Wall Street rollercoaster: Stanford expert tries to make sense of a careening marketplace

Aug 12, 2011 By Cynthia Haven

Economist Roger Noll admits that ignoring the wild ups and downs is hard, but "high volatility reveals only that many people are fearful about the nation's economic future."

Wall Street continued to careen wildly today, signaling a great deal of nervousness and uncertainty in the markets. Stanford News Service asked Roger Noll, co-director of the Program on Regulatory Policy at the Stanford Institute for Economic Policy Research, to offer some guidance.

The Dow tumbled 635 points Monday, climbed back 430 points on Tuesday, then plummeted 520 points again yesterday. Today it's up about 420 points. Can you make sense of this?

The short-term behavior of the is virtually impossible to explain, especially during a period of extreme volatility. Certainly no underlying economic facts could explain either the overall decline in the past two weeks or these huge day-to-day swings.

Ignoring this volatility is easier said than done. High volatility reveals only that many people are fearful about the nation's economic future. On a day-to-day basis, they can overreact to the latest tidbit of economic news. As a society, we should try to focus on the big picture issues while giving little weight to the latest economic factoid.

Could you give us a little orientation about the "big picture" – starting with the budget deficit?

 Looking five to 10 years into the future, the federal budget deficit is not sustainable. However, the current ratio of debt to GDP is not high enough to cause immediate concern, so short-term deficits can still be used safely to stimulate the economy.

So how do we "fix it"?

 The single most important factor affecting the federal deficit is the rate of economic growth. If the U.S. could grow at 4 to 5 percent over the next three years, over half of our deficit problem will go away through the additional taxes collected and the reductions in safety net and stimulus spending that will automatically occur when growth returns.

How best to do this depends on one's political ideology, but a good place to start is temporary transfers to state and local governments to prevent layoffs of teachers, police and firefighters. Other attractive stimulus actions are to increase spending on infrastructure, which we need anyway, and to extend the payroll tax cut for another year or two. A good place to cut expenditures is foreign military activity, including bases in Europe, which do little to stimulate our economy.

What's the biggest problem with our budget, in your opinion?

The primary long-term budget problem is growth in health care costs – Medicare, Medicaid and the pre-tax status of payments for employer-based health insurance. The U.S. must adopt substantial health care reforms in the next few years to solve our long-term fiscal problem.

Politically, neither large tax increases nor large cuts in access to medical care are likely to be feasible. The only plausible solution is institutional reform that effectively contains costs.

What about taxes?

Wholesale tax reform is long overdue. The main problem with the U.S. tax system is its complexity, due to a crazy quilt of deductions and credits. The present tax code is expensive to enforce and inequitable in its impact. A system with many fewer deductions and lower rates, on net raising somewhat more revenue, is the final piece to encouraging short-term growth and long-term fiscal stability.

Explore further: 3 Qs: Economist makes the case for new quasi-experiments as a way of studying environmental issues

add to favorites email to friend print save as pdf

Related Stories

Stanford economist predicts 'large, short-run recession'

Aug 11, 2011

(PhysOrg.com) -- Last Friday's Standard & Poor's downgrade of the U.S. credit rating topped a week that saw all three major stock market indexes delivering their worst performances since the 2008-2009 financial crisis.

Only tax increase can cure Illinois budget woes, study says

Nov 18, 2009

Tax increases are the only solution to a widening budget crisis that a new study says has landed Illinois among the nation's most financially troubled states, a soon-to-be-released report by a team of University of Illinois ...

IMF economists see dire future for US taxpayers

Apr 04, 2011

Americans will need to pay much heavier taxes and accept less from public healthcare to put state finances on a sustainable track, according to an IMF study published Monday.

Broadening the base of publicly funded health care

Nov 29, 2010

Health care costs and expenditures are expected to rise over the next decade or two and governments need methods to publicly finance these costs, states an analysis in CMAJ (Canadian Medical Association Journal).

Recommended for you

Which foods may cost you more due to Calif. drought

Apr 17, 2014

With California experiencing one of its worst droughts on record, grocery shoppers across the country can expect to see a short supply of certain fruits and vegetables in stores, and to pay higher prices ...

Performance measures for CEOs vary greatly, study finds

Apr 16, 2014

As companies file their annual proxy statements with the U.S. Securities and Exchange Commission (SEC) this spring, a new study by Rice University and Cornell University shows just how S&P 500 companies have ...

Investment helps keep transport up to speed

Apr 16, 2014

Greater investment in education and training for employees will be required to meet the future needs of the transport and logistics industry, according to recent reports by Monash University researchers.

User comments : 2

Adjust slider to filter visible comments by rank

Display comments: newest first

rwinners
5 / 5 (1) Aug 13, 2011
Mostly garbage. Computerized trading has been responsible for the violent trading ranges of the past 5 days, and it could bring an end to middle America's involvement in stocks.
Vendicar_Decarian
5 / 5 (1) Aug 13, 2011
The market volatility could easily be solved by requiring that stock purchases be held for a minimum length of time - say one to two months.

Doing this however would prevent the flipping of stocks by traders and computer programs. So Wall Street will have none of it.

The solution is that simple.

More news stories

Egypt archaeologists find ancient writer's tomb

Egypt's minister of antiquities says a team of Spanish archaeologists has discovered two tombs in the southern part of the country, one of them belonging to a writer and containing a trove of artifacts including reed pens ...

NASA's space station Robonaut finally getting legs

Robonaut, the first out-of-this-world humanoid, is finally getting its space legs. For three years, Robonaut has had to manage from the waist up. This new pair of legs means the experimental robot—now stuck ...