Oil will flow like milk and honey. Here’s why — John Reilly

MIT Sloan Sr. Lecturer John Reilly

From USA Today

The price of oil has fallen nearly 60% since peaking in June, and lately there’s been a lot of ink and pixels devoted to the question of whether oil prices will plunge even further or whether they will shoot right back up. An even bigger issue is whether prices will stay at these very low levels.

While I doubt oil prices will fall much more — how much further could they reasonably tumble? Perhaps another $20 or so? — history suggests we can expect prices to remain low for the foreseeable future. What’s playing out right now in the oil market is likely the same supply-demand dynamic we’ve seen over and over: several years of extremely high oil prices followed by decades of low prices. The twin oil shocks of the 1970s, for instance, resulted in 20 to 25 years of low prices.

Of course, things are different today — but not that much different. Over the past six or seven years, oil has been relatively expensive, often trading at over $100 a barrel. During that time, both the supply and demand sides of the equation have responded.

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Japan is still in Deflation — Roberto Rigobon

MIT Sloan Professor Roberto Rigobon

From Nikkei (published 10/21/14)

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.

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Easy flights to capital — Xavier Giroud

MIT Sloan Asst. Prof. Xavier Giroud

From Xconomy 

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.

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Retail industry pricing psychological warfare — Ozalp Ozer

MIT Sloan Visiting Professor Ozalp Ozer

From Fortune China

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.

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The lose-lose tax policy driving away U.S. business — Michelle Hanlon

MIT Sloan Prof. Michelle Hanlon

From The Wall Street Journal 

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 Pfizer PFE 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.

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