Thursday, February 24, 2011

Goldman Sachs Goes Totally Keynesian

It probably shouldn't come as a complete surprise. The investment bank that ends up placing operatives in government positions across the globe, Goldman Sachs, is out with a report calling for more government spending.

They argue for this spending based on the Keynesian theory that spending is good for the economy. This ignores the fact that it is production not consumption that increases the standard of living of a society and that government spending by definition means money is drained from other sectors to conduct the government spending binge. In other words, the spending, itself, is a wash, directed at government's favorite bureaucratic projects instead of being left in the private sector---where growth really occurs.

Specifically, Goldman Sachs economist Alec Phillips, based in Washington D.C., has issued a report that says the miniscule spending cuts of $61 billion in 2011 just approved by Republican controlled House could reduce US economic growth by 1.5 to 2 percentage points in the second and third quarters of the year. What nonsense! A Keynesian style look at one side of the equation if there ever was such a case. When you really think about it, Enron style bookkeeping and Keynesian economic analysis are not that much different, just pick and choose what you want to feature and keep everything else off the books.

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