Steven N. Kaplan
Richard H. Thaler
A recurring theme of this year’s presidential campaign is the need to encourage the formation of new businesses. Republicans in general, and Mitt Romney in particular, have stressed that the best way to stimulate such startups is via low tax rates on high-income earners.
Romney wants to cut top rates by 20 percent, maintain the favorable treatment given to capital gains and dividends, and completely eliminate the estate tax, which currently only kicks in on estates in excess of $5 million for an individual or $10 million for a (heterosexual) married couple.READ MORE
The failure to address crippling household-debt burdens is leading local governments to embrace the radical idea of using eminent domain to seize and write down mortgages.
Over the past month, two cities in California -- Stockton and San Bernardino -- have made moves to file for bankruptcy. They have a combined population of about 500,000, and Stockton is the largest city in U.S. history to file for bankruptcy.READ MORE
John H. Cochrane
On June 28, the Supreme Court upheld President Barack Obama’s health-care law. Opponents and supporters are still sparring over whether its mandate is a tax. It’s time to get over this debate. The mandate’s mild penalty was never this law’s central economic and policy flaw.
The legal distinctions among a mandate, a tax, a penalty, or a credit, and between federal and state powers, are important legally and constitutionally. But they are irrelevant in economic terms for this law.READ MORE
The reason isn’t just that the country’s widening income gap over the past few decades is an issue any president should address. Romney should also talk about inequality because he could benefit in the November election by convincing voters that there is more than one way to increase incomes for low-earning households.READ MORE
Gregory La Blanc
Facebook Inc. (FB)’s disastrous initial public offering has led to an increasing consensus that the social networking site was overpriced and that its business model is flawed.
Some attribute the debacle to issues raised in the company’s prospectus, such as the difficulty of monetizing mobile technology. Others have pointed to the slow growth in advertising revenue or questioned Facebook’s strategy of collecting vast quantities of data from its networked users to enable customized ads.READ MORE
Thomas Cooley, Matthew Richardson & Kermit Schoenholtz
In spite of Sunday’s victory of pro-bailout parties in the Greek election, the European Monetary Union remains in a battle for its survival. What began as a debt predicament is now compounded by a rapidly expanding banking crisis and growing political instability that threaten European integration.
Recent European backing to stem the run on Spanish banks was a welcome step away from the prevailing position that fiscal and banking problems aren’t candidates for coordinated action. Unfortunately, the details of the support for Spanish banks are vague, and were insufficient to calm the financial markets. Instead, the yield on Spanish 10-year government bonds has risen above 7 percent to a euro-era high.READ MORE
Whoever wins the U.S. presidency in November will potentially have to deal with combined tax increases and spending cuts that could extract 3 percent to 4 percent of gross domestic product from the economy -- a potentially catastrophic fiscal blow to the recovery from the deepest recession in 80 years.
The U.S. faces a reckoning at year’s end. The Bush-era tax cuts are scheduled to expire, resulting in huge tax increases for almost all taxpayers, not just the rich. Cuts in domestic spending, particularly on defense, could automatically take effect. The federal debt ceiling once again will bump up against legal borrowing limits. And the elections may narrow each party’s majority in Congress, making compromise more difficult in 2013. There is little leeway to “kick the can down the road.”READ MORE
James Heaton & Nicholas Polson
Market observers often divide investors into “smart money” and “dumb money.” Our research shows there may be a way to figure out which group you are in.
The first place to look is prices, which reflect the interaction of smart money and dumb money and may contain valuable information about the proportion of either in the market. In other words, the price knows which category we belong to. The trick is to extract that information.READ MORE
Takeo Hoshi & Anil K Kashyap
On May 5, the Tomari nuclear plant in Hokkaido shut down for routine maintenance, leaving Japan with no operating nuclear-power plants. There is a confused debate over what to do next.
Prime Minister Yoshihiko Noda has called for restarting the reactors at Ohi plant in Fukui, insisting that bringing them online is imperative for the economy. Although the government may prevail, many Japanese remain skeptical about nuclear safety.READ MORE
As the economy recovers and fuel prices ease, U.S. airlines are doing better. Prospects for the summer and the rest of 2012 look brighter, particularly because there are fewer carriers after the mergers of the last five years.
Yet U.S. airlines face a long-term challenge that should concern industry executives as well as investors. That impediment isn’t wages, fuel prices or a stagnant economy. It’s growth in demand for air travel, which has been anemic at best for more than a decade, even when the economy was expanding.READ MORE
U.S. and European banking regulators are conducting stress tests to determine whether financial institutions have enough capital to sustain losses as a result of adverse economic conditions.
A critical question is whether these results should be made public, and if so, at what level of detail. The answer is that regulators should be mindful of significant pitfalls.READ MORE
Tobias J. Moskowitz
Several years after the global financial crisis, the fierce debate over regulation continues to be driven by strong beliefs -- largely uninformed ones -- rather than hard facts.
Some believe more regulation is necessary, others that it would cause the downfall of our markets. No one, however, seems to be talking about the evidence for or against regulation.READ MORE
In the late 1990s, regulators in some U.S. states began to make electric utilities sell their nuclear reactors to private operators. They weren’t trying to help head off climate change, yet they managed to do just that.
Deregulation was supposed to bring down power prices. The sale of nuclear plants to nonutility owners, such as Exelon Corp. (EXC), was part of the process and was intended to serve that goal. But it also helped offset more greenhouse gas emissions in the 2000s than all of the wind and solar generation in the country combined.READ MORE
The U.S. doesn’t need a new economic engine. It already has one: entrepreneurship. It’s just that we aren’t getting the mileage out of it that we could.
Small businesses are instrumental to the U.S. economy. They employ 50 percent of all private-sector workers and create more than 60 percent of new jobs. The proof is present; entrepreneurs and small-business owners can revive the economy but they need more than just capital.READ MORE
Harry L. Davis
Much has been written about the qualities of successful leaders. These attributes often seem to float above any specific context, in the same way that a consumer’s preference expressed in a focus group is assumed to be equally present when that person is shopping in a grocery store or preparing a meal at the end of a long and tiring day.
Yet a leader’s success in attracting followers -- the essence of effective leadership -- is dependent upon how people perform in their roles in front of specific audiences. It’s in the day-to-day, meeting-to-meeting performances that someone moves key initiatives forward.READ MORE
With rare exceptions, marketing designed to create or enhance brand preference over competitors in established product categories changes nothing. No matter how big the budget or how clever the execution, “my brand is better than your brand” marketing rarely results in sales growth.
Look at any product category over a long time period and you will see that changes in market position rarely occurred unless there was a substantial or transformational innovation. Innovation drives customer “must haves.” These, in turn, define a new subcategory in which competitors are either weak or nonexistent, resulting in meaningful sales change.READ MORE
As commentators, politicians and academics struggle to make sense of the recent financial crisis and its ramifications, many of their accounts seek to identify a root cause or the “beginning of the story.”
Theories abound: Former Federal Reserve Board Chairman Alan Greenspan’s “easy money” for banks; the blindness of the credit- rating companies; strategies that encouraged low-income Americans to own homes; the invention of high-risk investment instruments; high-leveraged borrowing; short-sighted executives; greedy investment bankers; lying real-estate dealers, and so on.READ MORE
Mark-to-market accounting has long been viewed in academia as the gold standard for preparing financial statements. The rule makers, the Financial Accounting Standards Board and the International Accounting Standards Board, are coming to the same view. Yet shifting to those norms has some adverse consequences for investors.
For centuries, assets generally had been recorded on balance sheets at their actual “historical” costs. Critics argued that this method provided investors with stale information that was irrelevant to decision-making (“sunk” costs). Instead, they advocated marking assets to their estimated market prices, or “fair values.”READ MORE
Richard G. Sloan
As I struggled to navigate a roundabout at London’s Heathrow Airport recently, I wondered why the Brits don’t switch to driving on the right side of the road. The main obstacle, of course, is the difficulty of ensuring that all vehicles make the change at the same time. Just a few holdouts, particularly trucks, could cause major problems.
This is an appropriate analogy for the current chaos in companies’ financial statements as standard setters embrace fair-value accounting. Some recent examples:READ MORE