Goldman Sachs issued a “clarification” of its analyst’s attack on planned Republican budget cuts after Chairman Bernanke called hanky-panky. Poor fellows say they were misunderstood and now mostly agree with the chairman that any impact will be mild and brief — although frankly, I’m not sure this makes a great deal more sense than the original stories.
Besides Veronique de Rugy’s breakthrough posts here in the Corner, I note that Megan McArdle at The Atlantic and Caroline Baum of Bloomberg/Businessweek also let Goldman’s Alec Phillips (and fellow-traveler Mark Zandi) have it right in the old multiplier.
That had to hurt, especially since Ezra Klein, Jonathan Chait, and Slate’s David Weigel followed GS and Zandi off the cliff, apparently without understanding the underlying models and assumptions. Careful, guys. Unless you have a Ph.D., only practice Keynesianism in the privacy of your own home.
Also holding hands and jumping was Sen. Chuck Schumer, who said: “This nonpartisan study proves that the House Republicans’ proposal is a recipe for a double-dip recession. … This analysis puts a dagger through the heart of their ‘cut-and-grow’ fantasy.” Yet another example of why our elected representatives require careful adult supervision, and why they should not be left alone to play with too-big-to-fail investment houses.
So here’s the state of play on the proposed budget cuts and the multiplier effect thereof: Orthodox conservative economists, including Veronique and John B. Taylor, anticipate no downside (multiplier zero to negative). Orthodox liberal economists, including Bernanke, McArdle, and revisionist Goldman Sachs, aren’t thrilled by the cuts but say the impact will be mild, possibly costing 200,000 new jobs over several years (multiplier 1.05 to 1.55). The double-dippers, however, are lost in space (multiplier greater than five). As McArdle notes, “We’re going to cut government spending by 0.4% of GDP, and see a 2% drop? That’s a hell of a multiplier. A double-dip recession is an even more heroic stretch, given that the CBO is projecting GDP growth of 2.7% this year.”