Why is Goldman Sachs funding an economics department?


Perpetually impoverished Peru has an annual government budget that is a microscopic fraction of that of the United States. What is spent each year by the political class of the South American country amounts to a small rounding error for Congress.

All of this raises an obvious question: why – given that the Peruvian economy is often in dire straits – aren’t its politicians rolling out massive multibillion dollar spending bills? The answer to this question is so obvious it’s a waste of words to type, but here we go: Peru’s politicians have exponentially less money to spend (and borrow) precisely because its people produce exponentially less. . With production only representing a tiny fraction of total US production, government revenues in the Peruvian treasury are low. So, by extension, its borrowing capacity is very limited. Only countries that receive a lot of income (and which should receive a little more in the future) are able to borrow in volume. Markets are functioning.

All of this discussion about rates taking into account a recent report released by the Goldman Sachs economics team. It seems that the answer to the question on Peru (posed in the previous paragraph) would not be obvious to its economists.

For context, when Senator Joe Manchin announced that he would not vote in favor of President Biden’s alleged Build Back Better, the $ 2,000 billion spending bill died. In response, Goldman’s econ department released a report indicating that failure to proceed with Build Back Better would weigh on economic growth. The vice president of the economic eminence Kamala Harris actually quoted the GS

report as proof of what the US economy would lose from the spending restraint imposed on Congress. It is obvious that the economists of GS are not the only ones to be wrong.

To state the supreme evidence, government spending does not fuel economic growth. At all. By definition, public spending is economic sleepiness.

We know this not as Democrats or Republicans, but because we have common sense. Government spending is the economy-sapping process whereby people like Nancy Pelosi, Kevin McCarthy, Elizabeth Warren and Marco Rubio substitute their market knowledge for that of Jeff Bezos, Mark Zuckerberg and, yes, the awesome capital distributors at Goldman Sachs. Investment is the engine of economic growth, in which case government spending is the sinking scenario of the economy in which politicians direct resources to their highest levels. Politics use instead of brilliant investors pushing precious resources to their highest perceived business use. And the story doesn’t end there.

To see why this is not the case, please re-read how this article began. Why do American politicians have trillions of dollars each year to misallocate, while their Peruvian counterparts have only a tiny fraction of similar funds to waste?

The answer again is economic growth. It’s incredibly big in the United States and woefully small in Peru.

All of this points to a fundamental truth apparently lost to Goldman economists: government spending is always and everywhere a consequence of economic growth, not an instigator of it. Generally, government consumption has a dampening effect on growth simply because the government cannot invest, and if it could, Chuck Schumer and Josh Hawley are not as adept as Warren Buffett and Ken Fisher.

After that, when politicians spend, they spend the fruits of growth. Growth has already taken place, hence their ability to spend.

Applied in the United States, while it would be naive to assume that there won’t be some sort of Build Back Better compromise that includes trillions of spending, let’s not insult sanity by claiming that spending will boost the economic activity. Of course not. To assume otherwise is to engage in double counting. Government spending is what happens after private sector productivity. Always.

Politicians cannot extract the fruits of production just to increase production through politicized allocation of what is valuable. Such an opinion is not serious. And that’s a view that is certainly inferior to that of Goldman Sachs.

There is no doubt that its economists would answer that in terms of GDP, public spending has a “positive” impact. Okay, but that doesn’t disprove the truth about government spending that is shrinking the economy as much, but it does serve as a reminder of how wrong the calculation of GDP is.

The bottom line is that Goldman Sachs can do better. It owes better to its shareholders. As the world’s best investment bank, why would it waste precious resources on such blatantly incorrect analysis? Really, why is Goldman Sachs funding an economics department in the first place?


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