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The Trouble with Earmarxism?

As the debate over banning or at least suspending Congressional earmarks continues, it's worth returning to a recent study from Harvard Business School which indicates that earmarks have a negative impact on economic growth overall.

Why would that be the case?  Because the rise of earmarks and other hand-outs for business encourages the most talented and ambitious people to try to make money by lobbying Congress and gaming the system rather than by becoming entrepreneurs and creating new businesses.

Next question: can corporate hand-outs be reduced without reducing other hand-outs?  Or is the cultural logic that leads to one almost impossible to square with a refusal to do the other?

Categories > Economy

Discussions - 1 Comment

I will partially buy the reasoning that has the rise of earmarks encouraging people to start lobbying businesses. But I am not really sure about how great a study it is.

While we always make congress out to be rather evil, the truth is probably that every earmark they do make has to have a pretty good argument behind it.

And the best argument is that the gov. is already on the hook for unemployment insurance, medicare, exct....

This was the GM bailout argument. A huge portion of the GM bailout would have been spent by the government thru different safety net programs...had we not saved GM.

So if GM is already going down... if Michigan is already moving towards a recession...then the argument for pork and stimulus, which is less inflationary given unemployment is stronger.

That is it is easier to get money for industries that are failling, to try to offset the unemployment or negative economic picture.

That is pork barrel spending is often times tied to say base closures (and doesn't fully offset, the closure)

That is earmarks are easier to sell when a sector is collapsing.

"In the year that follows a congressman’s ascendency, the average firm in his state cuts back capital expenditures by roughly 15%. These firms also significantly reduce R&D expenditures and increase payouts to their investors."

Well the payout to investors isn't all bad...but typically a company that does cut back capital expenditures and reduces R&D is no longer a growth company... that is it has to pay a dividend to maintain its stock price.

You look at say AAPL Apple, it doesn't pay a dividend.

You look at say BTU Peabody Energy, it pays a dividend.
but it is a very small dividend...(It is actually a growth company, so bad example.)

Then again you look at say the state of West Virginia... appart from the argument that the state is collapsing, a good way to get earmarks is to argue some sort of environmental clean up...then that money comes with strings that say restricts mountain top coal removal or pays for clean-up...this shifts coal production from West
Virginia to Montana and Wyomming, and the Powder River Basin.

I mean this is basically what BTU did. So I suppose you can say these sorts of earmarks are "bad" for economic growth...but you can also say that companies that mine coal in west virginia depleted reserves, or faced high environmental clean up costs, so production fell, the stocks were defended with dividends, and production was shifted to a different state.

So while BTU(peabody is a growth company) the coal minning industry in west virginia is a declining growth industry, with steep environmental costs.

Earmarks may very well have a "negative impact" on economic growth, but this might be because earmarks are most plausible when the industry is hurting.

So I would bookmark this study under: "if it stops moving, subsidize it."

If you find it remarkable that subsidizing things that have stopped moving, doesn't have a positive effect on economic growth once you factor out the earmark then you don't get it.

It is like saying that unemployment checks have a negative impact on economic growth. Well, yeah but folks don't collect them until they are unemployed.

The authors of the study thus place too much reliance upon: "Thus, a congressman’s ascension to a powerful committee chair creates a positive shock to his or her state’s share of federal funds that is virtually independent of the state’s economic conditions."

I mean this is true, but there is too much reliance already built into the broad macro concept "the state's economic conditions". The "safety net" is certainly impacted by the state's macro economic conditions...but earmarks are not generally.

The thing is this does not mean that earmarks are not geared towards bear markets...You pick me any state, and I will find an industry/company in that state in a bear market, and one in a bull market.

The "earmarks" generally go to the "compelling state interests" that are easiest to sell, which generally means to the bear markets, and the environmental concerns...that is earmarks are not virtually independent of the state's economic conditions simply because the congressman's ascention to a powerful commitee chair is.

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