Next week is a big week for those keeping track of the success of Japanese economic policies. New interest rate numbers will be released on October 29 and these numbers represent the most current report card on Abenomics, as the policies of Japan’s Prime Minister Shinzo Abe are called.
Abenomics was presented just weeks after Abe took office in 2012 as the ultimate solution to almost two decades of stagnation in the country. The program has three pillars: monetary easing, structural reforms and renewed fiscal stimulus. One of the most important goals of Abenomics is increasing inflation, and ultimately changing inflation expectations—hoping to reverse a decade of deflation. To do so, the government began printing Yens in abundance.
Initial signs of success showed in the exchange rate, asset prices, and inflation rate. In fact, the official CPI for July 2014 shows a large annual inflation rate by Japanese standards: 3.4 percent. And from that perspective, it seems as if Abe’s policies have been effective and the job has been accomplished.
More recently, however, the economy has once again shown signs of weakness: Inflation expectations remain surprisingly low at around 1 percent, asset prices and bond markets seem to be unconvinced by the achievements, and the real economy is starting to slow.
Rather than dipping too deeply into the tax break tool box to attract new business, state and local governments might do just as well to make their local skies more friendly. Some research I’ve recently completed suggests that the easier it is for venture capitalists to travel by air, the better the companies in which they invest do.
When my colleagues (Shai Bernstein at Stanford University and Richard Townsend at Dartmouth College) and I analyzed what happened when new airline routes were introduced that reduced the travel time between venture capitalists and companies in which they had invested, we found a robust result: the travel time reduction leads to an increase in innovation as well as a greater likelihood of an IPO. Moreover, the greater the reduction in travel time, the stronger the positive effect on portfolio companies.
Our results indicate that VC involvement is an important determinant of innovation and success. Far from just sitting back to see if their investments pay off, venture capitalists tend to be active investors. They want to be up close and personal with their companies. Better flight connections that enable them to do so lead to greater company success, we found.
Have you ever been shopping and found a great jacket with a perfect fit? Then you look at the price tag and pause. Should you buy that perfect item now or wait to see if it’s still available during the inevitable end-of-season sale? What if the store told you that it only had a limited number left, or only had two on the rack in your size?
In a recent study I conducted with Prof. Karen Zheng, we found that as consumers have become more strategic about purchases, behavioral motives like regret and availability misperception are significant factors and should play a key role in pricing strategy.
Regret happens when consumers compare the outcome of a chosen action with that of the unchosen one and realize they would have been better off with the latter. In other words, they may regret buying the jacket now at the higher price if it turns out to be available during the sale for 30% off. Similarly, they may regret not buying it now if their size is gone by the time of the sale.
Apple issued $12 billion of U.S. debt in April, which gave the company a domestic cash infusion that allowed it to keep more earnings overseas. Last month PfizerPFE attempted to acquire AstraZeneca, a transaction that would have made Pfizer a subsidiary of the U.K.-based company. These were useful examples in the taxation classes I teach at MIT’s business school, but the real-world implications of these decisions are troubling. Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system.
The U.S. corporate statutory tax rate is one of the highest in the world at 35%. In addition, the U.S. has a world-wide tax system under which profits earned abroad face U.S. taxation when brought back to America. The other G-7 countries, however, all have some form of a territorial tax system that imposes little or no tax on repatriated earnings.
To compete with foreign-based companies that have lower tax burdens, U.S. corporations have developed do-it-yourself territorial tax strategies. They accumulate foreign earnings rather than repatriate the earnings and pay the U.S. taxes. This lowers a company’s tax burden, but it imposes other costs.
For example, U.S. corporations hold more than $2 trillion in unremitted foreign earnings, a substantial portion of which is in cash. This is cash that currently can’t be reinvested in the U.S. or given to shareholders. As a consequence, companies are borrowing more in the U.S. to fund domestic operations and pay dividends. Another potential effect is that companies invest the earnings in foreign locations.
U.S. inflation has been accelerating in recent months, presenting the Federal Reserve with a tricky question as it decides how quickly to remove stimulus from the U.S. economy: Is the rise in prices a precursor of things to come or simply a “catching up” phase as people begin to spend again after a brutal winter?
Recent data from the U.S. Labor Department have led some to suggest that the long run of very low U.S. inflation could be ending. From Dec. 31 through May 31, the consumer price index — not seasonally adjusted — rose a cumulative 2.1 percent. That’s equivalent to an annualized inflation rate of more than 5 percent, far exceeding the Fed’s target of about 2 percent.
If this is more than a temporary phenomenon, the Fed might have to respond by raising interest rates sooner than expected — a move that would restrain economic growth and could trigger sharp declines in stock and bond markets.
Some officials at the Fed, though, reportedly do not believe that the surge in consumer prices represents the beginning of a new inflationary trend. After all, in the period just before the winter, from Sept. 30 to Dec. 31, prices actually fell by a cumulative 0.5 percent. Combine the two periods, one with an increase and one with a small drop, and you get an annualized inflation rate since September of about 2.4 percent.