>>>Shocking News Alert! Once again, it's not the headline that's shocking, at least not for those of us who have even a tertiary understanding of the laws of economics. What's shocking is where it came from, Harvard.
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>>>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.
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>>>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?"
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>>>http://hbswk.hbs.edu/item/6420.html
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>>>"It was an enormous surprise, at least to us, to learn that the average firm in the chairman's state did not benefit at all from the unanticipated increase in spending," Coval reports.
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>>>It never ceases to amaze me that the "best and brightest" cannot grasp these seemingly simple and historically proven economic truths.
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>>OK, I'll bite - that paper's conclusions seemed surprising to me. One could assume the increased federal spending is a stimulus of sorts, and might have a fiscal multiplier effect cf. http://en.wikipedia.org/wiki/Fiscal_multiplier . It seems this is an example where the multiplier value is less than 1.
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>I reject the assumption that federal spending is a stimulus. The monies provided from the central command structure of the federal (and to a lessor extent state) government have been previously removed from the private sector and reassigned through a partisan and politically self-interested process. Those monies would be better left in the private sector who provide goods and services in response to local (city and county) directed contracts decided locally upon the community's need as determined through local input (county boards and city council meetings). Politically connected and distributed "stimulus" monies are political paybacks for previous and implied future campaign funding support.

"Previously removed" is not quite right - in most, if not all cases, the money is actually borrowed and/or printed so there isn't "immediate" pain of extraction/confiscation.

I believe the fiscal multiplier of a stimulus can be greater than 1 as per the Wikipedia article.

Also, well-targeted stimulus has a positive effect on confidence. To a very large extent, markets are literally a confidence game.

I agree that the allocation process is rife with overhead and arguably often corrupt. This effectively reduces the fiscal multiplier so in many cases it needs to start out significantly greater than 1 just in order to break even overall. The apparent finding in the paper you originally cited, that shows effective multipliers lower than 1, implies that in many cases the effects of overhead and corruption are extensive. This is probably unwelcome news to earmark-happy pols, but hopefully will serve as a wake-up call.

I agree that money in the private sector is often more effective than public, as long as the private sector is not corrupt. Unhappily there have been a lot of examples of private-sector corruption over the last couple of years.