Stimulus Surprise: Companies Retrench When Government Spends

The results of a new study by Harvard Business School will certainly shock some Keynesian academics — and high-ranking government officials. Instead of providing a stimulating effect to the economy, government spending creates pressures on private industry to reduce staff and investment. 

The article starts out:  "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?"  More at  Cfr. http://hbswk.hbs.edu/item/6420.html