Markets Serve Society's Broader Interests First, Not Goldman's

Naples friend Marc Schulman sent me this 2010 global economics report from Goldman Sachs. Marc was a highly regarded Wall Street analyst in his working career, and so understands full well the nature, conflicts and contradictions inherent in the voices and actions of Wall Street's investment bankers. And foremost among them, both as voice and player, is Goldman Sachs. The report's summary:

• In response to the largest post-war recession, OECD governments have run up record peacetime budget deficits. While deficit spending was the appropriate response to an unprecedented crisis, correcting these imbalances is now a critical challenge for economic policymakers.

• Empirical evidence is equivocal about the appropriate size of government in the long run. But history does provide guidance as to how governments can correct large fiscal imbalances, while protecting economic growth.

• In a review of every major fiscal correction in the OECD since 1975 [which are hardly comparable to our current situation], we find that decisive budgetary adjustments that have focused on reducing government expenditure have (i) been successful in correcting fiscal imbalances; (ii) typically boosted growth; and (iii) resulted in significant bond and equity market outperformance. Tax-driven fiscal adjustments, by contrast, typically fail to correct fiscal imbalances and are damaging for growth. [Emphasis and comment added.]

• The trade-off between withdrawing the stimulus too soon (and threatening the economy’s nascent recovery) and delaying the correction (and threatening a debt crisis) largely disappears when severe fiscal imbalances are corrected through reduced government expenditure.

• Our results are robust to controlling for prior economic conditions that might otherwise explain growth differences. They are also consistent with the findings of previous academic work in this area.

• That said, decisive expenditure-driven fiscal adjustments are politically difficult to implement and tend to take place only following a change in government and/or once bond markets force the government’s hand.

---"Limiting the Fall-Out From Fiscal Adjustment," [Summary Outline], Global Economics Paper No: 195, Goldman Sachs (4.15.2010)

I had my share of experience with investment bankers in professional life, including Goldman Sachs. They were probably the best at what they did, certainly the most influential. But while I had a grudging respect for them, I never trusted them--especially with respect to M&A and their so-called "innovative" products. Now, after the mortgage-backed securities debacle, I neither respect them nor trust them, and they carry little credibility with me. That extends to their market and economic reports as well. Surely we understand that the reasons investment bankers publish any kind of market or economic report for clients or potential clients--and for public decision makers, to be sure--is first to support or help create the most accomodating short- to intermediate-term environment for them and their profit profile.

Wall Street repeatedly demonstrates that they believe that society and government exist first to support strong markets, the sine qua non of the modern Western state. That's just how they are co-opted into thinking. They are neither inclined nor can afford to think otherwise. While the Goldman report above does acknowledge the political unlikelihood of balancing the budget by severely defunding essential public goods like Social Security, Medicare, Medicaid and others, it is quite clear that they advocate that result, were it possible. And they would reduce or hold constant the historically low tax burden of those most able to contribute, their clients and themselves, the wealthiest Americans. More money in the hands of the weathy is always their best prescription for America's economic and societal health. But most troubling, they appear to ignore or not recognize the broader societal impact of that policy approach, and the longer-term economic harm also done.

Even though healthy markets are essential as the economic engine of society, those markets, like government, exist first and only to benefit society as a whole and its broader interests, and in the process people individually. And the best interests of society (and long-term markets) are served by government that provides as well as possible for the education, health, infirmity and old age of its citizens. The future of markets and society depend increasingly on capable human labor and intellectual capital, and the condition of social stability. And those conditions depend on the continuing, even improving, provision by government of those public goods. And so, the full potential of markets and the economy have to take second place to first considering how they will best serve society and its interests. Amen.

Just my view on government and societal priorities, of course. But you would look in vain to find any substantial concern expressed by Goldman for such things. Rather, their approach would assure the most damage to these essential public goods. 

Now, I hasten to concede that were our economic and budget challenges to devolve into a situation like Greece--one of soverign insolvency on the edge of economic and societal failure--then the resolution of debt issues necessarily become the first interest of society. Then, we're talking the conditions of societal survival. And all must bear the pain and price of rebuilding--including the unavoidable damage to society's public profile and progress. Even in our current, less threatening condition, more pain and a price must be borne by all, both in terms of social programs and taxes. But we are not yet in such dire straits that we need resort to the wholesale sacrifice of our short- to intermediate-term social support programs and the development of human capital needed for the long-term future of our society and economy. Thorough need- and means-based reform, focus, and cost-efficency are still our more reasonable choices, if we have the wisdom and sense of political will to act timely on that.