The in-the-know types in Washington keep assuring the little people that there’s some secret negotiations on walking back from the budget standoff in Washington, avoiding a government shutdown. Pardon me if I don’t see it happening. It’s true that Republicans are working on a stopgap continuing resolution that would last two weeks, not four like the Democrats want, and would include $10 billion in cuts, unlike the Democratic plan which keeps things at current levels in the short-term. But that leaves the two sides $10 billion apart, with a little over a week to go. Senate Republicans plan to offer this measure as a substitute amendment to the Democrats’ stopgap, but that’s just to draw votes and rail against moderates for “voting against spending cuts.” Absolutely nothing here makes me believe that the continuing resolution won’t run out. I see a lot of posturing but no solution. And to be clear, we’re now talking about $10 billion dollars, in a budget of over $3 trillion, leading to a debilitating shutdown.

Into this environment comes something Sen. Chuck Schumer highlighted today – an analysis from Goldman Sachs showing that the House spending cut plan would significantly inhibit economic growth.

A confidential new report prepared by Goldman Sachs for its clients says spending cuts passed by the House of Representatives last week would be a drag on the economy, cutting economic growth by about two percent of GDP.

“Under the House passed spending bill [which cut spending by $61 billion],” says the report, which was obtained by ABC News, “the drag on GDP growth from federal fiscal policy would increase by 1.5pp to 2pp in Q2 and Q3 compared with current law.”

The report, which is signed by Goldman economist Alec Phillips, goes on to predict that the House-passed bill is unlikely to become law because it won’t pass the Senate and, in any case, the president threatened to veto it.

More likely, the report says, is a deal to cut spending by $25 billion this year, followed by a cut of $50 billion next year.

Even those more modest spending cuts, Goldman Sachs predicts, will cut economic growth rates by one percent of GDP.

The entire GS report is at the link. I know it’s the vampire squid, but their economic reports are actually usually decent. Incidentally, they also note that a shutdown itself would reduce federal spending by about $8 billion a week, and would reduce GDP growth by up to 0.8%. In other words, Republicans get what they want with spending cuts simply by doing nothing. And what they want actually harms the economy to a significant degree, with no real benefit.

Schumer is right to highlight this – the House CR would be a significant drag on growth. He told the Financial Times that “This nonpartisan study proves that the House Republicans’ proposal is a recipe for a double-dip recession. Just as the economy is beginning to pick up a little steam, the Republican budget would snuff out any chance of recovery.” But in the same breath, Schumer says we need to reduce the deficit, only in the “right” way, by “striking the right balance between cutting spending and growing the economy.”

That’s just ridiculous. Federal spending cuts would reduce aggregate demand. That’s the whole point. I wouldn’t deny that some cuts would wind up better than others, but that’s really marginal at this point. The economy is really not ready for spending cuts of any kind. And yet Schumer’s been running around saying “We all agree there must be cuts” for the last several weeks. The fact that the Goldman Sachs analysis says that their expected scenario of $25 billion in cuts this year and $50 billion next year would shave a point off of growth kind of proves this.

A new study of the stimulus package shows it worked better than expected. That’s because we know how to deal with a demand problem – provide demand through federal spending to boost economic growth. That’s pretty much economics 101, and you won’t find “cut and invest” anywhere in that textbook.

This is hugely important for macro policy debates because it suggests that more stimulus would provide a further boost to the economy and reduction in unemployment. This means that the only reason that we are sitting here with 25 million people unemployed and underemployed is that the politicians in Washington are too intimidated by the Wall Street deficit hawks.

The deficit hawks have used their enormous political power and control over the media to shut down any further discussion of stimulus. They have managed to completely dominate public debate with their brand of flat-earth economics. They are using the crisis that was created through their greed and incompetence to reduce hugely valued public benefits, like Social Security and Medicare. And, now they are using the crisis that they have created for state and local governments to destroy public sector unions.

This looks really awful because it is. Our nations’ leaders are deliberately inflicting enormous pain on tens of millions of people to advance their political agenda. This new study helps to prove this fact.

Maybe Chuck Schumer should read that analysis more closely and take its advice.