A Goldman Sachs research report warning that austerity measures and a possible budget shut down would be a drag to growth is being seen as a covert piece of Democratic propaganda by some on the right.
The report, by Goldman economist Alec Phillips, was first surfaced yesterday by ABC, which published a few key paragraphs. See if you can spot the propaganda.
- Proposals to cut federal spending, the possibility of a government shutdown, and the escalated debate over state employee compensation has increased interest in the effect of fiscal policy on growth, after last year’s fiscal package briefly neutralized the expected drag from federal fiscal policy.
- Federal spending cuts deserve the most attention. They are the most likely of these issues to occur, and could have the largest magnitude. The assumption we incorporated into our recently revised budget estimates—discretionary spending cuts of $25bn and $50bn below the CBO baseline for FY2011 and FY2012 respectively—would shave nearly one percentage point off of the annualized rate of real GDP growth in Q2, but would fade quickly with a negligible effect on growth by year-end.
- The related risk of a temporary federal government shutdown could also lead to a fiscal drag on growth, but this appears to be a lower probability scenario. We estimate that each week that the federal government is shut down would reduce federal spending by around $8bn, and could reduce real GDP growth by as much as 0.8 pp at an annualized rateher in the quarter it occurred, but would provide a lift to growth in the following quarter as federal activity returned to the previous level.
Reuters’ conservative columnist James Pethokoukis has been all over this. This morning he tweeted that this wasn’t even economics, it was just arithmetic (though he later tweeted that after being pro Democratic, Goldman now gives more to the GOP)! Robert Wenzel goes further, saying that the report may have been deliberately timed to help the Democrats in the current budget battle, and that Goldman was “providing pitchforks” for the Democrats.
But sorry, ff you think there’s pro-Democratic propaganda in the paragraphs above, you’ve got better eyes than we do. It specifically says that by the end of the year, the spending cuts would have a negligible effect, though it goes onto say that a government shutdown would have a more serious impact on growth.
Is there anyone that actually would dispute any of this? Not only does this seem blatantly obvious, but it’s exactly the same message we see in almost every macro research report we read: One risk to GDP estimates is austerity. Here’s another way to think about it: Just about everything we read after the tax cut deal was reached said that it would boost the GDP, and yet that, too, was basically pro-deficit Keynesianism in action.
Where were the howls of outrage over those reports? There weren’t any.
Here’s where people are getting tripped up. In the long term, more spending isn’t a recipe for a robust economy. But in the short term, Goldman’s point is incredibly conventional. And though people love to slam economists for their models and not predicting crises, in the short term, there’s nothing too difficult about forecasting GDP
So go ahead and slam Wall Street’s desire for a sugar-filled stimulus now, and for ignoring the long-term effects of policy. But the only aspect of Goldman’s report that was intentionally timed was a desire to communicate to clients various scenarios for what’s going on in DC.