This research examines the information content of the bank earnings components entitled "Securities Transactions Gains and Losses" (STGL). STGL reflect the accounting gain or loss that arises when a bank sells an investment security at a price different from the book value. Institutional as well as anecdotal evidence suggests that investors may price STGL differently from the operating earnings come ponent entitled "Income before Securities Transactions" (IBST). For example, prior to 1983, bank regulators viewed the IBST and STGL components as reflecting unique aspects of bank activities and, therefore, required that total bank earnings be disaggregated into IBST and STGL components (SEC 1983). In addition, because of investment market volatility and the discretionary nature of investment securities sales, STGL may convey limited information about current changes in bank value (Linden 1990). Indeed, with banks, security analysts often focus on IBST (Barth et al. 1990), and managers have been accused of selectively selling appreciated investment securities to increase reported levels of accounting earnings (Berton 1991; Wyatt 1991). Research by Barth et al. (1990) has assessed the relative ability of the IBST and STGL income components to explain cross-sectional variation in annual common stock prices. They predicted, for many of the reasons cited above, that the STGL earnings/security price multiple should be less than the multiple assigned to the IBST component. Their results confirm this prediction: IBST played an important role in explaining bank stock prices, but the earnings/security price multiple assigned to STGL did not differ significantly from zero. There are several reasons why STGL might not have exhibited information content in this research. First, as Barth et al. suggest, the incremental information content of the STGL component may have been diminished because STGL appear to be realized to smooth income. In this situation, STGL are likely to provide little incremental information about changes in bank equity values. Second, Barth et al. measure stock returns over a 12-month interval corresponding to the bank's fiscal year. When returns are measured over such a long period, the likelihood increases that information unrelated to earnings will also be reflected in equity prices, thereby (potentially) reducing the ability of earnings to explain security returns. Third, significant tax-related, cross-sectional differences may exist in the STGL earnings component/security price relationship, and these are "averaged away" when one overall earnings/security price coefficient is estimated. For example, Scholes et al. (1990) suggest that STGL may be realized to minimize taxes. Based on this tax-planning scenario (described in section I), security transaction losses (gains) for tax-paying (non-taxpaying) banks are predicted to be negatively (positively) related to bank equity values. The objective of this study is to assess whether the STGL earnings component is priced by investors in a manner consistent with this tax-planning rationale. Empirical tests measure the market reaction to IBST and STGL earnings information over the two-day interval consisting of the day before and day of the preliminary quarterly earnings release, and the results provide evidence that STGL are priced by investors in a manner consistent with the tax-planning hypothesis. However, these results appear to hold only in the first three quarters of the fiscal year. In the fourth quarter, there is no evidence that the STGL component is priced by bank investors. These fourth-quarter results are consistent with an increase in earnings-management activity related to STGL near the fiscal year-end

The Internal Revenue Code of 1954 sought to remove inequities, remove hindrances to economic growth, and clarify existing tax law, within the basic framework of existing revenue sources, taxpayer classifications, and rates. Thus there was no attempt during this revision of the laws to make any major re-distribution of the tax burden to achieve greater equity as between economic groups. Efforts to achieve greater tax equity were limited to some of the more obvious hardship situations within existing classifications involving matters of health, education, family status, retirement, and income security. Among these were provisions relating to medical deduction, sick pay, health plans, students, scholarships, fellowships, charitable contributions, surviving spouse, child care, retirement income credit, annuity exclusions, personal residences, insurance contracts and soil and water conservation. The equity rules are sound in concept and will benefit many millions of tax-payers. Some to whom they would normally apply, however, will not need them as their exemptions and the standard deductions are large enough to make their returns non-taxable. The additional rules provided to obtain more equitable treatment, of necessity, adds complications to the law, the regulations, and the tax forms. This has added to the taxpayer's problem of understanding the tax requirements and has made it more difficult for him to make certain that he pays the proper tax. Continued effort is required on the part of the internal revenue service to see that the tax returns are correct to in sure that no one pays no more nor less than he owes; on the part of accountants to further develop the habit among their clients for better records so that the tax can be accurately determined and substantiated; and, on the part of the taxpayers to familiarize themselves with the many new tax rules. This raises the question as to the advisability of easing some of the complexities for the extreme low income groups until there is a better general understanding of the rules by the lower middle, middle, and upper income groups. This would tend to narrow the problem of taxpayer education. One of several possible methods for such relief that is pointed out for discussion involved the introduction of a minimum standard deduction. The present standard deduction is, in general, 10% of the adjusted gross income. Thus a wage earner receiving only $720 a year is entitled to a standard deduction, in lieu of itemized deductions, of only $72, or 10% of $720. This small deduction too often forces him to itemize deductions involving much by way of record keeping as well as tax knowledge. A minimum standard deduction of $250 or 10% of the adjusted gross income, whichever is the greater, would cut through much of this paper work at the lower end of the scale and permit everyone to concentrate on the more important phases of taxation. Other possible methods for some relief of paper work relate to more liberalized filing requirements as an alternative to the present minimum requirements which currently cause the filing of several million non-taxable returns. Emphasis is placed upon the need for taxpayers to thoroughly understand their rights under the law or else many of the changes in the law to provide more equity will become only an idle gesture. The conclusion was expressed that the revenue service's current high school program of tax education, the accountants' help in informing the taxpayers, and continued advancement in administrative techniques will provide substantial improvement, but will never fully bridge the gap between the law's requirements and complete compliance for the mass of taxpayers

The Executive Committee voted at its January 2009 meeting to establish a new Committee on Government Relations. The Committee was authorized to establish a Washington office for the Association and to hire a part time Washington representative. Katharine Abraham (University of Maryland) was appointed chair of the new committee. The other members are Angus Deaton (AEA president and Princeton), Catherine Eckel (University of Texas–Dallas), Robert Hall (AEA president-elect and Stanford), Robert Moffitt (Johns Hopkins), Charles Plott (California Institute of Technology), Richard Schmalensee (MIT), Charles Schultze (Brookings Institution), and James Smith (Rand Corporation). Rebecca Blank (formerly of the Brookings Institution) served as a member of the Committee until she was confirmed as Undersecretary of Commerce in June 2009. The Committee’s first tasks were to develop a mission statement for the new Washington office and a description of the duties to be performed by the Association’s Washington representative. Both were approved by the Executive Committee at its April 2009 meeting and are posted to the Committee’s new Web site; for reference, copies are attached to this report. The Washington representative is charged primarily with developing information about legislation, regulations and agency decisions pertinent to the scientific interests of the AEA and, working closely with the Committee on Government Relations, to keep members of the Association informed about these developments. On occasion, the Washington representative may be asked to provide informational materials to congressional staff, Members of Congress and Executive Branch officials, but under no circumstances will s/he express any view or take any position in an official capacity that might be construed as partisan. The Washington representative position was advertised in the spring. Roughly 40 applications were received, and a hiring subcommittee interviewed the top few applicants in mid June. Based on the report of the interviewing subcommittee, the full Committee’s consensus choice to fill the position was longtime National Science Foundation program officer Dan Newlon, who retired from the NSF in August. Newlon accepted the offer of a halftime position and began work October 1. A blast e-mail that went out to AEA members in October announced the formation of the Committee and Dan’s appointment as the AEA’s new Washington representative. Dan’s appointment also is noted on the Committee’s Web site. Dan is a very capable person who has the additional advantages of being well known to economists and very familiar with the concerns of the economics profession. We are delighted he has agreed to take on this new role. Since October 1, Newlon has been meeting with representatives of various organizations whose interests overlap with those of the AEA. The Committee has met by phone with Newlon roughly once every two weeks. Much of the time during those meetings has been devoted to defining more clearly the role of the committee and the Washington representative. The Committee has authorized Newlon to move forward with several activities

After more than a decade of negotiations and planning under the Framework Convention on Climate Change (FCCC), the first binding international agreement to control the emissions of greenhouse gases has come into effect in the Kyoto Protocol. The first budget period of 2008–2012 is at hand. Moreover, the scientific evidence on greenhouse warming strengthens steadily as observational evidence of warming accumulates. The institutional framework of the Protocol has taken hold solidly in the European Union’s Emissions Trading Scheme (ETS), which covers almost half of Europe’s carbon dioxide emissions. Notwithstanding this apparent success, the Kyoto Protocol is widely seen as somewhere between troubled and terminal. Early troubles came with the failure to include the major developing countries along with lack of an agreedupon mechanism to include new countries and extend the agreement to new periods. The major blow came when the United States withdrew from the treaty in 2001. By 2002, the Protocol covered only 30 percent of global emissions, while the hard enforcement mechanism in the ETS accounts for about 8 percent of global emissions. Even if the current Protocol is extended, models indicate that it will have little impact on global temperature change. Unless there is a dramatic breakthrough or a new design, the Protocol threatens to be seen as a monument to institutional overreach. Nations are now beginning to consider the structure of climate-change policies for the period after 2008 to 2012. Some countries, states, cities, companies, and even universities are adopting their own climate-change policies. Are there, in fact, alternatives to the scheme of tradable emissions permits embodied in the Protocol? The fact is that alternative approaches have not had a serious hearing among natural scientists or among policymakers. What are some alternatives? For global public goods, there are three potential approaches: command-and-control regulation, quantity-oriented market approaches, and taxor price-based regimes. Of these, only the tradable-quantity and the price-like regimes have any hope of being reasonably efficient. Under a tradable-quantity approach, an agreement proceeds by setting limits on emissions by different countries. The limits are partially or wholly transferable among countries. This is the approach taken under the Kyoto Protocol. This approach has very limited international experience under existing protocols such as the CFC (chlorofluorocarbon) mechanisms and somewhat broader experience under national trading regimes, such as the U.S. sulfur dioxide regime. A radically different approach is to use harmonized prices, fees, or taxes as a method of coordinating policies among countries. This approach has no international experience in the environmental area, although it has modest experience nationally in such areas as the U.S. tax on ozone-depleting chemicals. On the other hand, the use of harmonized, price-type measures has extensive international experience in fiscal and trade policies, such as with the harmonization of taxes in the European Union and harmonized tariffs in international trade. These thoughts on the structure of international agreements to control global warming should not be regarded as negotiating strategies

One of the most striking trends in the behavior of youth in the United States during the 1990's has been the increased incidence of smoking. After steadily declining over the previous 15 years, youth smoking began to rise precipitously in 1992. By 1997, smoking by teenagers in the United States had risen by one-third from its 1991 trough, before declining again somewhat in 1998 and 1999. This trend is particularly striking in light of the continuing steady decline in adult smoking in the United States. This striking time trend has motivated substantial public-policy interest in youth smoking, highlighted by the recent unsuccessful attempt of the Clinton Administration to pass a comprehensive tobacco-regulation bill that had the ostensible main pulpose of reducing youth smoking. This public-policy interest arises out of concern that youth are not appropriately recognizing the long-run implications of their smoking decisions. Indeed, young smokers clearly underestimate the likelihood that they will still be smoking in their early twenties and beyond. For example, among high-school seniors who smoke, 56 percent say that they will not be smoking five years later, but only 31 percent of them have in fact quit five years hence. Moreover, among those who smoke more than one pack per day, the smoking rate five years later among those who stated that they would not be smoking (74 percent) is actually higher than the smoking rate among those who stated that they would be smoking (72 percent) (Department of Health and Human Services, 1994). If youth smoking leads to adult smoking, particularly in a manner that is underappreciated by the youth smokers themselves, it can have drastic implications for the health of the U.S. population. Smoking-related illness is the leading preventable cause of death in the United States, and smokers on average live from 6.5 (males) to 5.7 (females) fewer years, relative to those who have never smoked (David Cutler et al., 1999). The notion that this increase in youth smoking will lead to a rise in adult smoking is supported by the fact that 75 percent of smokers begin before their 19th birthday (Gruber and Jonathan Zinman, 2001). But this fact does not prove that the curTent upswing in youth smoking will lead to higher long-run adult smoking rates, as it is difficult to distinguish causality from these intertemporal colTelations; smoking later in life may not be a consequence of youth smoking for adults in the past, but rather smoking at both points in life may simply arise from intertemporal correlation in tastes for this activity. In this paper, I first discuss the causes of the rise in youth smoking in the 1990's, then provide some evidence to help causally assess its long-run implications for smoking in the United States and the health of the U.S. population

What I find surprising about the phenomenon of is economists' insistence on thinking about regulatory adjustments that affect financial firms as exogenous disturbances to a general economic equilibrium. Far from being a politically self-contained disturbance to financial markets, deregulation is an endogenous response by regulators to changes in the economic constraints that financial markets impose upon them. My perspective on financial and regulatory innovation may be grasped by visualizing the front window of a large financialservices firm. In this window are four signs. Three of the signs constitute electronic displays. The messages on these three signs as well as the equipment used to display them are continually updated by the firm's employees. The three signs display respectively the following information: 1) The product lines the firm offers: different types of deposit or investment accounts, credit arrangements, and other customer services; 2) The prices the firm currently attaches to each type of product; 3) The name, office locations, and organizational form of the institution itself. What about the fourth sign? This one is painted permanently on the window in gold letters. It says that the debts of this institution are guaranteed in full by either its home or host government because the firm is too large for affected politicians to allow it to fail. This image hints at two points. First, the permanence of the information conveyed by the fourth sign and the slowness with which politicians and bureaucrats adjust their monitoring of institutions' risk-taking activity to changing opportunities for taking risk help to explain the impermanence or volatility of the information displayed on the other three. Underpriced and insensitively monitored government guarantees cushion the penalties from failure that ordinarily constrain innovative behavior. Second, government guarantees and supporting regulatory activity are only part of the story. The other major forces are volatility in financial firms' macroeconomic and microeconomic environments, particularly the rapid technological change symbolized by the electronic signs whose form and content the firm's managers directly control. Financial theory holds that financial firms exist to reconcile in an economical fashion the funding needs of entities that want to spend more than their income with the desire for credit-enchanced savings vehicles on the part of entities that want to accrue a surplus. Conventional theory portrays society's savings propensities, the productivity of real capital, fiscal and monetary policy, and the technology of information processing and financial transacting as determining both the prices at which a financial-services firm could afford to offer untaxed and unsubsidized financial products and the essential economic functions it seeks to perform. My research (1984; 1987) takes these elements of the problem as given. It stresses that, overlaying the pattern of financial opportunities, regulatory competition helps to shape the formal organization of the firm. By organization, I mean the details of a financial intermediary's corporate structure, the locations and processes it uses to produce and distribute financial services, and the names and contractual details of the financial instruments that constitute its product line. My analysis stresses further that regulatory burdens and subsidies and regulatee adaptation to them simultaneously determine each other. *Ohio State University, Columbus, OH 43210

Since the classic work of Solon Justus Buck (1913) on the Granger Movement, historians have attempted to critically assess the economic roots of agrarian discontent at the end of the nineteenth century.1 farmers themselves complained that the prices they received for agricultural goods had fallen because railroads and grain elevator operators were acting collusively and middlemen were restricting demand, that the prices they were charged for other commodities were being artificially inflated by suppliers with market power, and that the usurious rates charged by moneylenders on farm mortgages were impoverishing the settler in need of credit. In response, the farmers attempted to organize cooperatives to bypass middlemen and lobbied for the regulation of railroad rates and the imposition of interest rate ceilings. Early analyses of nineteenthcentury farm protest, exemplified by John Hicks (1931), while not always taking these complaints at face value, were predicated upon the assumption that farmers were suffering from deteriorating economic conditions. Subsequent writers, starting with Fred Shannon (1945), attacked the traditional interpretation. Douglass North (1966) provides a summary of the revisionist view. To the complaint that the prices of farm products were falling, he offered that other commodity prices were declining as well and that the farmer's terms of trade were actually improving. To the complaint that railroad rates were artificially inflated, he responded that the price of transportation services fell faster than the general price level, and that the spread between farm prices and market prices narrowed over the period. While admitting that a comparison of mortgage interest rates in the eastern states and the rest of the country was the one observation consonant with the farmer's position, he pointed out that it is hard to know how much of this interest differential was due not to capital market imperfections but to the greater riskiness of mortgage loans out on the frontier (see p. 142). subsequent literature went to considerable lengths to elaborate and refine these views.2 traditional economic explanations were undermined to the point where textbook descriptions presented agrarian unrest as The Puzzle of Farm Discontent (Susan Lee and Peter Passell, 1979, p. 292). Left with no explanation for the frequency with which farmers voiced complaints of distress, economic historians engaged in various attempts to rehabilitate the traditional view. Anne Mayhew (1972) portrayed farm protest * Department of Economics, Harvard University, Cambridge, MA 02138. An earlier version of this paper was presented to seminars at the University of Rochester and Baruch College. In addition to those made by seminar participants, I am grateful for the comments of Lee Alston, Peter Berck, Stephen DeCanio, Stanley Engerman, Henry Gemery, Robert Higgs, John James, William Parker, Mark Rush, James Stock, Peter Temin, Jeffrey Williams, and Jeffrey Williamson. 'In addition to Buck, see the references cited below. 2The relevant literature is too extensive to survey here. For examples, see the analysis of railroad rates in Robert Higgs (1970), of farm prices in John Bowman and Richard Keehn (1974), and of agricultural incomes in Robert Fogel and Jack Rutner (1972

In a broad-based democracy, not all contracts will survive. Even some efficient contracts will be banned, if enough people dislike them. Thus if the average voter dislikes powerful private financial institutions, politics will, all else being equal, ban them. Interest groups cancel one another out. One group wants powerful financial institutions and another, such as small-town bankers, does not. The small-town bankers have a leg up in the political infighting, because popular opinion is on their side, leading to a ban on some arrangements that a less regulated economy might produce. Or, to recast the problem in agency cost terms, managers would like to be free from the oversight that powerful financial intermediaries might provide, and in the modern era, politicians might side with managers when the managers’ goals of thwarting takeovers align with a public wary of too many hostile takeovers. The politician can satisfy the managerial interest group and be popular at the same time. Agency costs move into the political arena; some contracts are banned, and whether the substitutes that arise are always perfect ones, without additional costs, is an open question. Law restricted the dominant financial institutions from the end of the nineteenth century onward. American banks were fragmented geographically, lacking the size to take big slices of capital of the large American firms emerging at the end of the nineteenth century. Banks’ products and portfolios have been further restricted: they were barred from the securities business and from owning stock. Their affiliates were also restricted in the stock they could own. Insurers could not buy stock for most of this century. Mutual funds cannot easily devote their portfolios to big blocks and face legal problems if they go into the boardroom. Pensions cannot take very big blocks without legal and structural problems; the big private pensions are under managerial control, not the other way around. These rule were neither random nor economically inevitable. While public interest goals of keeping financial intermediaries prudent and stable explain some of the rules, they do not explain all of them. Two dominant themes lay behind many of the rules: American public opinion, which mistrusted private large accumulations of power, and interest group politics. There were winners in fragmenting financial institutions. These winners had a large voice in Congress, and their goals matched public opinion. For example, small banks wanted to shackle large ones and succeeded in getting and keeping branching limits, banks on banks in the securities business, banks on bank affiliates’ moving outside of banking, and deposit insurance (which, by guaranteeing depositors that they will be paid if the bank fails, helps smaller, weaker banks more than it helps more solid, often bigger banks). These features of the political economy of American finance became foundational for corporate finance and the separation of ownership from control

A stroll along the first floor corridor at the International Monetary Fund's Washington headquarters reveals the fundamental and indisputable fact that political considerations, rather than purely economic concerns, are the predominant practical determinants of the domain of operation of currency regimes. Despite the theory of optimum currency areas which might suggest alternative outcomes, with few exceptions, the empirical regularity is one country, one money. Even the exceptions help prove the rule. The common currencies of the African franc zone reflect still strong political, as well as economic, linkage the former colonial power. The use of the U.S. dollar as the circulating medium in Panama (and Liberia) also reflects present or past political relationships. Moreover, the political theory of currency areas is not merely statement of static facts; it has predictive power. The common currency that Rome imposed throughout its empire did not survive the decline and fall of that empire. Similarly, the states that emerged from the breakups of the Austro-Hungarian and Ottoman empires after World War I rapidly moved separate currencies. When the Soviet Union collapsed at the end of 1991, some misguidedly thought that ruble zone could and should be preserved; but reality prevailed, and the 15 sovereign republics of the former Soviet Union all now have independent national currencies. Conversely, when the Founding Fathers sought construct a more perfect in the U.S. Constitution of 1787, the power to coin money and regulate the value thereof was transferred from the states the new federal government. The objective was not only improve the monetary basis for commerce and finance within and between the states, but also thereby strengthen their political union. In Europe today, the drive construct European Monetary Union (EMU) has been justified primarily on the prospective economic benefits of common currency. However, such proposal would have been literally unthinkable, whatever its possible economic benefits, with the political divisions that characterized Europe until relatively recent years. And, still today, the strongest advocates of EMU tend be those who see monetary union not only as beneficial economic mechanism, but also as substantively and symbolically important for strengthening the political dimension of European union. Conversely, those who are skeptical about stronger political union in Europe also tend be skeptical about EMU. In view of the centrality of political considerations in determining monetary arrangements, it seems essential ask how these considerations affect the differences between currency areas and currency unions, most importantly in the effort transform European monetary arrangements from currency area into EMU. A currency area is an arrangement for group of countries peg exchange rates among distinct national currencies. In some cases, exchange rates may be rigidly pegged, but more usually they are allowed fluctuate within narrow bands. Members retain their own central banks, although with serious constraints on the independence of national monetary policies. A currency union involves much stronger political and institutional commitment fix exchange rates absolutely through single money that functions as the monetary standard for group of countries. The supporting institutional structure also includes common monetary authority for all the countries of the union which determines monetary policy on union-wide basis. * Research Department, International Monetary Fund, Washington, DC 20431. The opinions expressed in this paper are solely those of the author and do not reflect the views of the International Monetary Fund

The discussion about new international financial architecture in the last several years is the most extensive debate about international monetary reform since the 1960's. The motivation for the current debate has been the sharp declines in GDP that resulted from the recent financial crises in Mexico, Thailand, Indonesia, and South Korea. The 1990's debate about international monetary reform differs from the earlier debate in two important ways-one is certainly important and the other may be important. In the 1960's there was a clear identification of the problem that had to be resolved; a mechanism was needed that would enable Germany, Japan, and numerous other countries to satisfy their demand for international reserve assets without inducing a persistent U.S. payments deficit. The problem involved the consistency between the demand and supply of reserves at a global level. In contrast, currently there is no agreement on the problem that must be resolved, as is strikingly evident from the diversity of proposals to reform the architecture. One view is that capital flows are too volatile, another is that bank regulation in many countries is inadequate (transparency and accountability are the buzzwords), and a third is that exchange rates have been pegged when they should have been allowed to float. A fourth is that there is need for an international lender of last resort. The debate in the 1960's originated with individuals in the universities; for several years those in the financial establishment were reluctant to accept the definition of the problem. They slighted the connection between the increase in demand for international reserve assets in Germany, Italy, Japan, and a number of other countries and the U.S. payments balance. In contrast, in the 1990's the discussion of reform initially involved individuals in official institutions. The uniqueness of the recent events was the combination of the sharp sudden depreciation of national currencies and the large loan losses incurred by the domestic banks that appear to have been in the range of 15-20 percent of GDP in the affected countries. The extent of currency overshooting was more extensive than in any previous episode. The debate about whether the Asian Financial Crisis is primarily a domestic banking and real-estate crisis or instead primarily a foreignexchange crisis partly stimulated by the rapid move to financial liberalization still has not been resolved. At the onset of the crisis in each of the several countries, there was a severe liquidity squeeze; asset prices declined sharply. Asset prices increased as this squeeze abated, but these prices have renmained much below their levels prior to the crisis; the implication is that these assets were substantially overvalued prior to the crisis. Much of the discussion has involved the fit or consistency among unrest-rained cross-border capital movements, the exchange-rate arrangement (and particularly whether currencies are pegged or free to float), and the central-bank monetary policies. One theme is that currencies cannot be pegged if capital flows are not constrained; the interpretation is that floating exchange rates would be preferable to pegged rates. The dominant view is that the severity of the Asian crisis reflects the fact that the central banks were reluctant to permit their currencies to depreciate when the capital inflow declined. The three papers in this session represent a tripartite approach toward restructuring institutional arrangements: one part is the role of the exchange rates, a second part is the role of international financial institutions, and the third is the role of central banks. These three institutional components can be arranged in a hierarchy, and the key is the role of central banks and their choice of monetary policies, which in turn has implications for the preferred choice of the exchange-rate regime. The central question is * Graduate School of Business, University of Chicago, 1101 E. 58th Street, Chicago, IL 60637