Why Does Goldman Sachs Fund An Economics Department?

Perpetually impoverished Peru has an annual government budget that’s a microscopic fraction of the U.S.’s. What’s spent annually by the South American country’s political class amounts to a tiny rounding error for Congress.

It all raises an obvious question: why – since Peru’s economy is frequently in such desperate shape – don’t its politicians roll out massive, trillion-dollar plus spending bills? The answer to this question is so obvious that it’s a waste of words to type out, but here we go anyway: Peru’s politicians have exponentially less money to spend (and borrow) precisely because its people produce exponentially less. With production a tiny fraction of total U.S. output, government revenues into Peru’s treasury are small. So, by extension, is its ability to borrow very limited. Only countries that that take in a lot of revenues (and that are expected to take in quite a bit more in the future) are able to borrow in size. Markets work.

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

For background, when Senator Joe Manchin announced he would not vote in support of President Biden’s alleged Build Back Better, the $2 trillion spending bill died. In response, Goldman’s econ department released a report indicating that Build Back Better’s non-passage would weigh on economic growth. Noted economic eminence Vice President Kamala Harris actually cited the GS
GS
report as evidence of what the U.S. economy would lose thanks to spending restraint imposed on Congress. It’s apparent that GS economists aren’t the only ones who are misguided.

To state the supremely obvious, government spending does not power economic growth. At all. By definition, government spending is an economic somnolent.

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 knowledge of the marketplace for that of Jeff Bezos, Mark Zuckerberg, and yes, the genius capital allocators at Goldman Sachs. Investment is what powers economic growth, at which point government spending is the economy-deadening scenario in which politicians direct resources to their highest political use instead of brilliant investors pushing precious resources to their highest perceived commercial use. And the story doesn’t end there.

To see why it doesn’t, please re-read how this write-up began. Why do U.S. politicians have trillions annually at their disposal to mis-allocate, while their counterparts in Peru have a tiny fraction of similar funds to waste?

The answer once again is economic growth. It’s staggeringly grand in the United States, and cruelly small in Peru.

It’s all a reminder of a basic truth seemingly lost on Goldman’s economists: government spending is always and everywhere a consequence of economic growth, not an instigator of same. As a rule government consumption has a deadening effect on growth simply because government can’t invest, and then if it could, Chuck Schumer and Josh Hawley aren’t as skillful as Warren Buffett and Ken Fisher.

After which, when politicians spend they are spending the fruits of growth. The growth already happened, hence their ability to spend.

Applied to the U.S., while it would be naïve to assume there won’t be some kind of Build Back Better compromise that includes trillions in spending, let’s please not insult reason by pretending that the spending will boost economic activity. Of course it will not. To presume otherwise is to engage in double counting. Government spending is what happens after private sector productivity. Always.

Politicians can’t extract the fruits of production only to drive more output via politicized allocation of what’s precious. Such a view isn’t serious. And it’s a view certainly beneath that of Goldman Sachs.

No doubt its economists would reply that in GDP terms, government spending does have a “positive” impact. Ok, but that doesn’t disprove the economy-shrinking truth about government spending as much as it’s a reminder of what a flawed calculation GDP is.

The main thing is that Goldman Sachs can do better. It owes its shareholders better. As the best investment bank in the world, why would it waste precious resources on analysis that is so plainly incorrect? Really, why does Goldman Sachs fund an economics department in the first place?