...the firm's econ wonks decided to try and simulate the real-world effect of letting the Bush tax cuts expire at the end of 2010. Using the respected Washington University Macro Model, Goldman reset the tax code to its pre-Bush status, assumed all tax cuts expired, and watched how the economy reacted as 2011 began. What did the firm see? Well, in the first quarter of 2011 the economy dropped 3 percentage points below what it would have been otherwise. "Absent a tailwind to growth from some other source," the analysis concludes, "this would almost surely mark the onset of a recession."

Update... Not so fast. A friend was kind enough to obtain a copy of the Goldman report. Indeed, it reports a sharp one-time hit to growth if the 2003 tax cuts were to expire. But in their Keynesian demand-side model, it's all about a hit to consumption -- rather than a penalty to risk-taking and capital investment:

The jump in taxes on January 1, 2011 squeezes disposable income and hence consumption. This feeds through to the rest of the economy, sharply curtailing growth...

The immediate effect is to cut the deficit by about 1½% of GDP, as shown in the top panel of Exhibit 2. This is about three-fifths of the shortfall we currently project for FY 2011, based on assumptions we consider realistic.

When the government runs a large deficit, “crowding out” occurs in the capital markets: Its borrowing, backed by the power to tax, takes priority over private borrowing and therefore denies some companies the funds they need for investment that is usually more productive than the government’s use of the funds. As a result, growth suffers and real interest rates rise.

The opposite occurs in our simulation. Restoring better balance to the government’s books reduces the deficit and hence the growth in its debt. This frees funds that now flow to the private sector allowing the capital stock to grow more rapidly and pushing down interest rates. As shown by the gap between the lines in the bottom panel, real interest rates end up substantially lower. This, eventually, raises output by about 1% above the level that would have prevailed without the tax increase.

Update 2 [2/8/2007]... Reader Raja Sekhar says,

Wow, that excerpt from the Goldman report is stunningly stupid and twisted. Raising taxes raises output? It's like an evil alternate universe in which Paul Krugman wrote Wealth of Nations. (Wait a second... I've already read that book... it was called Das Kapital.)

At the time, in the spring and early summer of 2003, of course, we were failing to find any significant WMDs and Mylroie's book was a bit of a gamble that we would find those WMDs; it was also a bit of Bush propaganda. I wrote about this on AOL in the message boards under a pseudonym called Fishhawk (given the hysteria of the time, it was unwise to use real names on AOL).

About three days later, I was surprised to see my 'story' in Paul Krugman's column except that he had seen it on Talking Points Memo where a reader had passed the information on to Josh Marshall (TPM, of course, is known for its great readers and their attentiveness to good tidbits to pass on). My version was first. Some extra details were added by Marshall and Krugman but what the reader passed on to Marshall was very much what I wrote. I honestly didn't mind because I became a steady reader of Talking Points Memo and about two dozen other blogs and left the growing chaos and frustration of the AOL message boards behind.

For close to seven years, Zimbabwe’s economy and quality of life have been in slow, uninterrupted decline. They are still declining this year, people there say, with one notable difference: the pace is no longer so slow... The trigger of this crisis — hyperinflation — reached an annual rate of 1,281 percent this month, and has been near or over 1,000 percent since last April. Hyperinflation has bankrupted the government, left 8 in 10 citizens destitute and decimated the country’s factories and farms.

One interesting thing that was left out of the New York Times article on the hyperinflationary situation in Zimbabwe, was that much of the mess that President Mugabe is facing now, is self-imposed. The NYT completely forgot to mention the massive land seizures of rich white farmers land (which were sped up during the late 90's), which were then broken apart and redistributed to the poor people, who also had no idea how to farm it, nor the capabilities to do so. Once the dust settled, Zimbabwe's argricultural system had collapsed completely, and food prices began to spiral out of control, which set off the hyperinflation that you see today. I for one find it totally shocking that the NYT would neglect to mention the failure of attempted wealth redistribution. (And by shocking, I mean not surprising at all.)

I noted that while the Times (of course the NY Times) can opine: "Eighty-two years old, wily and physically robust, Mr. Mugabe", they fail to mention what happened 5-7 years ago that started this economic decline. Zimbabwe once was the "bread basket" of Africa. Then something happened to the farms. Evidentally it just happened. Probably because there was no way they could blame George Bush.

Would Krugman argue that at least, like Cuba, Zimbabwe has excellent health care and 100% literacy? Or is there some other reason to want to have a hard-core Marxist economy? And I especially like fixing inflation by law. Next maybe they'll make geometry easier by fixing Pi at 3.0. I say Mugabe should continue the floggings until morale increases and productivity rises.

Came across this blog site of Luskin's. Typical right-wing stuff about capitalism as the source of freedom. Lots of typical comments about liberals being disingenuous, etc., but had to laugh at the analysis about Gates, et al and someone's observation that we could cap their wealth at 5% of what it has become without hurting economic incentives. Mr. Luskins seemed to see this as an attack on the personal liberties that make this country what it is. OK, Luskin, so here is the problem with your rationale. Your belief is based on the a priori assumption that whatever wealth Gates, Allen, Trump or any other billionaire accumulates was "freely" earned in the marketplace. I would argue that no single individual can create - or earn - for themselves that kind of wealth without exercising the governmentally-granted privileges of incorporation. The only way to amass that much wealth is to enjoy the governmentally-granted privilege of limited liability, corporate personhood, and pooled capital. And with that, the wealth is no more individually earned than the music of a symphony is "made" by the conductor. In short, the rules of the game allow the accumulation of that kind of wealth, but such accumulation in no way equates to creation. And since accumulation doesn't equate to creation, your moralistic cant about the "taking" of "earned" wealth falls downs.

That means anything we can do to create rules that more evenly distribute wealth while not impeding its creation are all to the good. Since the current set of rules provide us DAILY examples of where wealth is DESTROYED even as much of its remainder is transferred further into the hands of the already-wealthy (think Nardelli and Home Depot), I think we've got a ways to go before I get worried about Bill Gates' civil liberties.

Update 2... Reader Leland Montgomery says,

I reread your post about Brad DeLong's disregard for proprty rights, and couldn't help but wonder why he choose Bill Gates et al as examples instead of the surely even-less-wealth-deserving:

1. Whose wealth derives from inheritance, such as the Sulzbergers and the Grahams; and

2. Whose wealth dervies from speculation, rather than inventing useful products and services, such as George Soros.

My guess is that he thinks wealth is only undeserved when it's held by people who don't hate the United States.

The President is committed to strengthening the Social Security system and has reiterated his commitment to a bipartisan reform process in which participants are encouraged to bring different options for strengthening Social Security to the table. The Budget supports the proposals the President has put forward to date. Under these proposals, Social Security would include voluntary personal accounts funded by a portion of the worker’s Social Security payroll taxes. The Budget includes the estimated impact from the creation of such personal accounts. In 2012, the first year of the accounts, contributions will be capped at four percent of Social Security taxable earnings up to a $1,300 limit, increasing by $100 each year through 2017.

As part of a solution to restore the system to sustainable solvency, the President has also embraced the idea of indexing the future benefits of the highest wage workers to inflation while providing for a higher rate of benefit growth for lower-wage workers. Benefits for lower-wage workers would be tied to wage growth as under current law, ensuring that their benefits would grow faster than the poverty line. Progressive indexing coupled with voluntary personal retirement accounts will provide future seniors with real money and real security instead of the current system’s unfunded promises.

I suppose that the three most troubled companies in America are Ford, GM and the Chrysler division of Daimler-Benz. They've fallen and they can't get up.

They pay too much to workers who are retired. They spend billions to buy out current workers. They can't close factories fast enough. They can't easily close brands because federal law protect local dealers, but they know they make too many vehicles with over-paid workers with too many brands with too little distinction. They seem doomed. Much of their dilemma is seen as "their own fault." Yet, despite all, there is a sentiment to save them, or at least to help, as if there really is something of America wrapped up in a Chevrolet car or an F-150 truck.

Golly, with symptoms like these, the now-powerful Democrats must be ready to prove how they can come to the rescue. Don't they always throw money and love at the down-trodden?

Just listen to John Edwards, quoted in today's Wall Street Journal: "Mr. Edwards combined his Iraq message with a version of his stump speech from the last presidential campaign, evoking the plight of anonymous forgotten Americans like the "eight-year-old little girl (who) will go to bed hungry...because her father lost his job." Mr. Edwards almost never mentions his own political history -- especially not his 2004 race as John Kerry's running mate. This time around, he is even more a populist, and he closed his speech with a vow of solidarity with organized labor that drew thunderous applause."

So? All indications are that the new Congress will dramatically increase fuel economy standards; like it or not, this is a punitive action against these three companies. They all have the technology to comply, just not the customers or the efficency to do so without slipping further into financial trouble. Instead of a lifeline, the Democratic Congress is preparing to throw anvils into their boats.

Global warming is too important a problem after all. Imagine the reduction in this nation's carbon footprint if all of Michigan were returned to the forest.

This also means a healthy market for John Edwards. He can revive his theme about "two Americas", pointing first to theAmerican plants producing cars and trucks with badges such as Toyota, BMW, Honda, Nissan and Mercedes continue to set quality and sales records (ssh, don't mention the mostly non-union, mostly southern factories) and then, with a heavy heart, to the three near-terminally ill auto companies called GM, Ford and Chrysler.

If only he were president, the big three would get up and walk again.

Is the share of income of the top 1% in the United States high and rising? One...source is the Congressional Budget Office (CBO)...

The CBO's measure, "comprehensive income," ...assigns corporate profits to households...

How does the CBO get its results? By assumption. Gary Burtless of the Brookings Institution notes that the CBO...does not actually look at who owns capital. If your tax return shows no income from capital, then, according to the CBO, you own no capital. Can the CBO spell IRA? A huge and growing portion of capital owners in the U.S. earns dividends, interest and capital gains that never show up on tax returns because it is tax-sheltered. And the middle class owns a much higher fraction of its wealth in tax-sheltered assets than does the top 1%...

The CBO has incorrectly added a huge and rising share of corporate profits to the estimated incomes of the top 1%. Without that, CBO estimates of the top 1%'s share of income would have fallen substantially since 1988. If there is evidence of increased inequality since then, the CBO has not presented it.

He wants to make permanent the Bush tax cuts. ("If I didn't vote to make those tax cuts permanent, it would have the effect of a tax increase.") He supports radically scaling down the estate tax and does not now favor upper income increases in the Social Security tax. McCain gets tax policy advice from conservatives, including supply-side founding father Arthur Laffer. "I may have changed some of my views," the senator said in an interview. "You learn over 24 years."...It is difficult to measure how much transformation of McCain from taxer to tax-cutter has contributed to his fading popularity among Washington's media elite, but the romance is gone. The change, however, has not boosted McCain's stock in Congress, particularly the House. Conservatives justifiably complain about his positions on global warming and campaign finance.

Former Treasury Secretary John Snow says the Bush administration’s first effort to overhaul Social Security failed because the administration was “intransigent” on private accounts...

“We were pretty intransigent about the private accounts,” he said. The administration’s “condition for engaging” was private accounts carved out of the existing social security system, said Snow now chairman of the private equity firm Cerberus Capital Management. “That was a bridge too far for the Democrats.”

It's a gone dead train
Yes, it's a gone dead train

My engine was pumpin' steam
And I was grindin' at you hard and fast
Burnin' down the rails, tryin' to heat the way
Haulin' ass and ridin' up the track
And I laughed at the conductor who was tellin' me my coal
It would never last

But then the fire in my boiler
Up and quit before I came
Ain't no empty cellar
Like a gone dead train

Once was at a time when I could
Mama shave 'em dry
And raise a fever ice-down chill
Waitin' at the station
With a heavy loaded sack
Savin' up and holdin' just to spill
Shootin' my supply through my demon's eye
Instead of holdin' my time, I hope I will

But then the fire in my boiler
Up and quit before I came
There ain't no empty cellar
Needs a gone dead train

Yes it's a gone dead train
I'm gonna teach it to learn now, now
It's a gone dead train
Yes it's a gone dead train
I'm gonna teach it to learn now, now
It's a gone dead train
Gonna teach it, gonna teach it to learn

There ain't no easy day
When your daily run's a downhill pull
And there ain't no easy way
Wishin' for some jelly roll
There ain't no switch been made
To make your juicy lemon find
A spring to run a dry well full

But then the fire in my boiler
Up and quit before I came
Ain't no empty cellar
Needs a gone dead train

Yes it's a gone dead train
I'm gonna teach it to learn
You know it's a gone dead train
Gonna teach it, gonna teach it to burn
It's a gone dead train
It's a gone dead train, you gotta learn
It's a gone dead train
Gonna teach it, gonna teach it, gonna teach it to burn.

Update... Talk about eccentric: our "public editor" and artblogger Irwin Chusid says,

I’ve always considered square dance calling the original rap. Can’t cite a film that features it, but there’s gotta be many.

You wanted an earlier version of rap music. I believe the father of rap is Bob Denver. His rap song from the 60's can be heard at this link.

What's more surprising is the reaction from the ranks of the goody-goods who make it their business to monitor "corporate governance" -- usually falling all over themselves to promote some notion of "shareholder democracy," which is blatantly flouted by the Sulzbergers. Here's Nell Minow, the queen of the corporate governance harpies, on the situation between the Sulzbergers and Morgan Stanley:

I can certainly understand why the family would believe that they no longer had a relationship of trust with Morgan Stanley... It points up the problems inherent in multifunction financial services organizations.