Goldman Sachs's Suspicious Spending Call
Fiscal Policy: A major Wall Street investment bank says budget cuts pushed by the GOP could slash economic growth. If it were anyone other than Goldman Sachs making the prediction, maybe we'd believe it.
In a news-making forecast, the bank says Republicans' plan to trim $61 billion - out of an estimated deficit of $1.5 trillion on spending of $3.8 trillion - could lower U.S. GDP growth by as much as 2 percentage points as the year goes on.
"This nonpartisan study proves that the House Republicans' proposal is a recipe for a double-dip recession," Democratic Sen. Chuck Schumer quickly remarked. "This analysis puts a dagger through the heart of their 'cut-and-grow' fantasy."
This, of course, is true only if you buy into the Keynesian premise that a $1 increase in government spending leads to a greater than $1 increase in economic output.
That idea has been disproved and roundly criticized after the Obama administration blithely predicted $2.50 in economic activity for every $1 in added government "stimulus."
We've spent trillions more, but have little in the way of growth or jobs to show for it.
The theory has proved so laughably false that not even its most fervent proponents try to defend it anymore - with the exception of divorced-from-reality politicians such as Schumer.
Harvard University economist Robert Barro and Stanford University's John Taylor have done separate studies estimating far lower "multipliers" for government spending. Other economists have done the same.
Their work shows that more government spending, by taking money out of the private sector, is a loss to the economy and that taking money away from government is a gain. Since that clearly reflects reality, we're inclined to agree with it.
We could stop there, but there's another reason we disagree with Goldman Sachs: The conflict it has when it comes to making forecasts based on government policy.
The revolving door between Goldman and government is well-known. An investigative report last year by CBS News counted "at least four dozen former employees, lobbyists or advisers at the highest reaches of power both in Washington and around the world."
They include former Treasury Secretary Henry Paulson, who crafted the stimulus plan and Wall Street bailouts; former Democratic House Majority Leader Dick Gephardt; and former SEC head Arthur Levitt, who as of last year was a paid lobbyist for Goldman.
No surprise, then, that Goldman Sachs would see even the modest cuts proposed by the GOP as a danger to the economy. With its shifting business ties to government, the cuts would certainly be a danger to them.
No one on Wall Street did better as a result of the government's massive, disastrous intervention in the U.S. economy the past two years. Goldman didn't just see its business grow. It also watched as government regulators selectively let some of its key competitors die.
The Congressional Budget Office has now raised its estimate for the taxpayers' cost of the two-year-old economic "stimulus" to a shocking $821 billion.
The idea that a $61 billion cut in spending threatens the economy's growth is just plain silly.
