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Home Publications Blogs Beat the Press Does Congress Only Respond to Fluctuations in the Stock Market?

Does Congress Only Respond to Fluctuations in the Stock Market?

Friday, 28 December 2012 08:07

That seems to be the view of the NYT editorial board which concluded a piece on the fiscal standoff by saying:

"But if Congress cannot approve a deal by New Year’s Day, the anticipated sell-off on Wall Street in early January would, one hopes, force House Republicans to budge."

This view, if correct, is truly scary. First, the real impact of failing to come to a deal is the higher taxes and reduced spending which will soon slow growth and raise unemployment if Congress waits too long into 2013 to take action. One might hope that this would be of sufficient concern to get the Republicans in Congress to move.

As far as a sell-off on Wall Street, first it may not come and second, who gives a damn? The stock market has presumably priced in the risk of not seeing a deal by the end of the year. While prices will likely fall further if that risk is realized, those anticipating some sort of double-digit drop are likely to be disappointed.

On the flip side, it would be really scary if folks in Washington are making policy based on the ups and downs of the stock market. The stock market moves in erratic fashion in response to real news and to nothing. What were the events in the world that provided the basis for the 25 percent drop in prices in October of 1987? Was the economy headed for disaster?

Furthermore, even large fluctuations in the market have only a limited impact on the economy. If the market rises (or falls) by 10 percent there will be a very limited impact on investment, as the small portion of firms that rely stock issuance for financing investment will find it easier (or harder) to do so, as well as a modest impact on consumption due to the wealth effect. But even a 10 percent movement hardly implies a boom or recession. If we see the market fall by 3 percent as a result of missing the deadline, which may subsequently reversed, the impact on the economy will be hard to detect.

It would be incredibly irresponsibly to make policy based on stock market fluctuations. If some members of Congress actually base their votes on stock market fluctuations then this would be a great news story. Voters should have this information so that they can replace the current members with more competent policymakers.


Thanks to Robert Salzberg for calling this to my attention.

Comments (6)Add Comment
written by foosion, December 28, 2012 7:43
If the market doesn't think there will be a deal, it will go down, increasing the chances of a deal, which means the market goes up. Therefore, if the market goes down, it will go up, so why bother going down in the first place?

Traders might want others to sell, so they can buy cheap, but no one wants to sell low.

Seems an interesting conundrum for efficient market fans.
Wall Street May Assist in Avoiding Debt Ceiling Crisis Repeat
written by Robert Salzberg, December 28, 2012 7:54
Wall Street and business interests in general may be a much bigger factor in quelling R's stated desire to use the debt ceiling as a blunt instrument to force spending cuts from D's.

written by Jc, December 28, 2012 10:22
You seriously underestimate the effects Washington stupidity has on markets. During the debt ceiling debate marketsndropped 18 percent in a matter of weeks. At this point we are down around 2.5 percent. The rule of law has a much larger impact on valuations than you are alluding to and could be a reason valuations have languished 20% below historical averages even as profit margins and corporate profits have expanded to all time highs. There are two reasons markets move: an increase in earnings, or higher p/e multiple. I agree earnings won't be affected as government accounts for less than 10% of s+p earnings but let's agree to disagree on multiples contracting.
general stupidity
written by Barkley Rosser, December 28, 2012 2:11
NYT not so far off on this one. Both the market and Congress are stupid. The market has been betting a deal would be cut before the end of the year, but since the non-vote in the House last Thursday it is clear one will not happen prior to 1/1/13. The spectre of irresponsible stupidity that may really become serious when they have to deal with the debt ceiling a month or so later is suddenly back.

As for Congress, constituents start screaming bloody murder when the market falls apparently because of some stupid action or non-action by Congress, and the louder the constituents scream, particularly the wealthy donor ones who have lots of their wealth in the market, the more even idiot tea party Republicans start paying atttention.
trillions of quatloos
written by watermelonpunch, December 28, 2012 8:19
I've found it truly disturbing for awhile that this seems to be exactly the case. It's like everyone hangs on the word of stock market gamblers. I can't believe this hasn't been obvious to everybody for years now. It's like we're living in the Star Trek episode, "The Gamesters of Triskelion"... Shareholder value has become a more honoured right than any other right of citizens.
Congress Is No Better Informed than the Times and Probably No Better than Fox
written by Hugh Sansom, December 29, 2012 5:27
Congress is populated with people whose principle concerns are even more narrow than those of the money-grubbing creatures in American corporate boardrooms. Members of Congress are overwhelmingly narrow-minded, self-serving, poorly educated (lawyers, for the most part), and not particularly intelligent by any measure. Even the 'stars' like Chuck Schumer show themselves to be money-driven bigots at best. The tiny few who aim to do any good (Dennis Kucinich, Alan Grayson, Patrick Leahy sometimes, Barney Frank even less frequently) typically don't last long.

There is little incentive for American politicians to inform themselves when it is easier to win reelection by misinforming the public (with the aid of a compliant, docile, corrupt news media). Couple that with the 20-plus years during which American news media have treated daily stock market outcomes as the primary indicator of economic performance, and you have the "truly scary" scenario Dean Baker describes. Stock market performance is taken to be an indicator of corporate performance and the Times, Wall Street, Congress, and Obama all take the preferences of the 0.1% to be the only preferences that matter. They actually view with scorn the preferences of the 95%, except for the string of months when they have to deceive voters into thinking that they are worthy of reelection (hence, Obama's sudden concern with fairer taxation when he didn't give a damn about fairness for the first three years of his term and still doesn't for the most part).

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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.