Vampire squid to the rescue! Goldman Sachs has weighed in on the federal budget battle, and the investment bank that progressives love to despise is singing sweet music for opponents of severe Republican budget cuts.
The Republican plan to slash government spending by $61 billion in 2011 could reduce US economic growth by 1.5 to 2 percentage points in the second and third quarters of the year, a Goldman Sachs economist has warned.
The note from Alec Phillips, a forecaster based in Washington, was seized in the ongoing US budget fight by Democrats as validating their argument that the legislation approved by the Republican-led House of Representatives last Saturday would do significant damage to the US recovery.
ABC News provides a lengthy excerpt from the confidential Goldman report, including an interesting passage about the fiscal impact of a government shutdown.
A shutdown lasting more than a week could be meaningful. If Congress fails to renew the continuing resolution that is set to expire on March 4, the lapse seems likely to be fairly short. After all, there have been several short government shutdowns over the last few decades, but only two lasting more than three days. But a lapse of more than a few days, particularly toward the end of the quarter, could be more important. If funding lapsed, non-essential services would shut down immediately, representing around $8bn per week in missed federal spending, assuming that 40 percent of federal employees (not including the postal service) and their activities are deemed non-essential. This would equate to $32bn in annualized terms, or around 0.2 percent of GDP for each week of shutdown. Pulling this spending out of Q2 would reduce the contribution to quarterly GDP growth from federal activity by a little over 0.8pp at an annualized rate for each week the shutdown lasted, though if the shutdown ended long enough before the end of the quarter it is quite possible that some of the missed activity could be made up, reducing the overall hit to growth.
Let's recap: If Republicans don't get the cuts they want -- which will deliver a direct blow to the American economy at a time of high unemployment -- they're prepared to shut down the government, which will also hurt the economy. Either way, Americans lose.
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