No, Wall Street’s not sending a ‘sharp and unambiguous message’ against taxes

January 30, 2013

I'm a daily reader of the American Action Forum's Daily Dish, which offers a conservative take on the morning's economic news. Wednesday morning's edition particularly caught my eye for the bold claim in the first paragraph:

Counter to what the likes of Paul Krugman has been saying, CNBC notes that "Wall Street is sending a sharp and unambiguous message to Washington: cut spending and solve the deficit problem now and don't do it with more revenue.

The quote is correct, in the sense that it accurately transcribes the first paragraph of the CNBC article. But the CNBC article has an unusually misleading lead.

The article is by Steve Liesman, and it's summarizing CNBC's latest Fed poll, which "represent the opinions of 52 of the nation’s top money managers, investment strategists, and professional economists." But the paragraph misrepresents the poll -- and that's before questioning whether the poll accurately represents the message "the market" is sending.

Let's begin with what's true. It's true that the poll shows "eight of 10 respondents agreeing with the statement the U.S. should 'urgently enact a plan that puts it on a path toward a sustainable budget deficit.'" And it's true that the poll shows most of the respondents calling for quick spending cuts.

On taxes, however, the results are more mixed. As Liesman writes, "53 percent said the U.S. does not need any additional revenue. That compares with 46 percent who say the U.S. should boost revenue either this year, next year, or sometime in 2015 or later."


CNBC Fed Survey

As a broad point, every respondent to this poll has a personal and professional interest in seeing deficit reduction focus on spending. Money market managers and investment strategists don't tend to rely on Medicaid, but they do tend to pay taxes -- and lots of them. Further tax increases will hurt them, while further spending cuts won't. Asking them whether the deficit should be solved by cutting taxes is like asking me whether The Washington Post should cuts its budget by laying off bloggers.

But even so, 46 percent say we should have further tax increases. That's not much of "a sharp and unambiguous message" against more revenue. Rather, that's a mixed message that, at best, leans slightly against more revenue.

Of course, all that takes the poll and its 52 respondents at face value as a useful indication of what "the market" actually thinks. But when it comes to what the market actually thinks, I tend to prefer listening to, well, the market. My colleague Neil Irwin, in an analysis of recent market movements around the various deficit-reduction debates and fiscal deals, concluded, "there just isn’t any evidence from movements in the bond and currency markets "that "global investors are on a knife’s edge, ready to pounce and drive up U.S. government interest rates if we don’t enact a major deficit reduction package."

As one example, take Jan. 2, the day of the "fiscal cliff" deal. That deal did very little for the deficit even as it sharply raised taxes. The result? "The index was last up over 2%, a relatively rare-sized move for a major stock index. The resolution of the worst aspects of what was called the fiscal cliff as of yesterday has restored confidence to markets." Here's the S&P 500 from Dec. 28, 2012, to Jan. 4, 2013:

That big bump is the fiscal cliff deal, of course. The market's clear message was they liked that deal, which included no spending cuts, little deficit reduction, and significant tax increases on the rich.

If what you're looking for is a poll that's straight economic analysis from a broad sample of leading economics, the Economic Experts Panel run by Booth’s Initiative on Global Markets is the best source. Their respondents were basically unanimous in saying that budget sustainability would require both spending cuts and tax increases -- and that included tax increases on those making less than $250,000, underscoring just how much more revenue the economists thought we needed.

Meanwhile, the economy shrank in the fourth quarter, largely due to cuts in federal defense spending. Consequently, markets look pretty bad today. It's almost as if they're sending a sharp and unambiguous message about the dangers of short-term austerity.

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Neil Irwin · January 30, 2013