Posted on 02/23/2011 7:46:00 PM PST by sickoflibs
A confidential new report prepared by Goldman Sachs for its clients says spending cuts passed by the House of Representatives last week would be a drag on the economy, cutting economic growth by about two percent of GDP.
“Under the House passed spending bill [which cut spending by $61 billion],” says the report, which was obtained by ABC News, “the drag on GDP growth from federal fiscal policy would increase by 1.5pp to 2pp in Q2 and Q3 compared with current law.”
The report, which is signed by Goldman economist Alec Phillips, goes on to predict that the House-passed bill is unlikely to become law because it won’t pass the Senate and, in any case, the president threatened to veto it.
More likely, the report says, is a deal to cut spending by $25 billion this year, followed by a cut of $50 billion next year.
Even those more modest spending cuts, Goldman Sachs predicts, will cut economic growth rates by one percent of GDP.
Here’s the Report:
•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 rate in the quarter it occurred, but would provide a lift to growth in the following quarter as federal activity returned to the previous level. •The policies that several state governments are debating related to state employee compensation and organization appear to have—at least in the short term—little potential macroeconomic effect. We assume that state governments will cut spending or raise taxes no more than necessary to balance their budgets. This amount will be determined by the level of tax receipts available to pay for spending, not political negotiations. Fiscal drag is quickly reemerging as a focus, only a couple of months after an agreement to extend tax cuts and unemployment benefits appeared to have neutralized most of the drag from federal fiscal policy for most of 2011. We see federal spending cuts as the most important near-term risk. The possibility of a government shutdown is a significant but less likely factor, while the debate over state employee compensation seems unlikely to have a meaningful near-term macroeconomic effect:
Federal spending cuts would result in additional fiscal drag: In our recently updated budget deficit estimates, we have assumed that Congress will reduce discretionary spending by $25bn below the Congressional Budget Office's (CBO) baseline for FY2011, and another $25bn (for a total of $50bn below the baseline) for FY2012 (for more on these assumptions and our budget estimates, see “The US Budget Outlook: Better, but Not Good Enough,” US Economics Analyst 11/05, February 4, 2011). By contrast, the House of Representatives passed legislation over the weekend to cut spending for FY2011 by $60bn from current levels (the House hasn’t yet addressed FY2012). Both scenarios would add to the drag from federal fiscal policy on growth:
•The modest spending cuts we assume in our own budget forecast would lead to renewed fiscal drag. Since spending cuts could be enacted no earlier than next month, when the current fiscal year will be nearly half over, $25bn in cuts would require spending in the second half of FY2011 to be reduced by $50bn at an annual rate. Since the cut would be phased in abruptly, it could result in a drag on growth in Q2 by as much as one percentage point (pp), but would quickly fade over the next two quarters as spending stabilizes at a lower level, with little effect versus current policy on the rate of real GDP growth by year end. •The spending cut package that passed the House of Representatives would have a deeper effect. Under the House passed spending bill, the drag on GDP growth from federal fiscal policy would increase by 1.5pp to 2pp in Q2 and Q3 compared with current law. However, we don’t see this scenario as likely; while we expect discretionary spending to be cut, the current House proposal doesn’t appear viable in the Senate, and the president has already threatened a veto.
A federal shutdown poses less risk, as long as it is brief: A federal shutdown can potentially occur when one or more of the 12 annual appropriations bills have not been enacted for the current fiscal year. Usually, Congress provides temporary funding through a “continuing resolution” (CR) until appropriations have been enacted, but from time to time, particularly when control of government is divided, this does not happen and funding lapses. When this occurs, any agency or cabinet department without funding in place for the current fiscal year must cease non-essential operations. So far, Congress has not enacted any of the annual appropriations bills for the fiscal year that began October 1, so a shutdown would affect virtually all non-essential programs. That said, the potential for a federal shutdown probably does not present a major risk:
•While the possibility of a shutdown is real, it isn’t that likely. We wrote more extensively on the key fiscal developments over the next few months last week (see “The Federal Budget Process Gets Underway,” US Daily, February 17, 2011). The bottom line is that while rhetoric has escalated regarding spending cuts and the threat of a shutdown, we expect both sides to try to avoid one if possible, with the most likely solution appearing to be a short-term extension of funding at slightly reduced levels. •The effect of a shutdown is narrower than the term implies. Even in the most protracted government shutdown to date, from November 13 to 19, 1995 and again from December 15, 1995 to January 6, 1996, the majority of federal employees kept working. In the first episode in November 1995, about 40% of federal employees excluding the postal service were furloughed; in the December lapse the share of furloughed employees dropped to less than 15%, since Congress had managed to enact some appropriations legislation between the two shutdowns. If a shutdown occurred next month, it would probably affect nearly all agencies and departments, since no appropriations legislation has been enacted so far this year. But even so, this would imply that only around 40% of federal employees would be affected. •A shutdown lasting more than a week could be meaningful. If Congress fails to renew the continuing resolution that is set to expire on March 4, the lapse seems likely to be fairly short. After all, there have been several short government shutdowns over the last few decades, but only two lasting more than three days. But a lapse of more than a few days, particularly toward the end of the quarter, could be more important. If funding lapsed, non-essential services would shut down immediately, representing around $8bn per week in missed federal spending, assuming that 40% of federal employees (not including the postal service) and their activities are deemed non-essential. This would equate to $32bn in annualized terms, or around 0.2% of GDP for each week of shutdown. Pulling this spending out of Q2 would reduce the contribution to quarterly GDP growth from federal activity by a little over 0.8pp at an annualized rate for each week the shutdown lasted, though if the shutdown ended long enough before the end of the quarter it is quite possible that some of the missed activity could be made up, reducing the overall hit to growth. Otherwise, the return to previous spending levels following a one-week shutdown would actually increase growth in the following quarter by 0.5pp and by smaller amounts in subsequent quarters until most of the effect is reversed.
State budget negotiations seem likely to have the least effect: Debate over state employee compensation and the related issue of collective bargaining and other organizational issues among state employee unions have begun to make headlines in a number of states—Wisconsin, Ohio, and Indiana are the latest. While these issues are important for the longer-run fiscal health of state and local governments, in the short-term their balanced budget requirements make revenue shortfalls the most important factor driving their fiscal stance over the coming fiscal year (for most states, this begins in July). Political decisions will determine how spending cuts are distributed, and will also determine the mix of tax hikes and spending cuts, but are much less likely to change the overall amount of tightening that will occur. So while we continue to expect around 0.5pp in drag this year from state and local fiscal retrenchment, recent developments don’t seem likely to change this in either direction.
Alec Phillips
If you realize both parties in Washington think that our money is theirs and you trust them to do the wrong thing, this list is for you.
If you think there is a Santa Claus who is going to get elected in Washington and cut your taxes, spend a few trillion and that will jump-start the economy, this list is not for you.
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The Austrian School’s Commandments plus :From : link
1) You cannot spend your way out of a recession
2) You cannot regulate the economy into oblivion and expect it to function
3) You cannot tax people and businesses to the point of near slavery and expect them to keep producing
4) You cannot create an abundance of money out of thin air without making all that paper worthless
5) The government cannot make up for rising unemployment by just hiring all the out of work people to be bureaucrats or send them unemployment checks forever
6) You cannot live beyond your means indefinitely
7) The economy must actually produce something others are willing to buy
8) Every government bureaucrat should keep the following motto in mind when attempting to influence the economy: “First, do no harm!”
9) Central bank-supported fractional reserve banking is an economically distorting, ethically questionable activity. In particular, no government should ever do anything to save any bank from the full consequences of a bank run, no matter what the short-term consequences.
10) Gold is God’s money.
Add mine:
1) Businesses don't hire workers just because of demand for products or services, they hire because it makes them money. Sorry to have to state the obvious.
2) Government spending without taxing is still redistribution
3) Taking one man's money and giving it to another is not a job.
4) Paul Krugman and Bernake have been wrong about everything, as well as the other best and brightest Keynesian's who have been fixing our economy for over a decade.
5) Republicans in the minority (esp out of the White House) act like Republicans, in the majority they act like Democrats .
If the Vampire Squid doesn’t like it, it MUST be good for the taxpayers...
The government is a leaden weight on the economy.
Goldman & Sachs are rich liberals who love Big Government.
The most prominent alma mater of G&S was a guy named Jon Corzine.
New Jersey’s last Democratic Governor.
So cutting spending slows economic growth?? Well DUHH, short term economic activity maybe, But as soon as the stimuluses money, cash for clunkers, and homebuyer tax credit ran out, crash. But we still got the debt. So do these economists ever discuss LONG term economic growth?
Isnt Goldman Sach's a bank that was part of creating this disaster?? Didnt they just make money on it?
I used to compete against Goldman 25 years ago and they were crony capitalists even then. Just like GE, they are simply toting water for Obama.
Still making money on it, they buy the fed bonds and then sell them back to the fed.
Translation of the entire article:
US Taxpayer: STOP Printing Money, STOP Bankrupting our Country, STOP handing it out to Wall St. while we go belly up!
FED: Hey GS, what do you want us to do?
GS: Ignore them, how do you expect us to hand out billion dollar X-MAS bonuses to each other if we can’t rely on insider front running of QE I,II, III, IV, ....
FED: After careful consideration, we have decided to press forward with QE III and IV to save America from collapse.
The Harding/Coolidge Prosperity of the 1920's
On March 4, 1921, President Woodrow Wilson relinquished the office of the presidency to Ohio Senator Warren G. Harding. The state of the union was poor. "With the exception of Lincoln, probably no president in our national history has taken office with as pressing a burden of unresolved questions." Those were the words of the Nation of February 1921. The national economy was in the depths of a depression with an unemployment rate of 20% after a runaway inflation.On April 12,1921, President Harding went before a contentious Congress and presented his program for economic recovery which he called "A Return to Normalcy". Harding's normalcy program consisted of the following measures.
- A call for a national budget program (which was vetoed by his predecessor).
- National debt reduction
- Tax reduction
- An emergency tariff to protect American industry and farm commodities.
- Farm relief legislation (farm bankruptcies were up 20% from 1914).
- Immigration restrictions to protect American jobs.
President Harding pushed hard for his program and got it passed by Congress in 1921. By late 1922, the economy began to turn around. Harding did not live to see it, but his normalcy program proved to be the foundation that Coolidge prosperity was built on. Harding's successor, Calvin Coolidge had the wisdom to stay the course and build on Harding's program. The American people were the beneficiaries of the unprecedented prosperity of the 1920's. Unemployment was pared from its high in 1921 of 20% to an average of 3.3% for the remainder of the decade. The misery index which is a combination of unemployment and inflation had its sharpest decline in U.S. history under President Harding. The Gross National Product averaged 7% from 1924 to 1929. Wages, profits, and productivity all made substantial gains during the 1920's. Harding slashed federal spending by two billion from Wilson's last year and Coolidge maintained that spending level of 3.3 billion per year for the rest of the decade. The Harding-Coolidge tax cuts produced increased revenue that went to cut the national debt left by Wilson by one-third.
Source: Calvin Coolidge
Compare that performance to the president who "led" only a decade later!
I thinkg G&S better keep their mouths shut. Do they reaqlly think the American Taxpayers trust them?
Slight correction: " Still making money on it, they buy the Treasury bonds and then sell them back to the fed ”
:)
Lloyd Vampire Blanfein is a life long democrat and huge obama supporter. Those global bankers are nothing but socialists not only did they suck off the taxpayers teats in the past but they continue to do through the GSE’s. They also supported organizations like ACORN they should have been allowed to fail.
Goldman & Sachs are rich liberals who love Big Government.
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The Rats are shovel-ready for the dustbin of history.
Looks like Zero’s “investment” in Sachs is paying off.
I understood what you meant. But some here have not heard about it before.
They put The One in power which tells us alot about Goldman Sachs.
Their former employees have run the economy in the ground through heading up Treasury for the past couple of presidents, and that tells us alot about Golden Sacks.
Golden Sacks cares about two things: Establishing the New World Order and enriching themselves and each other. I think crashing the US is a big part of the chess game.
Goldman & Sachs was bailed out by TARP. They have former employees scattered throughout the Obama administration. The relationship is incestuous.
GS employs 30,000 people. Are these people rich liberals?
Even if they were, how does your statement relate to the article? Seems to me there is no relation: the report merely states economics fact, and you read into it something nefarious. "Sometimes, a cigar is just a cigar," as noted by Freud.
You remark is akin to hearing, "Physicists claim that water freezes at 32 degrees," and responding with, "Those damn liberal bastards."
Doesn't make much sense.
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