How federal pork suppresses business

An old axiom in Indiana is that the state suffers because Hoosier politicians bring home too little pork from Washington. If officials like Richard Lugar and Evan Bayh would just return more of those tax dollars, goes the wistful thinking, Indiana would have better roads to support business and better public spaces to attract knowledge workers.

However, a new Harvard Business School study suggests the truth is just the opposite: Federal money actually suppresses business investment and growth. In other words, be thankful that the dollars are not flowing to Indiana, at least not in massive quantities.

The researchers found a strong link between politicians’ rise to powerful congressional committee chairmanships—perches from which they could direct pork homeward—and a falloff in business investment.

A year after assuming a chairmanship, the chairman’s state on average received at least 40 percent more federal earmark spending, a level that endures until they leave the post.

In the year following the ascendancy, public companies in the politician’s home state cut capital expenditures about 15 percent, curtail research and development spending, and increase their dividends to investors. Companies also winnow headcount and see sales growth fall off.

The results held fairly consistently across large and small companies, and large and small states.

Indiana certainly sends more tax dollars to Washington than it gets back. The state, 14th-largest by population, ranks 32nd in earmarks. Only California, New York, Illinois, Ohio, Michigan and North Carolina get fewer earmarks on a per-capita basis.

A link to the study, which is quite readable, is here.

Why does federal largess suffocate corporate creativity? Purdue University finance professor John McConnell thinks local people put more energy into trying to land pork than doing productive work and creating jobs.

Look at West Virginia, McConnell says. It’s full of federally funded projects courtesy of long-time Sen. Robert Byrd, yet it’s among the most economically depressed states in the nation.

“Like many other opiates, federal pork creates an addiction that stunts creativity,” he says. “In this case, the addiction crowds out entrepreneurial activity of the type that creates value.”

McConnell adds that everyone would be better off with lower taxes and not having to beg to get it back.

Your turn. Is there an upside to pork?