Goldman Sachs: House Spending Cuts Will Hurt Economic Growth(Keynesian gloom and doom)

abc news ^ | February 23, 2011 | Jonathan Karl

[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

[TopQuark]

Here are a few short books that I found extremely useful. I think all conservatives should read them even if they don't care about history: they would recognize, then, that Obama administration is doing the same thing and uses the same language. They would never inadvertently repeat the socialist propaganda in the media, attacking big business, Wall Street, banks, CEOs, bonuses, "rich" people, etc. So I hope you'll enjoy reading them even you are not that interested in history:

1. Folsom, B., "New Deal or Raw Deal? How FDR's Economic Legacy Has Damaged America."

2. Powell, J. " FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression."

The second volume is being written by the Obama Administration as we speak: how cap-and-trade, health-care reform, etc. turned a recession into a Great Recession. The book helps to understand the methods and the rhetoric, and see the perps for what they are.

The next book is more narrow but very insightful on the issue of the relationship between big business and government. It's also an entertaining read -- a collection of very short biographies of the very colorful Americans that left us a great legacy:

3. Folsom, B., "The Myth of Robber Barons."

Some links will follow.

[ding_dong_daddy_from_dumas]

The second volume is being written by the Obama Administration as we speak: how cap-and-trade, health-care reform, etc. turned a recession into a Great Recession. The book helps to understand the methods and the rhetoric, and see the perps for what they are.

I'm glad you see cap-and-trade as antithetical to capitalism. So since Goldman became a major investor in the CCX, that should raise doubts about whose side GS is on (as a corporation, not every employee). I see nothing wrong with making money in itself, but do not approve of making money via a leftist swindle.

[TopQuark]

My goodness! In the previous post I mentioned to you how they always portray GS in nepharious and even ominous terms, panning the camera from the entrance in mid-Manhattan to the sky and giving thus a feeling of GS dominating us. As if to give further confirmation, the Guardian one of the links you gave has this photograph:

In all other cases, they show humans. If it's GM, the photo or TV footage show workers at the conveyor belt or at least products --- cars in dealer showrooms. If it's Alcoa or a steel company, we see workers sweating at a plant. We can relate to these people and things at a human level.

Not Goldman Sachs. We are not supposed to relate to financiers, those symbols of capitalism, in human terms. Accordingly, there are people. Ever. None of the 30,000 people around the world are ever shown. We are supposed to feel that in that ominous-looking building sits Shylock and counts money. Our money.

Same tricks were played by the Communist Pravda and Goebbels (Nazi) propaganda machine. They would be proud today of the MSM imagery.

[ZULU]

Wow!

THanks for that detailed response. What you say makes sense. I’ll try to keep an open mind on Goldman in the future.

ITs not necessary to address those posts individually. As I said, there were positive ones also.

[Little Ray]

Even from the Keynesian point of view, cutting gub’mint spending will hurt LESS than bankruptcy or hyperinflation...

[ZULU]

Thanks. I’ll check them out. I have a video on Milton Freedman on Freedom. I am going to start watching it this week.

[ZULU]

Defintely Goebbelsesque.

[TopQuark]

Ok, let's take it from the top, the first link you suggested:

http://www.guardian.co.uk/business/2011/jan/27/goldman-sachs-received-aig-bailout-cash

Let's read it slowly and see that the authors want us to feel and what is actually going on.

The headline: How Goldman Sachs gained from bailout of AIG
Documents given to the Financial Crisis Inquiry Commission show Goldman made $2.9bn on proprietary trades from AIG's bailout cash

The first line is false outright: Goldman did NOT gain from the bailout. Judging from the facts in the article it gained from its expertise and its own money that it got back from AIG. You'll see the details in a moment.

The key point we, little people, are supposed to get is "gained from bailout" -- be angry, the implication is that it gained illegally or at least immorally. To make sure that you did not miss that: "Goldman made $2.9bn" in the second line. Now that it's been drilled into your head, they'll build up your anger throughout the rest of the article.

But observe for now that the say one thing in the first line and a different one in the second: there is a huge difference between money and bank notes that represent the money. Suppose you receive a salary from your employer --- a check deposited into a bank. Then you withdraw some cash, buy a $1 lottery ticker and win $5. I a sensationalist way I scream, "Aha, got you; Zulu made profit from cash received from his employer!" Sounds terrible. But you'd probably say: "Who cares were cash comes from? It came from my employer and went to the bank. Before my employer got it, that cash was probably in the hands of some buyer who paid with that cash for some company products." And you'd be absolutely right: cash circulates; that's what it's supposed to do. You would probably continue: "Yes, was previously in someone elses hand, buy the money it represents --- that $1 with which I bought the ticket -- was always mine: I received it as a salary for my services as part of a contract between me and my employer."

The same thing happens in the case at hand. Yes cash came to GS from AIG --- so what, it always circulates somewhere. But the money has always belonged to GS. So GS took its own money, invested it (together with its expertise), and made $2.9bn --- just like you took $1 of your own money, invested into a lottery ticket, and made $4. So, what's wrong with that picture?

Absolutely nothing. But it surely sounds like there is plenty of wrong: the first line told you: "Goldman Sachs gained from bailout."

But what if you still have doubts: it's finance, with a lot of strange words --- who knows what really happened? Well, here comes appeal to authority: "Documents given to the Financial Crisis Inquiry Commission show..."

Aha, so there is a commission that nailed these SOBs! But wait, may be it's just an opinion? Not at all: "Documents... show"

Well, how can you have any doubts now? You are done, in just two lines. The rest of the articles states things correctly, identifies facts, but they have been now completely twisted. Let's see how.

Next, to reinforce your feelings they give a picture of the GS' ominous-looking building (see previous post).

Next: Goldman Sachs collected nearly $3bn (£1.9bn) from bailed-out US insurer American International Group (AIG)...

Correct, absolutely correct: the sentence says that GS received cash from AIG, and AIG was bailed out. But look how it sounds: as if GS received money from the bailout (the first line in the title actually says that). Well, to receive money from a bailed-out AIG is not the same thing as to receive money from the bailout. But that's the implication --- look at the structure of that sentence again.

Next: The revelation was made in the Financial Crisis Inquiry Commission (FCIC) report into 2008's financial meltdown.

Translation: I told you to trust me. So take at faith value what I just said and what I will say in the rest of the article. All of this is truth: I have various commissions and documents behind me.

Next, "According to the US government-sponsored FCIC, Appeal to even more authority: in case you distrust the commission, there is the entire government behind it.

...AIG's $182bn bailout was necessary because the insurer's collapse threatened "cascading losses and collapses" throughout the financial system.

Absolutely true.

Next: Goldman received $12.9bn of the bailout funds...

Absolutely false. The situation is simple. AIG owed GS according to the contracts they had signed --- think of a simple loan. AIG was in trouble and would be unable to pay what it owed (the loan) if it was not bailed out. Once it was bailed out by the taxpayer, it paid back its loan to GS. So GS did receive cash from AIG, but it was its own money.

I'll give another analogy. Suppose I (think Goldman) lend you (think AIG) $10,000 for a year. You fall on hard time and, at the end of the year, cannot pay back the money. Your uncle Sam (think the taxpayer), bless his heart, takes pity on you and bails you out --- gives you $20,000. You take some of that cash and give me back $10,000 of my own money. If someone at this point suggested that it is I who got bailed out by your uncle, you'd call that person crazy: I don't even know your uncle.

True, if your uncle did not bail you out, I would be in trouble too. But I received no money from your uncle: I got back from you (not your uncle) my own money. [ Yes, cash --- the banknotes --- were once in the hands of your uncle, then yours and now mine --- so what? ]. You see the analogy: GS gets back its own money (which indeed would be lost if AIG went down). This getting back its own money the MSM presents as "bailout of GS." And, to "prove" it, they point to the fact that cash it received was earlier in the hands of the taxpayer. Total nonsense.

But before you can understand that, they complete the sentence by an appeal to yer another authority: Goldman received $12.9bn of the bailout funds – a move that drew heavy criticism and allegations of cronyism...

Heavy criticism from whom? Not a word. In court, this would be called hearsay and the jury would be instructed to disregard these words. But you are reading it alone and in hurry, and think that this is true: there must've been people who even before saw GS for what it is --- a bunch of criminals!

...cronyism. The then treasury secretary, Hank Paulson, had previously been Goldman's chief executive.

Bingo! That explains everything: one hand washes the other! They lower you into the gutter of conspiract theorists.

So what that Paulson, Bush's advisor, comes from GS? Rubin, Clinton's advisor and the author of the Community Reinvestment Act that created the housing bubble, also came from Goldman. About 20% of all Supreme Justices in the history of our country come from Harvard Lae School --- is that also a conspiracy? Not at all. FOr centuries, really good, talented people applied to and were accepted by the Harward Law. No wonder that many of those that made it to the Supreme Court --- and must've been good, talented people --- had previously attended Harvard Law.

The same with Goldman: its peple are damn good at what they do, and it is little wonder that, when presidents look for advisors, they find the best at Goldman.

The accusation of cronism is also ridiculous at face value: at the time, a couple of years ago, I saw a table of how AIG used the bailout funds. There were a dozen or so banks plus other companies. And you don't have to be in finance to expect that: AIG, one of the largest companies in the world, had dealing not just with GS but with dozens, if not hundreds, of other financial companies. It owed money to them. When it received the bailout, it paid to them all. GS was one of dozens, if not hundreds, of companies who got back their own moneys. So why all this talk only about Godlman? Here they lie to you by omitting the relevant information.

But wait. Guardian has been laboring hard to convince of GS' ill-gained profits and now, half way into the article, when you are already pretty angry at GS, it turns our that: Much of that money went to Goldman clients.

Of course it did. Just as AIG owed money to GS, so did GS owe to clients.

Here are more specifics. Suppose you have a brockerage account at GS into which you put cahs and ask GS to invest it for you. GS takes your cash and lends it to AIG (actually it was an instrument called swap, but that does not matter; think of it as a loan). After the bailout, AIG hands the money (pays back the loan) to GS and GS deposits it, naturally, into your account. That's how, in simply terms, "money went to Goldman clients" --- you. So what horrible things has Goldman done here, except properly administering its clients' account?

Of course, the same things GS did for its clients it could do for the shareholders --- owners of the company. It took their (that is, Goldman's own) cash and lent it also to AIG. So when AIG returned those loans, some money was deposited into the clients accounts and some into company own (called proprietary) accounts: The FCIC breaks down exactly how much Goldman itself received and showed it got $2.9bn for "proprietary trades" – trades made on its own account.

So nothing illegal or immoral happened here. But if the already perpetrated lie is not enough, the Guardian piles up further: "showed it got $2.9bn for proprietary trades.'

No such thing could've happened. After GS received back the moneys it lent to AIG, it had to deposit YOUR money into YOUR brokerage account. But it could do whatever it wanted with its own money. When it received the money it was not earmarked for anything in particular purpose. It could've decided to spent it on cleaning carpets, on a lavish Christmas party, to buy a building... It decided to invested --- put money in its own brokerage account. But reread the sentence: GS "got $2.9bn for... trades." It says that taxpayers actually gave $2.9B to GS for the purpose of speculating in the market. The lie is simply breathtaking! I am truly speechless.

But, if you take this sentence at face value, how can you be less than appalled? I would be. I would mad as hell!

Next, Thus, unlike the $14bn received from AIG on trades in which Goldman owed the money to its own counterparties..." No relevance of this quote is explained. Maybe this contrast made sense in this report, but what it is is unclear from the article. So I read it as "blah, blah, blah..." With equally little sense it could read, "Unlike the Moon, the surface of which is cold, Goldman received...." Just does not make any sense.

So let's get to the punchline:

...this $2.9bn was retained by Goldman," the report states.

Anticlimactic, isn't it? As it turns out, nothing happened. AIG owed GS some money. AIG returned the money to GS. GS invested it on behalf of clients and owners, and made some money for the clients and shareholders. What's exactly wrong here? Where is any evidence that "Goldman Sachs gained from bailout of AIG" as the title of the article claims?

I really don't want you to miss the last sentence, which I am sure in a normal reading almost everybody would view as another "blah, blah, blah." In this case, it is not:

Wall Street sources strongly disagreed with the FCIC's characterization of the Goldman transactions.

Unnamed sources again. More importantly, the authors openly tells you --- but in the last sentence so that you would not pay attention --- that all of the above can be interpreted totally differently. He shamelessly admits that knowledgeable people not only disagree but disagree strongly. So, what where the counter-arguments, then? What did those "Wall Street sources" actually say in defense of GS?

Not a word. And you will never hear. An so with one-sided garbage --- everything against GS, no matter how false and stupid, an nothing in defense of GS --- piled up for years, how can you possible not hate Goldman?

This post ended up very long, to be sure. I a sorry it'll take you some time to read. The reason I did write in such detail is that I wanted to show you fully for once the anatomy of a lie perpetrated day in and day out by the MSM.

In case you need to hear this: neither I nor any member of my family has ever worked for GS. It's about the truth and the unjustly accused, not about taking sides in a fight.

[TopQuark]

"ITs not necessary to address those posts individually."

I have read this post only after writing a long analysis of the Guardian link. Sorry: if I saw it earlier, I'd spare you a long read :). Who knows, maybe you'll still find it useful?

Best, TQ.

[spunkets]

"Goldman employees and their relatives contributed almost a million dollars to Barack Obama's presidential campaign — making it' "the company from which Obama raised the most money in 2008"

[spunkets]

"experts at GS analyze the situation and issue their opinions, those that believe in their expertise and value their opinions (I know you are not one of them, you know better) pay for those reports."

Let's put some numbers and political judgements in perspective. The cut in question that supposedly causes the 2% drop in GDP is $61B. That 2% drop is $285B, based on a $14.3T GDP. So Alec, the GSach's analyst is claiming the Republican cut has a real economic value of 5X the face of the cut.

Where does this fantastic multiplier come from? Republicans cut pork. The wizards at GSachs can only achieve a 1.3X multiplier on their net. Where does the 5x multiplier come from? It must be from forces more powerful than wizards can generate. Is it a witch? Did Pelosi cast a spell on this 61B?

[spunkets]

3.5X for a 1.5% drop in GDP. 3X GDP drop for a $50B cut.

[TopQuark]

Had you spoken from the start the way your post reads, we would have no discussion. What precipitated the discussion is what Dostoyevsly called arrogance of ignorance demonstrated, e.g., in pearls such as this:

Social choice theory-that's where big daddy gov., er um "the people" redistribute wealth to achieve a state of GSachs, er um "Pareto" optimality, as per the welfare clause. "

Look even at your last post. First, you quote me:

TQ: "experts at GS analyze the situation and issue their opinions, those that believe in their expertise and value their opinions (I know you are not one of them, you know better) pay for those reports."

And then you question the multiplier. Where is logic, any discernible logic here? What's the connection with my words?

None. The connection is psychological: you want to be able to defame whomever you want, and you are just gonna go on a rant however illogical, uncalled-for, stupid and ignorant that may be.

I am not your psychologist. As it is, I have already replied to you more than your posts deserved. There was no discussion --- only strong statements that you did not bother even to justify, and me pointing that out. Enough.

Go ahead, continue your socialist rants, continue to defame people. Children, scoundrels and intellectual lightweights often behave as you do: they think that merely cursing someone and putting him down makes them look strong/knowledgeable/smart.

P.S. Had you bothered to have a discussion, I would comment on the issue of the multiplier you raised. But you are not interested in either truth or discussion. So you have the last word; you've shown your superiority and won --- congratulations!

[spunkets]

"Go ahead, continue your socialist rants, continue to defame people.

K.