A Goldman Sachs research report warning that austerity measures and a possible budget shut down would be a drag to growth is being seen as a covert piece of Democratic propaganda by some on the right.
The report, by Goldman economist Alec Phillips, was first surfaced yesterday by ABC, which published a few key paragraphs. See if you can spot the propaganda.
- 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 rateher in the quarter it occurred, but would provide a lift to growth in the following quarter as federal activity returned to the previous level.
Reuters’ conservative columnist James Pethokoukis has been all over this. This morning he tweeted that this wasn’t even economics, it was just arithmetic (though he later tweeted that after being pro Democratic, Goldman now gives more to the GOP)! Robert Wenzel goes further, saying that the report may have been deliberately timed to help the Democrats in the current budget battle, and that Goldman was “providing pitchforks” for the Democrats…
The article continues at Business Insider