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Home Publications Blogs Beat the Press Goldman Sachs Finds Cutting Government Spending Slows Growth, Post Columnist Michael Gerson Says Opposite

Goldman Sachs Finds Cutting Government Spending Slows Growth, Post Columnist Michael Gerson Says Opposite

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Saturday, 24 July 2010 08:30

The folks who thought the housing bubble was cool are now working overtime to make the victims of its collapse suffer as much as possible. This presumably explains the reason that Washington Post columnist Michael Gerson claimed that a Goldman Sachs study of 44 countries found that a study of 44 countries found that: "reducing government expenditures by one percentage point, in contrast, increases average annual growth by 0.6 percentage points."

What the study actually found was that a one percentage point decline in government consumption expenditures was associated with a 0.63 percent increase in growth. However, it found that a one percentage point increase in government investment expenditures (spending on education, research, infrastructure etc. ) was associated with a 1.25 percentage point increase in growth. This would mean, for example, that a one percentage point decline in spending that was split evenly between cuts to government consumption and cuts to investment would lead to 0.31 percentage point decline in GDP growth.

There are reasons that this study is inapplicable to current circumstances. Most notably, the bulk of the benefit from spending cuts appears to come through the channel of lower interest rates inducing more investment. This is unlikely to be a important channel given that interest rates are already extremely low, however, even ignoring this issue, Gerson has seriously misrepresented the findings of the study that he cited.  

Comments (5)Add Comment
...
written by skeptonomist, July 24, 2010 9:15
It should be obvious that in most countries now when the private economy fails and unemployment increases various automatic government expenditures such as unemployment compensation kick in, not to mention discretionary stimulus expenditures. Thus while there is a correlation of government expenditures with poor growth the causation is basically opposite to what Gerson assumes. I don't know whether the Goldman economists understand this and have some kind of procedure to identify causation, but my observation is that even trained economists frequently ignore the problems of isolating causation from a correlation and just give the interpretation which agrees with their ideology or preferred dogma.
Hmmm ...
written by Stephan, July 24, 2010 9:18
Shouldn't that read:

"However, it found that a one percentage point decline in government investment expenditures (spending on education, research, infrastructure etc. ) was associated with a 1.25 percent decrease in growth."?
...
written by Queen of Sheba, July 25, 2010 3:26
Michael Gerson has never struck me as a stupid man - partisan, yes, but not stupid.

Since I don't consider him stupid, but know him to be a conservative partisan, my only conclusion about what he's written in this article is that he is being dishonest for effect.

I've become cynical, I suppose, as nothing surprises me about what the Washington Post will print nowadays.
Aware
written by Rui Almeida, July 26, 2010 11:40
Does Goldma Schs still exist? Do they still haver opinions? Shameless!!
Rui
production goga presents
written by Gogaproduction, July 29, 2010 8:29
here is some interesting toy`s for small babies recycling their poo to your food. Eat your poo with pleasure.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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