Goldman and Zandi claim spending cuts – as included in the House-passed H.R. 1 – will reduce economic growth. John Taylor says “[n]othing could be more contrary to basic economics, experience and facts.” As Taylor argues, analysis used by Goldman Zachs, Mark Zandi, and partisan Democrats “was wrong in the past and it is highly likely to be wrong again”:
“Some claim that House budget proposal H.R. 1 to reduce the growth of federal government spending will cause a slowdown in the economy and even increase unemployment. Consider, for example, a recent report by Alec Phillips of Goldman Sachs which claims that the House proposal would reduce economic growth in the second and third quarters of this year by 1.5 to 2 percent if enacted into law next month. Nothing could be more contrary to basic economics, experience and facts. …
“Basic economic models in which incentives and expectations of future policy matter show that a credible plan to reduce gradually the deficit will increase economic growth and reduce unemployment by removing uncertainty and lowering the chances of large tax increases in the future. The high unemployment we are experiencing now is due to low private investment rather than low government spending. By reducing some uncertainty and the threats of exploding debt, the House spending proposal will encourage private investment.
“The analysis in this Goldman-Sachs report is based on the same type of ‘large multiplier’ theory that predicted that the stimulus package of 2009 would stimulate economic growth. Research by me and my colleague John Cogan finds that more up-to-date theories, which bring important incentive and expectations effects into account, show far smaller multipliers. In these models a reduction in the growth of spending will immediately crowd in private investment. Moreover, by following the stimulus money, we found that in actuality the stimulus package of 2009 had no material positive effect on economic growth or employment. The same economic theory which said the stimulus would increase economic growth in the past two years, says that reversing that spending will reduce growth now. It was wrong in the past and it is highly likely to be wrong again.”
Read Taylor’s full post here. Taylor was also among the group of 150 economists who signed a statement arguing for immediate action “to begin to slow government spending, reduce uncertainty and support the creation of new private-sector jobs.” You can read their statement here.
Goldman Sachs and Mark Zandi are principal defenders of the president’s “stimulus” fiasco and were often cited as sources who claimed the spending bill would work. Both are referenced on page 21 of this White House report. And Zandi argued in January 2009, for example, that “the country will have 4 million more jobs by the end of 2010” if the “stimulus” passed – “143,000 of them in Georgia.”
Well, through November 2010, Georgia lost 123,000 jobs – in fact, 47 out of 50 states have lost jobs since the “stimulus” was signed, and our unemployment rate has topped 9 percent for 21 consecutive months (despite promises by the Obama Administration that it wouldn’t rise above 8 percent).