobby for the money.

Tax earmarks–now that’s where you can really see the picture, and where no one is looking.

Conn Carroll May 27, 2010 at 11:10 am

Did they say if they investigated where firms chose to invest instead of the home state’s economy? Perhaps they redirected their resources to Washington DC lobbyists since that is where the firms could now win competitive advantage.

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