The Phillips Cure
House spending cuts hurt U.S growth -Goldman Sachs
WASHINGTON | Wed Feb 23, 2011 4:50pm EST
[fair use skip]
“Under the House passed spending bill, the drag on GDP growth from federal fiscal policy would increase by 1.5pp (percentage points) to 2pp in Q2 and Q3 compared with current law,” according to Alec Phillips, who signed the analysis that is dated Tuesday.
Various intelligent bloggers have expressed doubt that the effect could be so large (no links). I think they are not just puzzled but Posnered, that they have made a factor of 16 error in their informal calculations. They seem to think that Phillips is assuming a huge gigantic multiplier since 2% of GDP is many times 61.5 billion.
Yes Phllips talks about quarter growth of quarterly GDP but don’t the two factors of four cancel ? No they multiply.
In forecaster speak 1.5% less growth for two quarters means growth at an annualized rate which is 1.5% lower for two quarters, that is GDP which is 0.75% lower in the second of the two quarters. Growth “in” a quarter doesn’t mean growth during that quarter but that quarter’s level compared to the previous quarter’s level (GDP is measured over a quarter). So Phillips is saying that GDP in the third quarter of 2009 will be 0.75% lower if the Republicans get their way than it would be if Obama gets his way.
That is 0.75% of quarterly GDP not of annual GDP so third quarter GDP will be lower by less than $ 30 billion. If the spending cuts were evenly spread over the 7 remaining months of fiscal 2011, then 3rd quarter public spending would be lower by more than $26 billion. The simple static multiplier (effect on GDP_t)/(change of G_t) is around one, which is not absurdly high. By the same assumption on spending, the multiplier for the second quarter would be about 0.5.
In fact it is hard to cut planned spending quickly, so if Phillips’s model were static (which it isn’t) then the multipliers would both be less than one.
Of course Phillips is using a dynamic model in which there is a hump shaped response to a demand shock with GDP gradually rising, peaking and returning to roughly where it would be (only roughly because of possible crowding out or hysteresis or whatnot but usually assumed to be exactly when modelling). The multiplier isn’t a relationship between Government consumption in a quarter and GDP that quarter — it is a dynamic effect which grows and dies out. But the implied summary multiplier is perfectly standard among Keynesians and “Everyone hoping to make money selling economic analysis”
By the way, Speaker Boehner’s office has made a wonderfully boneheaded assertion for the second day in a row.
A spokesman for House Speaker John A. Boehner of Ohio said the Goldman Sachs report represented “the same outdated Washington mind-set,” comparing it to the thinking behind the 2009 Recovery Act
Someone better gently remind that spokesman that Goldman Sachs is based in New York not Washington. Oh and if they’re so dumb, why are they rich ? Finally aren’t Republicans supposed to trust the private sector ?
http://www.youtube.com/watch?v=kbr4qNnffi8&feature=related
Edgar Winter’s White Trash.
We all had a real good time, courtesy of the economics profession pretending that were scientists, with linear regression and all.
Guess what. They are not educated individuals. Business school, like Law school, perpetuates the mith among the Joe Lunchbucket set that these assholes have a clue. Unfortunately, they have become in charge, some-f***ing how.
I feel compelled to R2 my comments above so that the good folks at Angry Bear (classic best of the best) don’t block my comments like the econobrowser did in 2005 for arguing that the economy was on the verge of collapse as a result of the mortgage business, the Big Picture in 2007 for saying that the Stock Market was 80 % overvalued, and Economist’s view for challenging the insane notion of academic “free trade”.
All the best. Argue on.
Great explanation Robert. Thanks.
“Under the House passed spending bill, the drag on GDP growth from federal fiscal policy would increase by 1.5pp (percentage points) to 2pp in Q2 and Q3 compared with current law,” according to Alec Phillips, who signed the analysis that is dated Tuesday.
First of all, whtu is Alec Phillips ? What does “the drag on GDP growth from federal fiscal policy would increase by 1.5pp (percentage points) to 2pp in Q2 and Q3 compared with current law,” mean.
Nothing.
This little dick is in trhe big chair because the King has put him there. Let us stop paying attention to what the Aristocracy has to say and turn our focus to the real economy. What we need is a draft to put the little pencil dicks like Joe Phillips on the front lines, checking for dumb bombs that would blow his little Alec clean off. Then, maybe, the little assholes from “I’m bettter than you” would assume their rightful place in our society.
Yo, Buffpilot. Not interested in commenting for the ultra-right ?
Are my ideas so profound, so correct, that you do not have the intestinal fortitude to contest them ? I think that your ideas are so weak that you prefer to not put them out there.
That’s it. Your comments are mysognist, a fucking hobby. You don’t have the energy for verbal combat. Got to go down and receive your comabt veterans benefit, maybe.
Speak up, brother. Tell us why and how you support the Republican party on this site.
I’d say two things about Phillips. First Goldman Sachs obtains huge profits. That is their goal and they achieve it. So they seem to know what they are doing (unlike AIG, Lehman, Bear Starns, Merryl Lynch, UBS etc etc etc etc. They may or may not be evil, but they do seem to be competent.
But second, Republicans argue that businesses are bettter than government, that they are our Galtian superiors etc. So when Goldman Sachs says the Republicans’ plan will damage the economy, they don’t know what to reply. Basically claiming that Goldman Sachs is Washington is one of the most pathetic efforts at political rhetoric I have ever heard.
You can consider the post a discussion of confusion in the camp of the enemy.
I am an economist and I usually get very irritated when other economists claim they are scientists.
However, in my opinion there are some economists (not including me) are serious researchers who study reality and draw some useful inferences. They are not macroeconomists.
The forecasters are very unreliable. That includes the Goldman Sachs team. But at least they are more in touch with the real world than academic macroeconomists.
Yo Robert,
Keynsian Economics is sweet music to Washington. You mean to tell me that any govmint spending is good spending? Get outta here! Sign me up! I can dig holes and fill them up at prevailing wage all day long!
However, not everybody believes this. There are “Keynsians” and then there are people that believe that spending should have some economic rationale. The “Stimulus” wasn’t exactly compelling evidence for the Keysians.
Maybe Goldman is short Treasuries.
Two of Sandi’s comments were deleted.
LOL sammy….not what Robert said, and certainly also not what Keynes recommended. But economic thoughtfulness is not much part of the equation in spending bills as they emerge from Congress.
Glad you are skeptical of Goldman Sachs issuing pronouncements that might serve someone else’s interests and benefit.
“Basically claiming that Goldman Sachs is Washington is one of the most pathetic efforts at political rhetoric I have ever heard.”
It would certainly be more accurate to say that Washington DC is Goldman Sachs. Boehner has it backwards like so many of his other ideas. It isn’t unlikely that he spole hastily and simply confused the roles played by both. Maybe someone should call Boehner and claim to be Blankfein. That ought to get things straightened out quickly enough. “Hello John. Yes, this is Lloyd. Do me a favor and get your head out of your tuchus and stop screwing with the recovery. You guys are nuts and America seems to be waking up to the scam.”
Dan
You’re going to make a liar out of me. Only a few days ago I was assuring Norman (I think it was) that it is truly difficult to get deleted on AB. Next time Sandi goes off the deep end in print please send me a copy before you delete or notify me of the impending removal. I get a kick out of some of Sandi’s rhetoric and the more extreme is the more amusing and likely insightful. He’s not always polite, but he is generally on target.
Well. prick and dick and such needs needs some editing. But yes, not the best way to edit…I seem to have lost some flexibility in the matter thru js kit.
Well I don’t say that I blame you if those are the best that Sandi can do by way of insult. That’s junior high school league. Let me know when something worth deletiing comes up again. I prefer a little more red meat on an insult. There’s little value to a ranking by a rank amateur.
It should be assumed that anything GS allows to pass its doors is aimed at inducing money into a trade that it is either liquidating or looking to take the other side of
Let it be stipulated too the Goldman Sachs “says” nothing. People within it do and usually according to an internalized script. In cases of research see above.
All statements by financial actors have to be assumed to be self serving and veiwed from a forensic perspective. So what to make of this missive? I hardly needs to be said that the economy is totally dependent upon Treasury borrowing and spending. Ulitimately the most draconian GOP cuts, alegedly draconian, amount to maybe 6% or 7% of FY 11 or 12’s total deficit. In other words marginal. While the rabble can be lead to believe the GOP is trying to cut the deficit to zero, among which are more than a few congress cirtters themselves, the serious people know the score.
Americas strategic position is inseperarble from the functioning of its giant financial and banking institutions. Which actually defines our problem. While a reenactment of Bernanke and Paulson walking into the Capital building to address the leaderships with dynamite strapped to their chests demanding trillions no questions asked is unlikely to be repeated you can be sure every day of the week the leaderships get the message loud and clear. If you crash the markets and the banks your face might be in the history books in the chapter on the decline of America.
I’ve found myself wondering whether or not the headlong rush into levels of budget cutting that can slow the already anemic recovery would be tempered by the reality of increased oil prices which will also be hurting the economy. So far I haven’t seen any rational thought being applied.