So at the end of a multi-billion dollar campaign, relatively little is different in the American government. So was it all a huge waste, or did we at least get some useful economic stimulus out of this? I’d say mostly waste. Heavy spending on campaign television advertisements is like a textbook example of things that don’t boost the economy.
Recall that a recession is essentially a situation in which planned investments and desired savings don’t balance out, leaving idle resources in the economy. A cut in interest rates can stimulate investment by bringing that balance back into line. So can a brand new invention. The amazing new gizmo creates demand not just for gizmos but for brand new factories and wearhouses to make and sell them. Federal fiscal policy can also work in this regard. But a sudden surge of outside ad spending on North Dakota TV stations induced by an unexpectedly close Senate race doesn’t inspire those stations to invest in new facilities. All that happens is they raise prices and boost their short-term profits. It’s good news for the station, but just a shift of wealth away from Sheldon Adelson and to the owners of local TV stations in hot election markets.
What’s more, there’s significant crowding out here. Every ad that Romney or Obama ran in Ohio was an extra 15 or 30 seconds that wasn’t used to air some other advertisement. The total flow of advertising through the system is basically fixed, and increased demand for airtime is just inflationary. As I’ve said before, we can tell the economy as a whole suffered from a negative demand shock rather than a negative supply shock because inflation fell and we’ve never caught up—a telltale sign of economy-wide resource idling. But in the specific case of TV advertising we see the reverse. Higher demand plus supply constraints equals higher prices rather than more resource utilization.