Obama’s best friend at Goldman Sachs
FORTUNE — When we learned that employees of Goldman Sachs, a group that overwhelmingly supported Barack Obama in 2008, shifted their allegiances to Mitt Romney this election, many saw it as a sign that the President had alienated the investment bank. But while Goldman’s rank and file may have turned against Obama, he still has an important ally at the firm: Goldman’s chief economist, Jan Hatzius.
To be sure, the German-born Hatzius hasn’t publicly stated that he supports the President. But his analysis, which is widely read in financial circles, has long jibed with the monetary and fiscal policies embraced by Democrats. In numerous notes published over the last few years, Hatzius has advocated stimulus spending and called for more quantitative easing, renouncing efforts to slash the deficit as premature.
He summarized these views in a speech last year, after accepting the 2011 Lawrence R. Klein Award for making the most accurate forecasts during the previous four years. In his remarks, the economist quoted former Treasury Secretary Larry Summers, who said that, while the crisis was “caused by too much confidence, borrowing, and spending,” it could only be resolved by “increases in confidence, borrowing, and spending.” Hatzius continued:
I believe that this is true. But unfortunately, it is probably too much of an irony to resonate with most voters and elected officials. Especially after a period in which some fiscal stimulus has already been applied and the economy is still in bad shape, it is all too tempting to believe that government deficits are part of the problem rather than part of the solution, and that macroeconomics is a morality tale where virtuous governments are rewarded and wicked ones are punished. That view is held more strongly in some countries and cultures than in others but it has been gaining ground everywhere, including the United States.
Hatzius’ views have endeared him to the likes of liberal economist Paul Krugman, who has mentioned the Goldmanite nearly a dozen times in his New York Times blog. Krugman has repeatedly referred to Hatzius’ group as “excellent,” calling the economist a “very calm, measured guy.” Back in 2009, he noted that Hatzius’ analysis was “spot on.”
Krugman recently touted a note that Goldman’s team put out on the subject of “policy uncertainty.” Republicans (and business leaders) often argue that uncertainty created by the Obama administration’s excessive regulations have prevented companies from hiring new workers.
Hatzius disagreed. “[W]e do not believe that the economy’s poor performance has been caused by an exogenous increase in policy uncertainty,” he wrote. The note includes a chart showing that an index measuring uncertainty tracks closely with the economic output gap. “[M]uch of the increase in policy uncertainty is probably a consequence of economic weakness, rather than its cause,” he wrote, knocking down an argument that is frequently espoused by conservative politicians.
In early October, Hatzius expressed dismay that Congress would let the $126 billion payroll tax cut expire, arguing that it would likely counteract the boost from QE3. “We are surprised that neither party has seriously challenged the case for fiscal retrenchment,” he wrote. He added: “While we agree that the U.S. government will ultimately need to tighten its belt, a big move in a restrictive direction still looks decidedly premature to us.”
The Goldman economist has been a thorn in the side of deficit hawks, arguing in 2010, for example, that “inflation is unlikely to become a problem for years.” In 2011, he published a note titled “The case for a Nominal GDP Level Target,” giving his endorsement to the idea, which has since gained momentum. NGDP targeting, a concept that was promoted early on by the professor and blogger Scott Sumner, would have Fed officials targeting a nominal GDP level, and then pledging to do whatever it takes (e.g. buying assets) to reach that level. In his note, which cited Sumner, Hatzius called NGDP targeting “the Fed’s most promising option.”
The economist rose to prominence during the financial meltdown, largely because of his accurate prognostications leading up to the crisis. Schooled at Oxford and the University of Wisconsin-Madison, Hatzius joined Goldman’s Frankfurt office in 1997. He became the chief economist at Goldman in 2011, succeeding William Dudley, the current president of the Federal Reserve Bank of New York.
Federal Election Commission records show that Hatzius donated $1000 to the Democratic National Committee in 2004 and $2300 to Obama in 2007. During this election cycle, he only donated to Goldman’s political action committee, which had backed candidates from both parties.
Hatzius sounded warnings about the housing market as early as 2005, when he published a report that asked “Bubble Trouble? Probably Yes.” In December of 2007, the economics writer Ben Stein criticized Hatzius in the New York Times for his gloomy prognostications, accusing the economist of fear-mongering in order to support Goldman’s bearish position.
Stein (incorrectly) mocked Hatzius for his view that the subprime mortgage crisis could spin out of control, hampering lending and slowing growth. “He is also postulating,” Stein wrote, “that lenders would have to retrench so deeply that lending would stall and growth would falter — an event that, again, has not happened on any scale in the postwar world, except when planned by the central bank.” (The piece, available here, is worth reading for its comedic value alone).
While Wall Street economists typically avoid giving explicit political commentary, some well known forecasters have said that a Romney win would boost the market. Barry Knapp, the top U.S. equities strategist at Barclays, predicted in October that a GOP sweep would likely send stocks higher; he observed in a separate note that a Romney win would “carry a dual mandate” of “pro-growth tax reform and entitlement reform.” David Rosenberg, a notoriously bearish economist with a large following, recently said in an interviewthat Romney would be more likely to compromise, making him “overall better for the economy.”
Hatzius has not said outright that he believes an Obama victory would benefit the economy. A Goldman Sachs (GS) spokesperson said, “Forecasts are informed by our views on how the economy works and what government policy will mean for markets and interest rates. Our goal is to be as accurate as possible, not to champion the policies of either party.”
And yet, Hatzius’ positions have no doubt pleased the administration. The President may have lost many of his supporters at Goldman, but he has maintained an intellectual ally—which may be worth more than the decline in donations.