Rafat's Law: Inflation Elasticity

I've realized laws designed to control externalities and systemic shocks--such as banning secondhand smoke, anti-pollution regulations, or requiring certain levels of retrofitting in earthquake-prone areas--are necessary, while most other laws merely impose social values from elites onto the rest of society, transferring power to lawyers and politicians rather than individuals.

Laws favoring transparency in government are also necessary, though we've learned in America that transparency tends to come from whistleblowers rather than voluntary compliance (See Daniel Ellsberg, Edward Snowden, etc.).

Economic "laws" are the most important, but are usually backwards-looking and therefore inadequate for future reference, especially in a globalized economy with many moving parts.  Yet, as long as the data economists rely upon is relevant, recent, and relatively constant within a specific time period, economic "laws" may help establish the groundwork for further discussion.

I've tried for years to articulate an economic "law" I understand intuitively but cannot explain well.  It deals with the social response to an increasing gap between expected wages, debt loads, and essential services/products such as housing, healthcare, food, and transportation. Economic "experts" don't seem to separate essential vs. non-essential items when evaluating the inflation trajectory of wages and costs.

For example, getting an education costing 5K may not seem like a great deal if minimum wage is $3.50/hr, but it's still within reach. (Tara VanDerveer can still afford to go to college even she's not from an affluent family and eventually land a prestigious coaching job.)  If that same education, with new and fancier departments at the same college, costs 10K when the minimum wage is $7/hr, it's not as good a deal even though we've doubled both the cost and the wages.  In other words, the doubling of wages and costs should produce the same or similar results, but we're seeing that it does not. (Rafat's Law of Inflation Inelasticity: manipulating general wages by fiat to provide more equal opportunity does not solve the price inflation problem because the cost of essential items in modern society is often so much higher than wages that any rise in wages typically causes additional price inflation. Such price inflation relative to wage inflation increases at unsustainable rates due to the high starting price point, low starting wage point, and the compound inflation problem.)

Worst of all, some higher costs, such as education, divert disposable and other income from tangible goods--especially tangible goods that may be transferred at lower values to other buyers if the initial purchase doesn't work out as expected. (You can transfer a paper book to someone else or sell it at a lower price to a used bookstore, but a Kindle selection is worth something only to you.)

Sorry, Warren Buffett--we live in interesting times. 

As the economy moves from tangible goods to services (e.g., data retention, secure networks, Wi-Fi reliability, etc.)--which cannot necessarily be transferred to new owners without modification--it encourages monopolies.  Competitors tend to use the same dominant platforms in the intangible economy and enter as "add ons" rather than something new or within a new ecosystem. No economic theory has explored this new paradigm.

Additionally, inflation in one area that is uneven has effects on more elastic wages and costs, especially as more and more economic activities depend on each other's growth.  Inelastic inflation means some prices such as tuition always increase, even if wage and job growth is uneven or elastic. Yet, one major reason for inflation elasticity is that higher costs in some areas, like tuition, tend to reduce well-paying jobs in that profession relative to unsubsidized tuition costs while solidifying power in the existing legacy group--at least in a democratic political system. Such a phenomenon typically leads to a greater reliance on debt or non-organic sources to spur job growth, adding an unpredictable new factor to an already complex inflation situation.

In short, prices and costs in some areas, such as U.S. tuition and tenured professor wages, are inelastic in the sense they do not experience deflation (though reduced enrollment may occur) because of political and legal support; in contrast, prices and costs in other areas are generally elastic even if an upward trend exists in the long term.

If elasticity in Sector X increases dramatically while inelasticity applies to Sector Y, backlash and social cohesion will occur.  If debt is used to mitigate the gap's effect between the elastic and inelastic sector, further distortions will occur, which are unpredictable to the extent the debt's gains don't flow equally or equitably (see election of Trump).

I don't know the solution to the above problem, but I don't want to have to explain it before we can start a discussion.  I call it "inflation elasticity" for now, but perhaps someone else can explain it better.

Bonus: Another common problem should have a shorthand name. When organizations are small, it is easy to hire likeminded people who interpret regulations and rules similarly. Predictability is almost assured, which leads to better compliance and mutual respect.

As organizations and the output they examine increase in number and complexity, enforcement is handled differently based on different fact scenarios, leading to different results based on arbitrary factors (e.g., which judge or case officer is randomly assigned, etc.).  Dissatisfaction is sure to increase.  As outcomes diverge, the system itself leads to distrust--the exact opposite outcome it was designed to create.

At that point, a leader has to decide how to manage his or her "troops."  If s/he orders them to comply with a singular or non-discretionary interpretation, s/he will fail because no method exists that covers all possible fact scenarios and permutations; at the same time, doing nothing will lead to sustained divergent outcomes, causing more distrust.  If the costs related to such a system continue to increase, regardless of reform or increased consistency, dissatisfaction and distrust will become contempt.

For this reason, almost everyone who grows older begins to appreciate the value of "small" while lamenting "small's" inability to expose its inhabitants to full knowledge and diversity of experience. Yet, I have seen nothing that teaches me how to solve the problem of trust and "big" without resorting to mindless enforcement that doesn't consider relevant differences.

Update on June 2017: my first "law" is explained here: http://willworkforjustice.blogspot.com/2009/04/rafats-law-of-diversity.html 

Credit and Credibility in America

America Has the Most Complex System of Government Worldwide

I'm keenly interested in how other countries promote stability and confidence in government services. For example, compare London, England (about 8 million residents) to the Bay Area in California (about 7 million residents). The Bay Area has several different FBI offices, Sheriff's offices, and city police departments. Except for the FBI, all the offices have different elected or appointed leaders. Meanwhile, London is served by one Metropolitan Police Department, which employs about 50,000 people. It's true London is subject to jurisdiction by the National Crime Agency, but overlapping jurisdiction is rarer, and we're still discussing two law enforcement agencies rather than ten-plus in the Bay Area (S.F., Cupertino, Campbell, Sunnyvale, Palo Alto, Oakland, Alameda County, San Mateo County, Santa Clara County, Marin County, etc.).  Having one police agency reduces administrative overhead as well as the need for different procedures, but it also seems to provide greater trust through greater simplicity.

America, in contrast, has at least three different levels of governance and taxation: federal, state, and local (city and county).  In a typical day, an American parent might pay gas taxes to the state and the city; educational fees to a local school board--which may have independent taxing authority--and a state; and then sales taxes at different rates to yet two other cities. Such fragmentation makes it difficult to determine whom to hold accountable if anything goes wrong; worse, it's harder to improve services even if nothing is wrong because of the need to understand different and overlapping procedures and jurisdiction. (And we haven't even mentioned property taxes or special assessments.)

As one might expect, such complexity increases the potential for corruption exponentially, especially when the goal is to increase annual funding under a system forcing governmental entities to compete against each other for the many of the same dollars. In one instance, a county and city in the same territory sued each other over a dispute about which entity was entitled to millions of dollars of tax revenue already received.

In other countries, the federal/national government might act as a tax collector and then distribute funding to states or territories, thereby creating greater fiscal accountability through separation. When the entity using the money isn't the same entity collecting it, chances of corruption are reduced. Think of it this way: if you apply for a passport at one office but have to pay the fee in another office and bring back a receipt allowing you to pick up your passport, the chances for bribery are almost nil.

On paper, the idea behind America's governmental diversity is to increase checks and balances and to provide opportunities for each city and state to create their own cultures, which might appeal to different persons and therefore increase inclusivity. Don't like too much government?  Go to New Hampshire. Want lots of government? Go to Northern California. Is your local police force not handling your complaints properly or arresting one racial group more than others for no reason? The federal government can step in on your behalf and sue to fix the problem.

In practice, however, attempts at governmental diversity and accountability have failed, causing almost total mistrust of government. Rather than provide true checks and balances, America's political system of local, state, and federal power has led to more "gaming" on each level, creating complexities difficult to unwind. The original system was created by people familiar with only 13 colonies/states with a population of about 2 million residents in 1775 and about 4 to 5 million in 1800 (not including natives). We can't even remark, "I don't think we're in Kansas anymore," because Kansas didn't exist at the time.

Debt Restricts True Freedom of Choice

Despite such a convoluted system, if people were able to move easily, they could take advantage of different cultures and activities nationwide. On paper, if one city or state was corrupt or close-minded, a family could move and start over in another less corrupt place. In practice, it just doesn't work that way. A college graduate lacking parental support would have about 20,000 USD in student loans. If this person was particularly ambitious, s/he might advance to graduate school, which would necessitate more student loans (though many science/engineering degrees provide grants and stipends). In either case, most of the college grad's networking opportunities would be local or at least in the same state, limiting employment mobility. Thus, despite having the technical ability to move 2,800 miles away, freedom of choice is limited by systemic forces, especially college and networking connections, which tend to be local.

In addition to the general need for alumni connections to garner employment, the need to go in debt to receive not only a college degree but a home and perhaps a new car restricts freedom of movement. If one buys a new car--a requirement in most American cities, which lack efficient public transportation--the value of the car immediately depreciates, making it inadvisable to sell quickly.  (An auto lease is possible but a terrible deal because of the lack of ownership and mileage restrictions.) Basically, more debt restricts flexibility, especially when much of the debt creates local rather than cross-border advantages.

What about buying a home, the most "local" purchase one can make? Under the federal tax code, it would be foolish to buy a home and sell it in less than five years due to numerous costs associated with the sale and the tax benefits of waiting at least 2 years--and that's before a possible penalty for early mortgage payments.

Furthermore, most college grads don't buy homes after graduation. They tend not to have practical skills, because most professors lack recent relevant work experience, meaning even after years of paying tuition, graduates still rely on business investment and training to be productive and profitable. In the meantime, since saving for a down payment can take years, renting is the most feasible option.

In short, a successful American reaching the age of 24 might have 22,000 USD in student loans, a car loan of 12,000 USD, and no ownership of anything other than a piece of paper--while being dependent on local connections to maximize employment and debt-repayment options.

People in Debt are Beholden to their Elders and Therefore the Establishment

A person with 34,000 USD in debt isn't likely to rock any boat. In fact, because of the convoluted system we discussed earlier, such a person is better off brown-nosing as many people as possible to increase his or her chances of receiving employment, even exaggerating his or her expertise to compete with other applicants. As you might predict, in such a dynamic, integrity is often the first value to dissipate, as everyone is focused on paying off debt rather than working together to advance long-term goals. A good reputation is a fine virtue, but not one you can eat.

Establishment-Oriented Societies Do Not Favor Dissent

In San Jose, California--one of the largest cities in America--both recent mayoral candidates graduated from the same private Catholic high school. This was not an accident. Why would anyone pay 7,000 to 12,000 USD for their children to attend a private school when MIT puts its content online?

What if the American Establishment is so ensconced in power, you have to buy your way in?  Maybe it doesn't matter how intelligent or honest your daughter is--if she wants to be mayor one day, what really counts is whether her parents put her in the right private high school. As of April 2017, Santa Clara County's Board of Supervisors is majority Catholic. Dave Cortese attended Bellarmine (Catholic) high school. Cindy Chavez graduated from Moreau Catholic High School in Hayward. Mike Wasserman attended Bellarmine (Catholic) high school from 1972 to 1976. Who's the top local cop? Eddie Garcia, who attended St. Francis High School. As of 2017, Bellarmine high school charges over $20,000 annually in tuition.

It's true all alumni tend to look out for each other, but if you need to start in high school to build those connections, your children will get the jobs left over after the elites assign the ones they want to themselves--regardless of integrity. In such a system, loyalty to your own fiefdom matters more than loyalty to country or the public trust. Some entities, including the military, may convince themselves that looking out for each other is the same as being patriotic, but even General Colin Powell was made to look foolish by intelligence agencies with false information when he testified in favor of invading Iraq. In an age soaked with debt and paid-for connections formed as early as high school, integrity doesn't matter as much as maintaining institutional image.

When Donald Trump said during the presidential debates that mitigating taxes was "smart," he was right--the tax code allows him to take a deduction, so why shouldn't he? What obligation does he have to anyone else, especially when he can donate the money he saved to the entities of his choice--just like Warren Buffett, who will evade the estate tax by donating almost all of his billions to a fellow billionaire?

What happens to dissent in such a system, when the elites look out for themselves, their friends, and their particular institution's image more than any long-term view about what is best for the public?

How can the younger generation--which used to raise hell about unjust wars such as Vietnam--muster any sustained dissent when they are in debt as early as 19 years old or dependent on parental funding?

If government spending drives so many well-paying jobs--now with better benefits than the private sector in many states--and maintaining institutional image is more important than integrity, why would any rational college student or graduate speak out against any entity connected with the government, such as police, teachers, or firefighters? (One side is backed by billions of dollars each year, and the other owes thousands of dollars to the same aforementioned people.)

What happens to a society when the only people capable of bucking the Establishment are themselves part of it?

What happens to a society when the incentive for being honest is non-existent while the incentive for supporting the status quo is the greater likelihood to pay off debt one was forced to take to achieve the possibility of a middle class lifestyle?

I'm interested in knowing whether the problems I've mentioned above are the same everywhere, or especially so in the U.S.  Stay tuned... 

© Matthew Mehdi Rafat (2017) 

Colusa, CA

If you ever go to Davis, CA--one of my favorite American cities--about an hour away is a farming town called Colusa.  There's a bar, Rocco's, that serves excellent food, and the scenery is calming from January until the heat in June.

Seth Godin, on Hillary Clinton's Chances in 2005

"Hillary Clinton, more than others, has a worldview problem because the vast majority of the electorate has already told itself a story about her... I believe there isn't enough money in circulation to persuade those voters that have already made up their minds to change them." -- from Seth Godin's All Marketers are Liars (2005), pp. 81, hardcover.

Bonus: "Trust is the scarcest resource we've got left. No one trusts anyone." -- pp. 9.

What's my take? Marketers have reached a point where their stories diverge so far from reality, people have stopped listening.  The real gamechangers will be the truth-tellers--if the marketers allow them media space.

Bonus: "Hillary Clinton received the most money from Goldman [Sachs] employees and affiliated PACs... during the 2016 election cycle." -- The Atlantic, April 2017, pp. 23. #hillaryclinton 

Western Civilization and its Exiles

By Rebecca Goldstein, National Geographic (2017)

In 399 BC, the Greeks tried and killed Socrates--"the best, wisest and most upright man"--because they grew tired of his anti-democratic views.  His death caused Plato to self-exile.

The Greek Empire lasted from 776 BC to 323 BC (until the death of Alexander the Great), or about 350 years.   Yet, the moment Greece killed Socrates, it was over for the Greeks, who are today the weakest link in the European Union.

The Roman Empire lasted about 500 years.

If any place cannot keep its best people, it will eventually fail or become irrelevant.  History is simply a reiteration of places that managed to keep their best people safe while attracting--and keeping--the best people from all over the world.

Propaganda and favorable media coverage play major roles in where people go, because if you never hear of certain places due to dishonest communication or inadequate media access, they won't be able to attract the best people in a systemic or broad manner.  The problem is when propaganda deviates significantly from reality, leading to dissatisfaction among both natives and newcomers. Americans are discovering that splintering media and allowing varying levels of honesty is posing major challenges in maintaining societal cohesion.

Bonus: Wisdom is often found in the unlikeliest of places.  Guess who?

“His view of American and world politics was so on point and profound and now, eerily prophetic. Even to the last days of his life, even if his mind wasn’t always there, he was devouring the news, reading every newspaper and being an oracle who foresaw what was coming.” 

Book Recommendation: Hilarious Satire of Academia

March 25, 2017
Worldwide Intelligentsia
Wherever, Everywhere

Dear Readers:

I haven't laughed this hard since Me Talk Pretty One Day and David Lodge's similar novel, Changing Places. Jay is a beleaguered English professor who appears to spend most of his time writing letters of recommendation. His writing style is equal parts maudlin, passive-aggressive, and earnest. I needn't say more, I suspect.

An aside: I asked my law professor for a LOR over a month ago, and it took a month, two in-person visits, and about 10 emails to get it. Trying to make it easier for her, and with her agreement, I did it myself and drafted two noncontroversial paragraphs. It still took a month to get the letter. She actually expected an online form (would it cut off her sentences, like in the book?) and looked at me like I was crazy for questioning why it was taking more than 10 minutes to do a copy-and-paste job. Apparently, professors don't mail letters anymore--they have staff and a queue for this sort of thing. When people wonder why Americans voted for Trump, I tell them this story.

"With candor, regret, and a whiff of vengeance,"
Mateo

Update: the author is apparently both witty AND wise. How come female authors "do" male characters so well, but we men can't seem to reciprocate?

Retail Therapy: What's Wrong with Brick-and-Mortar Retail?

Payless Shoes appears headed towards bankruptcy. Sears looks like it's on life support.  Does anyone shop at JC Penney anymore?  

It's tempting to say retail is dead and appoint Amazon as its pallbearer, but one look at McDonald's, Costco, H&M, Chick-fil-A, In 'N Out, and Dunkin' Donuts tells you brick-and-mortar can work just fine.  

Target (TGT), which I own, is the odd duck, so I will focus on it.  It used to be Target was retail's darling.  Fans would refer to it as "Tar-jay" (with a French accent) to denote some particularly welcoming stores and its exclusive clothing lines.  At one point, a famous designer, Isaac Mizrahi, created an exclusive fashion line for Target for five years.  The fact that a "discount" retailer was able to carve out a high-end niche, at least in the consumer's mind, is worth further study.  

Recently, however, Target has lost its ability to maintain its brand.  A series of unfortunate events occurred.  In 2013, hackers took advantage of Target's credit card information, a debacle that continued to make headlines through 2015.  It exited Canada, admitting defeat in the country.  Its exclusive fashion collaborations didn't garner as much appeal as in the past.  And it angered fundamentalist conservatives by taking a political stance on unisex bathrooms.  

What is happening to Target, whose stock is at a five-year low?  

1.  As living costs in America have increased, wages haven't kept pace.  It's hard to motivate employees when they see employment with you as a temporary gig.  At least waiters and bartenders have tips to motivate them, so they can't completely slack off.  

2.  Today, the main way to differentiate retail is through outstanding customer service.  Chick-fil-A has great food, but most people will remember its consistent service long after the taste of spicy chicken has been forgotten.  With its relatively low wages, how does Target create consistently excellent customer service?  

Note that Costco pays higher wages than the industry norm, which it considers to be part of its competitive advantage because higher wages can reduce employee turnover.  American retailers in trouble have failed to adapt to higher living costs while complying with Wall Street's general antipathy to higher wages for unskilled labor.  

Canada's Tim Horton's has adapted by hiring foreign-born Filipinas--who have a reputation for excellent customer service--to staff its stores.  Obviously it needs its government to be on the same page when it comes to immigration to do this, but Canada, as usual, succeeds where others have failed because of its greater tolerance and dedication to doing what works. 

Dunkin' Donuts has adapted by reducing the size of its stores, lowering its overhead and need for additional staff.  I'll never forget ordering a sandwich in a Chicago public transportation hub and trying to figure out how Dunkin' fit an entire kitchen in what appeared to be the size of a rich housewife's shoe closet.  (Maybe the new retail paradigm is this: can your store fit into an airport or public transportation hub and still succeed?  Hopefully not, though I notice bookstores seem to be doing well in airports and nowhere else.) 

3.  Does anyone think the majority of employees at Payless are experts on the perfect shoe fit or style? Of course not.  That's why it's cheap to shop there.  In contrast, Asics in Tokyo has a machine to measure your foot and print out data--yours to keep--that helps the Asics employee identify your best shoe choice.  After the helpful employee spends all that time with you, you really do want to buy whatever shoe s/he recommends.  After all, who am I to doubt science? 

As far as I know, Target has no individually-tailored services outside its photo department. 

4.  Partnerships are an excellent way to keep your brand in the spotlight but difficult to find and even harder to maintain.  I knew Olympic Gold medalist Jordan Burroughs would be a superstar long before he became a household name in some circles and abroad, even in Iran.  (As proof I'm no bandwagon fan, I donated to his gold medal fund *before* he won the gold. Besides, how could anyone not like his family? http://ftw.usatoday.com/2013/10/olympic-wrestler-gets-married-bride-wears-his-signature-shoes-down-the-aisle) 

Corporate partnerships are hard.  Jordan Burroughs made some comments against excessive police force that could have made him unpopular, but most people appreciated his measured criticism.  Meanwhile, Nike dropped the great Manny Pacquiao, and Colin Kaepernick is unemployed.  

In Target's case, it's just not getting enough mileage out of its "exclusive" partnerships because consumers figured out if they miss one offering, another will soon appear.  The lesson is simple: companies that mislead consumers, even if indirectly, will suffer, because consumers have become smarter about seeing through advertising gimmicks.  Target appears to suffer from a case of "MBA-itis"--short-term profits over long-term credibility.  

In Asics' case, it not only managed to scoop up the brightest star in a growing sport, it also cultivated a mutually-beneficial relationship with the sport's most respected coach for decades.  Is that why they were able to identify and sign Jordan Burroughs before other apparel companies?  Maybe not, but it couldn't hurt. 

5.  Consistency matters.  McDonald's might not always provide good customer service, but its coffee will taste the same everywhere in the world.  Its only adaptations are specific to local tastes, like adding guacamole to its Mexican burgers or using the term "liberty" in its advertising in Guantanamo Bay (the irony isn't lost on me).  When you consider the TSA can't even manage to be consistent in its own country, you'll see achieving consistency isn't easy but key to maintaining your brand's reputation.  

In Australia, I eagerly visited a Target store near Chinatown to see how my Target investment was doing.  I almost sold my shares the next day.  With Australia's affluent customers, you'd think Target would make the country a priority. Yet, the store was not clean and not even organized well.  I didn't want to buy a single thing.  Even the lighting made me sad. 

Perhaps Australia's relatively high currency and higher labor costs make it harder to invest there, but why open a store that will damage your brand's reputation?  How hard can it be for the Board's and executive team's spouses and children to travel a few times a year--on their own dime--to international locations and give objective feedback to their family?  One visit was all I needed to realize Target lacks the expertise or ability to expand overseas. 

[Correction and Update from Wikipedia: "Despite the similar logo, name and type of outlets, Target Australia [founded as Lindsays] carries no corporate connection or relation to the US discount retailer, Minneapolis, MN-based Target Corporation."] 

Conclusion: Target has many problems that justify its current low stock price and will need to think long-term to stay relevant.  Its issues expanding internationally need to be addressed immediately. 

© Matthew Mehdi Rafat (2017)

Disclosure: I own Target shares and other retailer company shares as part of mutual funds and/or ETFs, but my positions may change at any time.  You are responsible for your due diligence.  Nothing herein is intended to be investment advice.