Do Powerful Politicians Cause Corporate Downsizing?

Abstract

This paper employs a new empirical approach for identifying the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanships as a source of exogenous variation in state-level federal expenditures. We show that fiscal spending shocks appear to significantly dampen corporate investment activity. This retrenchment occurs within large and small states and is most pronounced among geographically concentrated firms. The effects are economically meaningful, and the mechanism-entirely distinct from interest rate and tax channels-suggests new considerations in assessing the impact of government spending on private-sector economic activity.