On Friday, I wrote about why I think the Goldman Sachs analysis that the GOP spending cuts would hurt the economy doesn’t make sense. Today, economist John Taylor piles on.
There are several things wrong with the analysis used in Goldman Sachs report. First, it does not take account of the beneficial effects of starting now on a credible plan to reduce the deficit. Basic economic models in which incentives and expectations of future policy matter show that a credible plan to reduce gradually the deficit will increase economic growth and reduce unemployment by removing uncertainty and lowering the chances of large tax increases in the future. The high unemployment we are experiencing now is due to low private investment rather than low government spending. By reducing some uncertainty and the threats of exploding debt, the House spending proposal will encourage private investment.
The analysis in this Goldman-Sachs report is based on the same type of “large multiplier” theory that predicted that the stimulus package of 2009 would stimulate economic growth. Research by me and my colleague John Cogan finds that more up-to-date theories, which bring important incentive and expectations effects into account, show far smaller multipliers. In these models a reduction in the growth of spending will immediately crowd in private investment. Moreover, by following the stimulus money, we found that in actuality the stimulus package of 2009 had no material positive effect on economic growth or employment. The same economic theory which said the stimulus would increase economic growth in the past two years, says that reversing that spending will reduce growth now. It was wrong in the past and it is highly likely to be wrong again.
There is also the fact that the report confuses budget authority with budget outlays, which is what’s actually spent. Basically, it plugs wrong numbers into an already problematic model.
Unsurprisingly, this morning the Washington Post quoted Mark Zandi of Moody’s making the same claims about the negative impact of cutting spending. Taylor’s criticisms (and mine) apply to his work, too.
I mentioned this before when Zandi's names came up before but he gave a presentation at my job site during the spring of 2009 and predicted the economy, including the housing market, would be in great shape by the fourth quarter of 2009. He was so wrong it is not even funny. As a reminder, Zandi has a direct line to Obama, Pelosi and Reid.
Reply to this commentLinkReport AbuseGoldman-Sachs has the #1 federaltit position in the US. A great river of money flows into the ever grasping hands of it's 'genius' (and I might add attractive) employees.
Reply to this commentLinkReport AbuseGovernment Sachs is NEVER going to go against the FED or the Administration position. They epitomize crony capitalism and do nothing but encourage more state control of the economy (and manipulation of the stock market).
Reply to this commentLinkReport Abuse@RightEveryTime--
You're right again.
This is a far cry from your father's Goldman Sachs. Today, it's the epitome of Crony Capitalism.
Reply to this commentLinkReport AbuseI have a question for orthodox Keynesians, either those at Goldman Sachs, or any that might be posting on this board. I'm not trying to be difficult, I am genuinely curious and hope to be informed.
If government deficit spending is what causes economic growth, why do we ever have recessions? It's not like the government was a model of austerity before any of the recent recessions. Lord Keynes' model was deficit spending during recessions to "prime the pump" followed by reduced spending during good times to reduce the debt that was run up during the downturn.
It's questionable whether that model is even possible in a country where the people on whom the money is spent get to vote. Even if it is possible for a republic with near universal franchise to implement Keynesianism, we certainly have not done so. Instead of surpluses in good times and deficits in bad our approach is large deficits in good times, and staggeringly large ones in bad.
The national debt is approaching 100 percent of GDP, but Goldman Sachs says that we can't cut spending or we will destroy economic growth. If we can't reduce government spending now, when will we ever be able to? At 200 percent of GDP, 300 percent? 1000 percent?
I'm just asking.
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