"Stimulus Surprise: Companies Retrench When Government Spends" - HBS Study

Through a relationship I established a number of years back with a Gold / Treasury analyst (old guy, tracking both since the early 60s), I've developed a strong set of views on government spending programs and their real effects on growth: Public Spend Crowds out the Private Sector. To boil it down to its basics, the government's spending efforts to stimulate growth is only effective in creating public sector jobs while have the opposite effect on corporate / small business spending.

I've personally been against the stimulus plan from the offset and a recently published Harvard Business School study on the topic really does the best job in quantifying the views I've been preaching to colleauges and friends since the ARRA began making its way around congress.

The analysis is some 20 odd pages with a detailed appendix and worth a read if you're into tracking our shift to a welfare state.

Since it has always been difficult to track the statistics for such a claim, the researchers found a great way to benchmark spending effect over 40 years - whenever a senator / congressman was promoted to high level positions in congress, they'd mark it at time zero and track earmarked spending in the local economy as well as shifts in overall corporate hiring / capex spending over the time period. My description of time zero is simplified but if you've got the time to have a read through it, you'll have some strong opinions for or against it.

Main results:
- When a state's Senator ascended to the chair of one of the top-three committees, earmarks in the following year increased between 40% and 50%, and discretionary state-level Federal transfers increased about 10%. In the median case, that represented a $200 million increase in Federal spending directed to that state.

• In response, the average firm in the median state cut its employment growth rate by 3% to 13%, reduced capital expenditures by approximately 15% or $39 million, R&D expenditures by roughly 10% or $34 million and experienced a decline in sales. They also increased their dividend payouts by 13%, suggesting fewer investment opportunities. These results were even more pronounced for firms within industries targeted by the Federal spending and for firms that did not have overseas operations, and therefore were more exposed to the effects of the increase in Federal spending on their home state's economy.

The study (in pdf):
http://www.people.hbs.edu/cmalloy/pdffiles/envaloy.pdf

The discussion:
http://hbswk.hbs.edu/item/6420.html

Please, no unjustified bashing of the conclusions; if you have a read through it and have justifiable argument, please post, no "these guys are idiots, we would have been worse off" (you get the picture). Trying to increase the intellectual commentary around here, can't take "this prestige vs that bank vs this group" anymore...