While a government shutdown was averted last weekend, thus saving the economy from nothing, avoidance didn’t happen in time to save economists from themselves. Talking to the New York Times about the potential for a shutdown, EY-Parthenon chief economist Gregory Daco observed that while the latter wouldn’t be a “game changer,” a lengthy closing of the federal government’s doors could “become a significant drag” on the economy. What could Daco possibly mean?
Lest he forget, government has no spending power other than what it extracts from the private sector first. The previous assertion isn’t a political statement as much as it’s a statement of the obvious. All demand is a consequence of production, and the federal government’s $6 trillion+ in annual spending power is a consequence of it taxing and borrowing the fruits of private production.
To which Daco might reply that GDP is most definitely increased by government spending. True, but it doesn’t prove Daco’s argument as much as it at least partially reveals the fatuous and dishonest nature of the GDP calculation: it’s a monument to double counting whereby economists count government consumption of the fruits of economic growth, as economic growth.
Further implied in GDP conceit is that if the federal government weren’t taxing and borrowing in order to consume, that the U.S. economy would shrink. Put another way, to believe government spending is additive to growth is to believe that theft should be legalized if politicians ever cease consuming on the backs of the citizenry.
All of which brings us to Goldman Sachs and its economics team. Goldman CEO David Solomon owes it to reason to spend some time with the economists in his firm’s employ. Really, with every shutdown or talk of same comes analysis from GS economists about how one week of federal shutdown will shave off .1 or .2 percent from GDP, with the number rising as time spent in shutdown mode does. They’re not serious.
What’s sad is that despite working for Goldman Sachs, they don’t know why they’re not serious. It’s lost on Goldman’s economists that the firm’s investment bankers and capital allocators aren’t paid handsomely because they’re bad at moving capital to its highest use, but precisely because they’re very good at it. Which raises an obvious counterfactual: how much bigger and more dynamic would the U.S. economy be if the federal government consumed – say – $1 trillion of precious wealth annually instead of over $6 trillion? With the difference in mind, imagine how much more wealth the immense talents at Goldman and elsewhere could put to work on the way to better everything. It staggers the mind. Too bad Goldman’s economists aren’t staggered.
Instead, they’re seemingly the first call for New York Times reporters any time the federal government shuts down, or might shut down. The answer is invariably the same from them about the alleged hit that the economy will take if government ceases full operation. How could they be so easily fooled?
The good news is that David Solomon isn’t. When pressed at a recent energy conference about his puzzling assertion that government spending had boosted near-term growth, the excellent and optimistic Solomon backtracked before acknowledging the genius of the profit-motivated at moving precious resources to their highest use. He will pray convey this truth to his economics department: regardless of the good or bad of government, it’s not additive to growth. It’s only a cost, albeit an unseen one as the Goldman’s of the world allocate less capital so that government can consume a great deal more.
Reprinted from RealClearMarkets