Politicians love to hold ribbon-cutting ceremonies in front of projects financed by government. Congressmen and women smilingly brag about how they are helping their home state “create jobs” by bringing home the bacon, and state lawmakers are overjoyed that “free” federal government money is being showered upon their state. The money awarded to the contractors performing the work, they insist, will “multiply” throughout the economy and create jobs and economic growth.
But a recent study by three Harvard economists concludes what I’ve been declaring for a long time: government spending (of any type) does not “stimulate” the economy. In fact, it hampers economic progress.
Read here my article summarizing the Harvard study. Here is a slice:
The reason for negative economic effects coming after a windfall of supposedly “free” federal dollars is what economists refer to as the “crowd out” effect. The government-financed projects crowd out investments that would have otherwise been made by the private, productive sector of the economy. Because scarce resources in the local and state economies such as labor, land and equipment are diverted to politically-motivated projects away from profit-seeking ventures, states that receive boosts in federally-funded projects are left worse off.
The next time you see a smiling politician attending some ribbon-cutting ceremony in front of a federally-funded project bragging about how he “brought home the bacon” to his home state, know that there is no such thing as a free lunch. The evidence is in: bringing more federal funds to their home state may make for good headlines for the politicians responsible, but is bad for business.