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Tax Cuts and Failed Legislation: The Modern Economy

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The Problem

In the US the stock market represents the health of American businesses and the larger economy; the rapid rise and fall of stock prices is the tell tale sign of volatility and a market in danger of recession . Volatility is not new in the US economy: in the past 100 years, we have seen three major economic recessions: 1929, 1987, and 2008 (Segal). However, in 2018 the Dow Jones, an index comprised of stocks from 30 well established billion dollar companies, saw extreme volatility (Vlastelica). On February 5th, 2018 the Dow Jones at closing lost 1,175.21 points, the most significant loss in US history. Three days after that loss, the index saw its second biggest lost at 1,032.89 points. Then in December the Dow Jones had its best single-day gain at a little over 1,000 points, illustrating the most extreme market volatility in history (Egan).

“The VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index (SPXSM) call and put options.”

My Interest

I took up investing as a hobby when I was 12 years old, not knowing much about the big picture of the US economy. Now, I am more interested in learning the ins and outs of the US stock exchange and what factors determine stock value. In my research, I found that past and present volatility in the United States’ stock exchange affect daily life and the broader economy.  Through this project, I gained a greater understanding of the stock market specifically current turmoil in the exchange and the policies surrounding it. It is essential to know not only the recent past of the market but to go deeper into history and investigate what contributed to recessions in the past. For more information click here.

Past Shortcomings of The US Stock Exchange

In the past 100 years, we have seen three major economic recessions: 1929, 1987, and 2008 (Duigan). Each of these meltdowns has had a combination of different contributing factors: inflation, interest rates, loans, international relations, and decisions made by the Federal Reserve. The stock market is the catalyst for economic fluctuation, both success, and failure of the US economy and of everyday peoples financial health (Tooze). For More Information click here

The Modern Problem

Since the 2008 financial crisis, the US government has implemented new legislation aimed at securing the economy and avoiding future economic meltdowns. The most significant piece of legislation is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Chaffee). This Act increased oversight and regulation of different elements of the economy, including regulations for the federal reserve and accounting standards for loan ratings. By creating different bureaus and oversight committees in the government, the Act further restricted the areas that contributed to the 2008 crash. However, many view the Dodd-Frank Act as a failure for not adequately addressing the expansion of foreign markets and the heavy reliance on other nations to support the US economy. While the Act worked to implement monitors on international trade, it based regulations on growth predicted in the twentieth century rather than the current economy (Chaffee). The current economy is supported on a framework of new technological developments and business like Tesla and SpaceX. In addition, the Act has been heavily criticized for restrictions that impede economic growth by limiting the way that banks and financial firms can invest their capital.

The increased volatility in the US market is due to many national and legislative issues including rising political tensions, optics on the Trump Administration, tax cuts, and economic oversight laws.  In the modern era the US heavily relies on foreign markets and their significant economic influence on domestic businesses. Legislation that attempts to protect the US economy does not properly address the global market forces at play and thus cannot truly protect the economy in the long term.  The Trump Administration plans to address the need for growth in the US economy and aims to have three percent overall economic growth by the end of 2020 (Gilboa) His proposed economic growth plan relies heavily on tax cuts. The White House believes these tax cuts will free up enough capital to increase business growth and offset the cost of the cuts. Tax cuts are still widely unpopular amongst American voters, and it is clear in the Trump Administration’s “America First” rhetoric that interdependence of the global market is undervalued (Gilboa). Unfortunately this plan could likely lead to increased volatility if cuts are not paid for with enough business capital gains. These policies will continue to negatively impact the economy over the next year and beyond. For more information click here.

Solutions

A Call to Action

The greatest way that individuals can advance their own interest and support the economy as a whole is to learn more about stock trading and the best practices.  An uninformed public typically results in mass panic after a dip in stock prices and in many cases it leads to extreme volatility. Panic-selling is the wide-scale sale of a certain stock. Typically the investor does not care about price but is selling out of fear. Emotionally driven selling of stocks is very problematic for the economy and feeds into volatility (Scott).  To combat these prevalent problems, investors need to become more educated. If you are interested in learning more about this topic or trading stocks here are some resources that can help you.


The Big Picture

In order to address stock market volatility on a macro-level, we must focus on increasing transparency in trading amongst investors and brokers. The U.S. Securities and Exchange Commission (SEC) relies on an outdated system based on how stock trading was done on floors like the New York Stock exchange 20 years ago. However, In 2019, stock trading is done in seconds around the world with computers. This virtual system is much more challenging for the SEC to regulate and thus lacks the regular checks and balances needed to ensure transparency (Golder). If the SEC updates their system to match current day technology, the stock market would have more oversight that could prevent volatility.
Another proven method to combat volatility according to Hal Scott, a professor of international financial systems at Harvard Law School, is to better utilize market-wide trading halts. Currently, the SEC implements halts infrequently and only in extreme scenarios (Scott). However, in hopes of preventing “flash crashes” and severe loss of capital, the SEC should implement trading halts more often. These halts would only be triggered when a certain number of stocks or a percentage of equity in an index displays extreme volatility. For more information click here.

Bibliography

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COMMENTS: 2
  1. April 25, 2019 by Kailen Citron

    Wow, this is a really interesting topic that I didn’t quite understand before you shared this information with us! Nice Job!

  2. April 30, 2019 by Kyong Pak

    Nice work, Ethan! I’m impressed by your strong understanding of the stock market. You elucidated the many factors – institutional, legislative, political – that contribute to market volatility. Great resource list for potential investors to reference. I enjoyed your presentation.

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