Showing posts with label globalization. Show all posts
Showing posts with label globalization. Show all posts

Saturday, October 16, 2021

Economics, Malaysia, and Economic Growth

Economics is broken because other than Hernando de Soto's work, it fails to account for politics and sociology. One of the field's most egregious mistakes is assuming protectionism always equals failure within a globalized trading paradigm--or that slower economic growth is necessarily inferior to faster growth. Post-WWII, debt within allied Western nations created an interdependent system facilitating common goals and knowledge transfers. Meanwhile, in formerly colonized countries, most residents remained poor during as well as after colonization, and the Asian financial crisis of 1997-1998 confirmed a distrust of Western finance. 

When judging formerly colonized countries like Malaysia, one must remember just how poor the natives were. According to Tun Dr. Mahathir, "The country's per capita income in 1957, the year of Independence, was less than USD350. Under British colonial rule more than 70% of the population lived below the poverty line... there were only about 100 university graduates in the whole country." If an Asian country associated Western influence with mismanagement--not an illogical conclusion after the Vietnam War--then it would prefer homegrown businesses over FDI, even if slower growth resulted. 

Why so much misunderstanding? When globalized trade focuses on things rather than people, cross-cultural understanding cannot succeed except on a superficial level. In a debt-soaked world, will the 22nd century be different?

© Matthew Mehdi Rafat (2021)

Monday, December 7, 2020

Good Journalist Hunting, Part 3: Criminal Justice

"I am not educated, nor am I an expert in any particular field--but I am sincere, and my sincerity is my credentials." -- Malcolm X 

My Credentials

In the spirit of Brother Malcolm, here are my credentials regarding America's legal system: 

Sanctioned 11,000 USD by Northern District judge Samuel Conti (the party seeking sanctions later declared bankruptcy); 

Sanctioned 1,000 USD by Santa Clara Superior Court judge Socrates Manoukian, who reversed the sanctions verbally at a subsequent appearance once he realized a written order was required;

Flipped off an FBI recruiter at Levi Strauss & Co.'s HQ in San Francisco, California after I criticized the agency and he demanded my name. Fired by Levi's the same day, took a trip around the world shortly thereafter. (Fun fact: the company likes to shorten its name to LS&Co.);

Voluntarily resigned from D.C. Bar in protest against Trump v. Hawaii (2018) and mailed my admission certificates to Supreme Court Justice Sonia Sotomayor;  

Arrested by police in 2016, sent to jail for several hours, accused of being under a controlled substance, released without charge due to "LACK OF SUF EVID." (Though I have advocated legalization of most drugs, I do not drink alcohol, nor do I smoke.) 

Arrested by police in 2019, sent to jail for several hours, accused of intimidation and obstruction. On the same day I sent trial briefs to the Santa Clara County District Attorney's Office, the deputy district attorney said he would dismiss the case. At the next court hearing, the judge granted the prosecutor's request to dismiss my case in the "interests of justice." 

As of December 2020, I remain in good standing with the California State Bar since 2002 and have never had a client submit a complaint against me. 

Not All Government Agencies Believe in Transparency and Public Access

"I had a good working system of paying off policemen. It was here that I learned that vice and crime can only exist, at least the kind and level that I was in, to the degree the police cooperate with it." -- Malcolm X, referring to his pre-Islamic days as a numbers runner, bootlegger, and pimp. 

From Paul Krassner's The Realist, when abortion was illegal throughout America.

When dealing with American government, an honest man learns his experience varies based on which neighborhood he happens to visit, rendering all positive and negative stories equally true, and guaranteeing substantial private sector involvement. In fact, the more the government fails, the more the private sector enters with proposed solutions. Without balance, we shall live in a country with as many technological and regulatory standards as municipalities and also one where national leaders offer increasingly harsher promises of reform and efficiency.

Today, Americans find it fashionable to bash local cops but not the national military, which lacks sense until you realize most of America's GDP is manufactured, shipped, and protected by the military and its virtually unlimited spending--including marketing--whereas police departments cannot run annual deficits. 

Kurt Vonnegut Jr. Interview, Playboy Magazine, July 1973

Though most African-Americans do not trust the police, their complaint has to do with competence, i.e., poor training, otherwise known as poor formal education. Subjected to constant examples of abuse of discretion, few Americans realize cops are only one piece of the legal ecosystem and its most easily derided. A landscape prioritizing mobile footage of police officers failing at their jobs while prosecutors and judges enjoy intransparency tilts toward instability. Consequently, the typical American voter has no qualms voting lawyers into political office despite the fact that incompetent police officers cannot exist without corrupt lawyers, and corrupt lawyers cannot exist without indolent judges. (It is worth noting most judges are merely lawyers with more political connections than other lawyers.). 

Part of the problem is that California judges deem themselves masters of their courtrooms and set their own rules, which include banning recording devices. Santa Clara County, California has notices throughout courtrooms citing Nixon v. Warner, 435 U.S. 589 (1978) and Marin Independent v. Municipal Court, 12 Cal.App.4th 1712 (1993) as authorities against transparency. The result? Unwarranted prestige of one governmental branch over another, with disproportionate respect gained from deliberate opaqueness. It is not until we actually look up the aforementioned cases that we realize the extent to which judges have gone to bar public access and thus public scrutiny. Incredibly, the "Nixon" in Nixon v. Warner refers to impeached President Richard Nixon, meaning California's judicial branch is using a criminal executive as protection against public access. As for Marin Independent, the court cited Nixon and used circular reasoning, holding that media can attend and report on judicial proceedings but has no absolute right to record proceedings because courts can set their own rules. Stated more simply, people can't record court proceedings because the king, er, court says so. 

Counterpoint from libertarian Justice William O. Douglas's book, Anatomy of Liberty (1963)

In California, I have civil law experience, but while practicing, had never seen criminal court proceedings other than assisting a colleague with a routine DUI--incidentally, an ample cash cow for local law enforcement when fines are paid as part of a negotiated plea. What I saw when wrongfully arrested would shock any professor, journalist, or academic who has ever praised the American justice system or who believes in robust checks and balances. Despite my legal education, I had no practical knowledge of criminal courts until my two arrests. Lawyers work either on civil or criminal cases, and even the courthouses are different depending on whether a case is criminal or civil.

Relevant Statistics

First, five statistics:

1. "74% of people in American jails have not been convicted of a crime. Sometimes this is because they’re considered a flight risk or danger to society, but the majority of individuals in jail are there because they can’t afford bail." -- Christian Science Monitor, August 3, 2020 

2. "[M]ore than half of Brazil’s prison population is eventually released without a conviction." -- Christian Science Monitor, August 27, 2020 [I include this statistic because astute readers will notice a connection between USA and Brasil, two countries that share disproportionate Catholic legal influence and a non-coincidental history of chattel slavery.] 

3. "One in three U.S. adults has been arrested by age 23. Communities of color; lesbian, gay, bisexual, and transgender individuals; and people with histories of abuse or mental illness are disproportionately affected. As a result, between 70 million and 100 million—or as many as one in three Americans—have some type of criminal record." -- from The Sentencing Project (2015) 

4. "Usually missing from the conversation about mass incarceration, however, is any recognition that imprisoned or detained Americans currently represent barely one-tenth of the total population of felony convicts. As a ballpark estimate, over 20 million Americans in society at large currently have a felony in their past, and this immense population is effectively statistically invisible." -- Dr. Nicholas Eberstadt (2019) 

5. "The countries with the highest estimated pretrial detention populations on an average day are, not surprisingly, those with the largest general populations. The United States heads the list with 487,000, followed by Brazil (190,000), Mexico (98,000)... As a result of these high pretrial detention rates, 10 to 40 percent of the entire incarcerated population is behind bars without a conviction in most countries in the Americas." -- Richard Aborn and Ashley D. Cannon (2013) 

6. "Misdemeanors... [low-level criminal offenses] account for about 80% of all arrests and 80% of state criminal dockets, says Alexandra Natapoff, a law professor at the University of California at Irvine and author of Punishment Without Crime." -- from NPR (2020) 

I had four thoughts when evaluating
 the above statistics. First, American police possess virtually untrammeled discretion--which means judges, city councils, and unions have failed in their presumed oversight function. Second, it follows from the aforementioned that police unions must have substantial power over city councils as well as judges and prosecutors. Third, prosecutors have little say in day-to-day police work and appear to operate in totally separate spheres than police--despite the teamwork one would assume in their symbiotic relationship. (Using an American football analogy, America's criminal justice system is like a QB attempting passes to a WR that drops the ball 3/4 times and doesn't know the play beforehand.) Fourth, prosecutors and police departments use misdemeanors to justify maintaining or increasing funding. After evaluating the above information and spending allocations, you may decide the military controls America's national government and police unions control local governments while politicians rotate every four years to provide the appearance of choice. The overall picture is more complex.

When anyone is arrested, police have an option to take the person to a holding cell-- typically a county jail--or "cite and release." The former requires fingerprinting, a health questionnaire, a mug shot, and other steps commonly referred to as a "booking." The latter is a written citation sent to the county district attorney's office, which then decides whether to file charges. Only if charges are issued are you required to take further action, including checking in at the local police station. Right away, you can see every single cop, whether rookie or veteran, has the power to make your life easier or harder. 

You may also notice we are dealing with two different government agencies: the police work for a city, whereas the jail and district attorney's office are run by a county. Both answer to separate government boards and sometimes sue each other to establish their required scope of duties, indicating a potentially adversarial relationship. (Imagine the American football game we described in the previous paragraph, and now add separate assistant coaches who don't always get along and who are paid from different sources.) 

Arrest Number One

In my first arrest, the government accused me of taking illegal drugs and arrested me while I was walking. (Again, I do not drink alcohol, nor do I smoke. I am a middling but dedicated former athlete and coach.) After my arrest, I was given a blood test, fingerprinted, questioned by a nurse, offered a Pop Tart, then put into a temporary cell with two other people. (I was also photographed, but I can't remember where in the process this step occurred. It may be that the steps are done based on whomever happens to be in front of a counter rather than in the back.) While I stayed in the cell for several hours, pacing back and forth out of boredom, four to five other people cycled through the same cell, most of them drunk. It dawned on me that even a lowly county jail is an expensive economic ecosystem. My arrest alone bolstered numbers used to justify taxpayer dollars to a lab technician; a nurse; several police officers; the district attorney's office; and private companies selling snacks. 

After my release, my personal items were returned, and I used my mobile phone to book a ride-hailing service back to my residence. Other arrestees pay substantial towing fees because they are unable to move their parked cars in a timely manner. If released, they are returned a key to a car that is often fifteen to twenty miles away, because most homeowners don't want to be anywhere near a jail or prison.

Arrest Number Two

My second arrest was at a sporting event. A drunk fan had the audacity to complain to private security about me, even though he was the one causing problems. Long story short, he was with three other people, I was alone, and I suppose four tickets are worth more than one. Unbeknownst to most patrons, sporting arenas are staffed by private sector workers but at least partly owned by cities. Police departments love professional sports because an insurance policy or the law requires a certain number of officers at events, and strapped local governments view sports as a way to boost officer pay and morale off-budget. In my incident, arena police didn't do any work or independent investigation. They simply carried out the wishes of the low-level private security guard and made an arrest. 

If you've been reading closely, then you've already extracted the unsteady and variable relationship between the following factors: annually balanced budgets; union negotiations; automatic cost of living increases (aka COLA); voter antipathy towards higher taxes; and competing government agencies. Such interplay provides perverse incentives in favor of arrests--especially considering most arrestees do not have enough out-of-pocket damages to justify a lawsuit. In cases where cities have paid substantial sums to arrestees, serious death or physical injury was part of the arrest, such as in NBA star Thabo Sefolosha's case. Seen another way, an arrest that doesn't lead to a conviction or even a charge still requires the same work as a legitimate arrest, and come budget time, no one is penalized for an arrest that doesn't generate a lawsuit and payout. 

After my second arrest, I was taken to the same jail as before and released after several hours. This time, the Santa Clara County District Attorney's Office decided to charge me, which meant they issued a warrant. Unfortunately, they issued the warrant (aka notice to appear) to my residence months after the incident and when I was out of the country and thus had no way of checking in. I later discovered the government is not required to personally serve notice of a misdemeanor warrant/charge. I am unsure if the same latitude apples to felonies, but compare such discretion with a civil case: when I file a civil lawsuit, I must effect personal service of the complaint unless I swear to the court I have tried every means of personal service and failed, a process that requires hiring a third party and/or using a specialized database. It doesn't matter if the case is worth 250,000 dollars or 8,000 dollars--I have to effect personal service, which means I have to do everything humanly possible to ensure you receive the complaint in your hands. 
(Note: in California, restraining orders utilize a less rigorous process than civil complaints, leading to potentially widespread abuse--and more work for police.) If the court later decides I was not forthcoming about my diligence in locating the defendant, the judge can sanction me and/or refer me for disciplinary action, which could result in the loss of my license to practice law. 

Moreover, as a civil lawyer, I cannot sit on a complaint for months as the district attorney did in my case. I am required to serve the complaint within a short period of time and appear at a status conference regularly to tell the court I am actively pursuing the case. If I appear months after I file a complaint and tell a civil court judge that I have done nothing, the judge will likely dismiss the case sua sponte. Suffice to say, I was more than a little stunned at the gap in required diligence: work for an individual or business trying to get money, and you better cross your "i"s and dot your "t"s, or you can't get past the first stage of litigation; work for a government that can imprison you for failing to appear at a police station, and you can jail someone for 11 months without a reasonable person ever receiving or knowing about a warrant. 

Here we may be tempted to judge government more harshly than the private sector, but what we're actually seeing is government exempting itself from rules in order to avoid unnecessary costs or the potential for employee discipline. Since most governments are self-insured, any litigation, whether employee mistreatment or police brutality, impacts innocent taxpayers. In short, when the government "turtles," its shell is designed to protect the innocent. What's the catch? "Turtling" protects taxpayers but destroys the ability to see defects in governance, ensuring long-term decline. On corruption, George Carlin once remarked, "It's a club, and you ain't in it." When threatened, the "club"--any club, really--binds together more tightly, preferring jurisdictional carveouts as defectors sprout like statutory subsections from an original statute. The outsiders, aka the "others," leave because they are ignored or poorly treated, and they leave because the main body of law has failed to institute effective procedures alerting them to dissatisfaction. Even if you don't know Goodhart's Law, you know incentives matter, and incentives drafted in response to creeping corruption require plain eyesight, not rose-colored glasses or blindness. 

Predictably, as voters raise complaints, city councils--staffed mostly by lawyers and de facto union representatives--increase regulation. Yet, because the regulation is like an NFL front office demanding changes to the strange QB to WR scenario discussed earlier, we have the additional obstacle of the blind inserting themselves into a game they do not fully understand. Faced with miscommunication and mixed signals, the QB, the WR, and the coaching staff all form their own clubs to insulate themselves from further regulation. More arrests are made or not made to placate the front office (aka city council), and regulation intended to reform has merely decreased morale: "These arrests are based almost entirely on the word of cops, who say they are incentivized to round up as many 'bodies' as they can." 

Meanwhile, in criminal court, the district attorney runs the show. The judge, being structurally independent, has no pre-trial contact with the police or the accused, and thus relies on the integrity of the district attorney, who in turn depends on the integrity of the police. At the hearing where my charge was dismissed, about thirty other cases were present, and the judge didn't know any facts of my case, not even my arrest date--even though I could have been sent to jail for months. The judge brushed aside my comment that California's de facto one-party state had seemingly produced an outcome where life and liberty are treated with less respect than property and money. (Later, I realized civil courts function better than criminal courts because businesses, especially cost-conscious insurance companies, regularly use civil courts, whereas poor people and government employees regularly use criminal courts. Stated another way, each civil court filing provides hundreds to thousands of dollars for the government as well as the private sector, but each criminal court case is a negative taxpayer cost because criminal courts do not charge the accused fees or costs.) 

When Americans think of respected American judges, they are thinking of appellate courts with limited dockets, not busy trial courts. The United States has a few judges who will be remembered as bucking the tide of totalitarianism, namely Judge James RobertsonRobert TakasugiRoger L. Gregory, and of course Justice Sonia Sotomayor. None of them are now trial court judges, which means you, an ordinary citizen, could never be heard by them. At the first level of litigation are mostly judges who do not understand much, who specialized in only one area of legal practice, and who are at the mercy of information given to them by lawyers. Were tragedy not certain, one might marvel at the fact that American courts depend on the integrity of lawyers in a country where most people do not trust lawyers and most lawyers do not trust each other. 

Conclusion

As of 2020, I am not actively practicing law, and I've enjoyed not wearing a suit in five-plus years. Abraham Lincoln once said, "Let no young man choosing the law for a calling for a moment yield to the popular belief -- resolve to be honest at all events; and if in your own judgment you cannot be an honest lawyer, resolve to be honest without being a lawyer." When I realized I could not give my clients reasonably predictable outcomes based on the evidence, I resolved to quit practicing law as soon as possible. To the extent Americans cannot find an honest lawyer, judges may realize too late they have relegated American courts to the realm of the rich and the overinsured. 

It is tempting to say the United States should become like India, a country with perhaps an even more complex legal system. After all, post-colonial India excels at technology within a large, multicultural, and diverse land once colonized by the British, and no less a visionary than Jeff Bezos has said, "I want to make a prediction... I predict that the 21st century is going to be the Indian century." Realistically, we should strive to be exactly like ourselves, no better and no worse, and accept that growing pains are a normal part of a young nation's growth. One day, we will realize the foundation of globalization was built on an inherently insecure technological standard, and we will understand our devolution from civilization to fragmented security state. For now, until diplomacy and global cooperation improve, all we can do is hope our lonely betters survive to tell our stories as we stumble along in open darkness. 

© Matthew Mehdi Rafat (December 2020)

Dedicated to David Simon, creator of The Wire (2002-2008) 

Disclaimer: Nothing herein is legal advice. As of December 2020, I am not accepting new clients. I am writing solely in my capacity as an observer, and your experience with police and/or the criminal system may differ substantially from mine. 

Bonus: Good Journalist Hunting, Part 1 is HERE. Part 2 is HERE

Update: I don't mean to imply civil courts are perfect or more conducive to justice than criminal courts. Most civil court motion judges don't read all of the parties' briefs, but their law clerks prepare memorandums for them, which provide summaries of relevant law and facts. Civil court is procedurally intensive and geared towards creating a record of everything, which delays justice but also tends to soften both parties' original demands. In state criminal court, the district attorney functions as the judge's de facto law clerk until trial, blurring the lines between independent judiciary and executive branch (i.e., the district attorney acting on behalf of the state, mayor, and police). Compared to civil cases alleging over 25,000 USD in damages, most criminal cases lack bespoke dispositive motions because the system assumes a trial will take place, even though most civil and criminal cases settle or plead. 

Since lawyers know most cases settle, they are incentivized to overcharge or to allege every possible violation, but with an important difference: if a district attorney overcharges, s/he can usually drop the unnecessary charges before trial without consequences, whereas a civil lawyer, upon opposing counsel's request, must spend hours matching all of the facts and evidence to each element in each claim early in the case. This is another way of saying criminal statutes are extremely broad, whereas civil statutes at least attempt to restrict both parties. At the end of the day, civil lawyers not working for insurance companies have to show their clients results to get paid, and if a civil lawyer files too many claims or motions, at some point, the civil lawyer's own availability or client becomes a check and balance on excessive behavior. 

Finally, some civil lawyers do get default judgments against individuals by publication or by serving the complaint at an old address, but they still have to declare under penalty of perjury that 1) the address they used is the one given to them by a third-party investigator or specialized database (Lexis-Nexis, etc.); and 2) they attempted personal service at known addresses, including work. Any defendant not personally served can also file a straightforward motion to remove a default judgment if plaintiff failed to exercise proper due diligence. 

Update: regarding court transparency, the following opinion from federal Judge Davila in USA vs. Elizabeth Holmes (2021) is useful: 

The United States Supreme Court has held that the right to attend criminal proceedings “is implicit in the guarantees of the First Amendment.” Richmond Newspapers, Inc. v. Virginia, 448 U.S. 555, 556 (1980). The First Amendment right of public access extends to pretrial proceedings as well as documents filed in connection with those proceedings. Associated Press v. U.S. Dist. Court for Cent. Dist. of Cal., 705 F.2d 1143, 1145 (9th Cir. 1983); see also Kamakana v. City & Cty. of Honolulu, 447 F.3d 1172, 1178–79 (9th Cir. 2006) (“Historically, courts have recognized a ‘general right to inspect and copy public records and documents, including judicial records and documents.’” (quoting Nixon v. Warner Commc’ns, Inc., 435 U.S. 589, 597 & n.7 (1978))). Access to judicial records, however, is “not absolute.” Kamakana, 447 F.3d at 1178. The Supreme Court “has made clear that the right to an open trial may give way in certain cases to other rights or interests, such as the defendant’s right to a fair trial or the government’s interest in inhibiting disclosure of sensitive information.” Waller v. Georgia, 467 U.S. 39, 45 (1984).

Saturday, April 18, 2020

A Building Divided against Itself Cannot Stand

Sabine Weyand, EU director-general for trade:

[Economic] Self-sufficiency is not an option for any country. It's not an option even for any continent.


Bloomberg, "Supply Lines," April 13, 2020: 

Regarding "ventilators, the breathing-assistance machines in short supply across the world [because of COVID-19]... Depending on the model, they can contain as many as 900 pieces sourced from all over the world."
 

We can argue manufacturing interdependence is unconscionably risky, but we can also acknowledge it's sensible for lower wage countries to take a higher share of more routine work. Yet, regardless of your beliefs on international trade, you probably don't know the historical basis for globalization, or even that a globalized economy does not have to be similar to the status quo

To better understand our current post-globalization era, think of the worldwide economy as two landlords in charge of two growing buildings. Until 1945, there were many landlords but most of them were inefficient or corrupt because they lacked a central office and/or the knowhow to attract and develop talent. Most landlords also had difficulty borrowing money and attracting investors on their own, hurting their chances of not only expansion but also basic maintenance. After 1945, only two landlords--the ones with the most sturdy manufacturing designs and access to oil--were able and willing to lease space to interested parties. All other landlords preferred local tenants, were bankrupted, or were indebted to one of the two remaining landlords.

As a duopoly, the two landlords initially agreed not to compete with each other. One landlord--ASU Corp--indirectly created non-competes within its own building by assigning its partners to lead production. As the most knowledgeable entity within the building, ASU used office leases as a launchpad for mutually beneficial long-term relationships. To minimize conflicts, ASU tenants would specialize in certain services and not compete with each other directly--at least not until tenants were able to master the basics of production and consumption. Under ASU's watchful eye, all tenants, as much as possible, would do business only with the landlord and with each other--and only under the landlord's protection, funding, legal principles, and guidance. 

The other landlord-- RSSU Cooperative--showed its strength by designing the most useful structures and facilities possible. It required its tenants to focus on farming/agriculture and infrastructure. In addition, each tenant had to sign a lease allowing the landlord an easement for technological/scientific testing. Like the other landlord, everyone would trade only with each other, but all the transactions in this building would be handled by the landlord, who would station one employee in each tenant's office to monitor trade and also to help facilitate transport and security. 

Over time, ASU's willingness to provide debt allowed its tenants to take more risks and to expand their own businesses--as long as they stayed current on interest and rent payments to ASU each month. ASU's status as creditor to its tenants meant it could dictate not just business strategy, but financial terms. Under ASU's leadership and advertising, transactions substantially increased between all tenants and also with the landlord. ASU's generous debt terms meant each transaction in its building benefitted from a multiplier effect, where the more tenants traded with each other, the better the chances that debts would be paid and values and prices would increase--for everyone. ASU aimed to master production and consumption, not just production.

RSSU, on the other hand, envisioned each tenant providing each other--as well as itself--with tangible and necessary items. It did not trust each tenant to set prices fairly or sustainably. As a result, while its consumers could satisfy all of their basic needs--except for food when harvests failed--each tenant lacked incentives to cater to consumers or to innovate in ways different from the landlord's expressly stated needs. 


I could continue, but you get the point. The multiplier effect of debt allowed one country to expand its influence at the expense of the other while also stealing much of the other's talent. Such economic expansion required continual fine-tuning of products, advertising, and supply chains so allies would not compete excessively with each other and would maximize the velocity of money. This system gave a single country the power to issue trillions of dollars of debt and to use its financial system--backed by tangible oil and intangible digital technology--as the backbone of the world's economy. Over time, as the United States ran deficits to sustain control over an economic system where it could make the rules, it began to lose influence because some savvy tenants were not in its building or refused to play by its rules. (Note: wherever there is a rule, someone subject to it is determining how to circumvent it in order to gain an advantage.)

Using the prior example, 
if a new landlord appears--we'll call this third landlord "ANIC"--and sells similar products cheaper than ASU's tenants, at some point conflicts are inevitable if ASU's deficits and its allies' debts assume ever-increasing values and prices. Moreover, the idea of agreed-upon specialization--whether in software, semiconductors, oil, or gas--looks naive if supply chains can be disrupted by a single tenant. (The USA's Middle Eastern military adventurism after 1973's OPEC embargo attempted to resolve this gap.) To summarize, if 900 pieces are needed to make a ventilator, a wise and trusted negotiator can create 900 friends and allies; however, if the primary negotiator's financial or security skills are deemed unreliable or capricious, opportunities to inspire 900 direct competitors becomes more likely. 

Once we realize trustworthiness is the true underlying foundation of a world economy spread out over multiple and distant countries, we know why the United States succeeded spectacularly from 1945 to 2001. In 1945, General George Marshall and General Dwight Eisenhower represented the best of the United States and used their strength to promote compassion, resolve, honor, and fairness. We need not cite any of their personal statements to prove the latter because the two countries they helped rebuild--Germany and Japan--are two of the most successful countries in the world today, with Tokyo the world's most advanced city in terms of infrastructure. In other words, while the Soviet Union--with its flag's hammer--desired the title of infrastructure expert, it was the United States under Eisenhower and Marshall that actually deserved it. Under these men, the world benefited from America converting its wartime manufacturing capacity to facilitate trade and movement within nations and between them. None of this trade, a version of sharing resources with debt tethering everyone together, would have been possible without trust. 

Fast-forward to 2020. Today's America, after the debacle of the Vietnam war, represents the visions of George Bush Sr., former CIA director, and Donald Trump, real estate developer. These two men view illegal tactics as necessary costs to weaken competitors while creating preferences for their own multi-national ambitions: malls, media, and majestic buildings plus a military designed to maintain currency stability by controlling the world's oil supply. We don't need a crystal ball to see that America in 2020 and in the near future is less likely to attract tenants/allies than America in 1945. 

In the meantime, more "tenants" will move to China's "building," though most will try to lease space with both China and the United States. Others, such as the EU, will try to become Landlord #3. Best case, this straddling will generate bridges between the "ANIC" and "ASU" buildings using a new industry of go-betweens; worst case, currency and legal complications (e.g., money laundering) will force tenants to choose a single lease. 

A "single lease" scenario would lead to a new 1945, where China and the U.S. carve out economic zones similar to the post-WWII East-West divide. (Think Checkpoint Charlie, but with tariffs, laws, and sanctions limiting movement rather than physical walls.)
The straightforwardness of the "single lease" scenario is appealing but would render the future dependent on the integrity and reasonableness of Chinese and American leadership. (Though I wonder: if we get a do-over, why does it feel like the U.S. is the old Soviet Union, and Iraq/Yemen its Afghanistan?) 

I predict most countries will improve domestic supply chains to ensure supplies of essential items, with adequate capacity judged based on emergency needs. Wise politicians will see food and water security as equally important as nuclear and digital technology. How such internal reliance will mesh with existing trade agreements is anyone's guess, but one thing is certain: the post-WWII framework of economic and financial interdependence as the foundations of peace is finished--at least until we see another Eisenhower and Marshall. 

© Matthew Mehdi Rafat (2020) 

Friday, March 17, 2017

Consequences of Housing Inflation Policy in the U.S.

From OECD 
The above chart compares the types of countries' 2015 financial assets.  More specifically, it shows the percentage of cash (currency and deposits) held by households as a percentage of overall wealth.  You'll notice the U.S. is an outlier, because most Americans have their life savings in their home equity. From the Federal Reserve, on housing before the 2009 financial crisis:

[H]ousing wealth of U.S. households at the end of 2008 was 25.4 trillion dollars. Housing wealth is about one half of total household net worth (which is 52.9 trillion dollars), and is larger than the Gross Domestic Product (14.4 trillion dollars). Moreover, since financial wealth is more unequally distributed than housing wealth, housing wealth accounts for almost two thirds of the total wealth of the median household.

Housing as the driver of America's savings vehicle is no accident.  Tax policy guarantees housing prices will always increase absent extraordinary circumstances. In fact, tax policy is so potent in this regard, what brought about the 2008-2009 financial crisis wasn't some unexpected event but the overuse of this magical money-making machine.  (Like most sure things, the main threat is overloading and overextension of the thing itself.)

The issue isn't just the well-known mortgage tax deduction, which cost the government about $70 billion in 2013--it's the way it favors banking dependency and excessive borrowing.  You can deduct all of your mortgage interest up to $1 million in principal on the home in which you live, which means banks and buyers are incentivized to borrow as much as they can up to that limit.  By setting a limit by fiat, the government has encouraged everyone to game the system up to that limit (a corollary to Goodhart's Law).  What's worse is the government compounds the problem by guaranteeing the borrowed money indirectly through agencies like Fannie Mae and Ginnie Mae.  Meanwhile, homeownership rates in the U.K. and Canada are similar to the United States, even though the first two countries don't allow such a tax loophole, er, deduction.  (Anything that allows you to minimize your taxes is a "loophole," but if the government likes a loophole, it'll call it a deduction to make it sound nicer and to encourage its use.)  Why set up tax policy that confers so much power to the banking system?

First, in theory, it makes sense to support home ownership.  Owning a home is usually a long-term decision that creates more interest in sustaining your surroundings.  The reality, however, is different--as cities have become larger, community becomes difficult to achieve, and most Americans tend to be private folks anyway--they may bring an apple pie to a new neighbor, but unlike many other countries, an invite into one's home is rare.

Second, by having so much wealth held illiquid and therefore captive and subject to fees (broker fees, closing costs, etc.), which discourages impulse moves, the government can manipulate its citizens' financial freedom and also its currency strength.  In contrast, in other countries, especially China, residents can remove their wealth--such as stock market gains--and transfer it elsewhere, such as Canada (Vancouver) or the United States (Cupertino, CA).  Such options can create havoc for governments, because not only do they lose wealth that supports their own currency, but the wealth they helped created is now captive in another country's currency and protected by law, making its return more difficult.

Third, if wealth is illiquid, easily tracked, and tangible, it can provide stable tax revenue.  How does this help the average resident?  Under a cost-benefit analysis, it doesn't.  In California, even after passage of a proposition that limited the government's ability to raise property taxes, some local governments still tried to over-estimate housing prices for purposes of increasing the applicable tax revenue or granted more developer permits than usual, harming quality of life by not accounting for public transportation or improved roads or new highway lanes.

At the end of the day, globalization requires more flexibility, more consumer disposable income, and more individual labor mobility.  Meanwhile, America's tax code continues to prioritize the exact opposite.  What could possibly go wrong? (Again?)

Bonus: the key to currency strength is reserves, and when your non-gold and non-natural-resource reserves are guaranteed to grow as well as be held captive, the (financial) world is a reserve bank's oyster.  In normal economic circumstances, if you want to make your exports more attractive, you can weaken your currency by issuing more debt; if you want your currency to remain strong, you issue less debt or debt at ultra-low interest rates.  In America, however, you can have the best of both worlds--you can issue more debt, keep it captive in housing, and create tax policies that ensure the debt becomes an asset at some point.  How does this captive wealth, which allows greater government manipulation of both currency and exports/imports, help sustain a growing middle class? Well, it doesn't.  It actually leads to more boom-bust cycles and debacles like the 2003 Cancun WTO trade failure and its continuation. Rendering the sale of essential items like housing and education on the financial sector's willingness to issue debt is a recipe for short-term gains and long-term disaster.

Worse, by ensuring both private and public banking entities have disproportionate influence over the economy, you cede power to the financial sector in the absence of almost perfect regulation and enforcement.  What does the financial sector do in exchange for such power, given that it doesn't make anything?  In theory, it exists to encourage stability, predictability, and the integrity of economic transactions.  Unfortunately, with pro forma accounting and conflicts of interest within banks, it doesn't even do accounting or valuation well.  In short, America's current tax system takes a sector that should be the designated driver in the economy and makes him or her into a Formula One fan itching to get into the driver's seat.  Given the global nature of finance, it's not just America that falls prey to such problems--google "Deutsche Bank hidden losses swaps" for more. 

Wednesday, January 11, 2017

Globalization: a Counterargument based on Love and the Individual

I have always supported globalization, but with caveats--including that the process from old to new not only consider, but protect the ones left behind.  Furthermore, government spending drives much of the modern economy, and its inefficient allocation of tax revenue has created mega-cities, which are easier to control and influence, but which do not necessarily increase individual or marital happiness.  Such inefficient spending almost forces established politicians to focus on larger cities rather than small ones, creating opposition from newer players in smaller cities who feel left behind and who have little incentive to cooperate with existing players.  Somehow, globalization has made it easier for international megacities to cooperate with each other than larger and smaller cities in the same state or country.

Even with this disconnect, why aren't people in developed economies happier? Part of it must be due to the lessening influence of the individual, and the individual's difficulty in actualizing the power of sincere and selfless contribution as cities grow larger.  Another part is more basic--the difficulty of finding compatible relationships.  I recently watched La La Land (2016)--a wonderfully bittersweet movie based in L.A.--and realized yet another issue with prevailing forces in developed economies: people, especially men, must often choose between careers and love.

Why do I focus on men? I suppose it's because women may not necessarily find true love, but they are rarely alone if they choose not to be.  Men who want to be fathers, on the other hand, seem to have resigned themselves to conforming to a world where their productivity and agreeableness are prized over their own self-discovery and needs.  Other men who see their roles diminishing on all fronts have decided they won't go gently into that good night and have found succor within fringe political groups.  Others just opt out.

In short, the 21st century is in danger of becoming a tragedy by forcing most of the most idealistic people to compromise their ideals to fit in or to find companionship.  Interconnectedness is breeding contempt and dissension as more people realize principles matter less than someone else's overall end goal. When individuals are not supreme--even if right--a sense of decency becomes too readily sacrificed on the altar of reasonableness.  Such compromise, if done by fiat, renders the populace prone to rebellion--first in small ways, then in larger ways that finally become too noticeable for the mainstream to ignore. At that point, as if by design, the disenchanted men and women, the ones left behind by forces outside their control, flee to places where they can feel free--or worse, they stay and withdraw.

In La La Land, the Ryan Gosling character drives away his true love and attempts to get her back, only to lose her again.  He ends up successful but alone.  The Emma Stone character ends up successful and married, but not with her true love.  No one has fled anywhere, but the moral seems to be that large cities force people to choose between being broke and idealistic, or settled and compromised.  If this is a reflection of modern love in America, it's time for a change in the economic system, which requires political changes.

Governments are realizing that happiness might not be easily measured in officially reported data, but tax revenue is often driven by whether people feel as if they can achieve their relationship goals in x rather than y city.  Indeed, taxpayers don't need to leave to new countries to disengage--they can simply move to other areas within the same country, up-ending local economic projections drastically, as so many cities--burdened with debt--depend on sales and other taxes requiring constant economic growth or at least a non-declining working population. Those new high rise condos going up in every major city? Who will buy them from existing and secondary owners without a steady influx of younger workers?

Economic projections, once disturbed, require more debt and thus fewer choices, or pit existing players against younger and newer ones, such as immigrants.  Worse yet, taxpayers who don't leave and who stay in areas that don't reflect their values tend to disengage emotionally from others not within their own groups, decreasing the positive impacts of diversity and dooming efforts to create cohesive communities.  Without community, what is the point of working 60 hour weeks or taking out $50,000 in student loans?

How governments interact with each other will determine whether worldwide prosperity is merely academic well-wishing or the next stage of cultural evolution.  Since it's obvious more ideas result from greater rather than less interaction, my wager's already been placed--as have the bets of trillions of investments and debt.  Democratic governments are quickly learning that if they desire to help their citizenry stay in their current globalized trajectory, they cannot ignore the individual, and they cannot talk down to those who do not share their opinions.   To protect continued migration of people and ideas, the future requires empathy as much as productivity.  Which countries will be up to the challenge?  Which ones will win the battle to create a place where Ryan Gosling and Emma Stone's characters meet, fight, fall in love, and stay together? 

© Matthew Mehdi Rafat (2017)

Bonus: "We are an urban species. Homo urbanis is actively reshaping geopolitics, economics and climate action in the 21st century. And with good reason. While the world’s cities cover just 2% of the earth’s surface, they account for 55% of its population. What’s more, they generate 80% of the world’s GDP and over 90% of its patents. Yet they are also responsible for 75% of all energy consumption and 80% of CO2 emissions." -- from World Economic Forum, Katherine Aguirre from the Igarapé Institute, and others from the Global Parliament of Mayors and C40. 

Wednesday, January 4, 2017

Tea and Trade

Tonight, I walked into a small Indian or Pakistani-owned grocery store and had a epiphany about globalization. Seeing an entire row of teas of superior quality that most Americans will never see made me realize that despite much increased trade, actual diversity of products hasn't reached the average consumer.  And that's just the teas--a very simple product.

In short, adult voters in developed countries are suffering from twin headwinds: 1) they see traditional manufacturing jobs lose ground to services-based and technology jobs--without having the educational or training opportunities to enter those faster-growing sectors; and 2) they do not see sufficiently tangible benefits of allowing competition from foreign countries, especially in countries with lower living costs (which allow for lower wages).

The result of globalization should be more choices and labor mobility, not just lower prices.  Right now, most consumers have the illusion of choice because a few major companies own most media and the tangible products they use.  To take one example, Disney owns not just ABC, but Nickelodeon and ESPN--as well as Pixar.  The reason such consolidation has occurred isn't just lax anti-trust enforcement and IPO monies, but the complexity of trade agreements, tariffs, and other impediments to "free" trade.  Media consolidation is particularly troubling because it means a small group of companies can influence your consumer choices based on whether they highlight x product rather than y product under a system driven not by quality but by whomever can pay the highest ad dollar.  Basically, the current advertising system generates greater demand and recognition for a few companies, which then influences shelf space in retail outlets, which then creates self-reinforcing product "choices" based on a very narrow set of influencers.

Moreover, large companies have legal teams that can comply with increasingly complex regulations purportedly designed to help the public but that disadvantage smaller competitors who lack the consistent revenue or access to the corporate loan market to fund legal teams that can expertly find loopholes or survive prolonged litigation.  In other words, laws, once they become complex and costly to defend, hurt the consumer by reducing competition and therefore consumer choice.  They also divert revenue to "outsiders" (lawyers, insurance companies, etc.) without any improvement for the consumer.  (I've advocated that most civil laws with private rights of action, except for harassment, should not apply to companies with fewer than x employees or less than x gross revenue, but that's a post for another time. Criminal laws, of course, would still apply, such as fraud.)

In the current era of so-called "free trade," a small grocery store--using eBay, Alibaba, or personal contacts--may have more food diversity than a Walmart or Kroger's in terms of the origin of their products but may need to pay a much higher share of revenue to insurance companies to prevent bankruptcy due to chance events, without any guarantee that the policy will cover the specific event feared; or choose to operate in the informal economy; or hire only close friends and family.  This is not what globalization promised.  It was not supposed to restrict labor choices while enriching the investor and lawyer classes at the expense of the worker class and rendering the government impotent and feckless.  It was not supposed to cause government employees to create separate and unequal disciplinary and compensation systems while increasing taxes to pay for guaranteed benefits unavailable to private sector workers.  It certainly was not supposed to promote an educational-governmental complex designed to trick voters into forking over more tax dollars to sustain a K-12 system that fails to impart any practical or critical-thinking skills.

The challenge now is to figure out how to use globalization and laws to increase labor mobility and truly diverse choices without using government power to coerce outcomes or pick winners and losers. Thus far, voters outside large cities can sense that the promises of globalization "as is" will require them to accept more debt, more inflation in essential items, less accountability, and more dependence on elites.  As such, they are rationally skeptical of their changing environment and the politicians who fail to address such issues head-on.

By failing to openly acknowledge globalization's current problems, politicians of all stripes are promoting dystopia and endangering the concept of democratic rule.  As a strong supporter of globalization, I fear its tendency towards "sameness" (i.e., shopping malls and high rise condos everywhere) but have never questioned its promise: a world where we can experience other cultures and ideas in ways never before possible.  If done properly, greater connectivity and technology could bring the end of war, famine, and disease--but only if done in ways that promote stability (such as a universal basic income), accountability, and tangible benefits to the average consumer.  

Wednesday, October 26, 2016

Is the New World Order Here Yet? (Book Review)

Written after the 2008-2009 financial crisis, Jerome Corsi strikes an appropriately skeptical tone towards globalization in America for Sale (2009, hardcover) (updated?): "What is left challenged by globalists is the possibility that globalism itself may be inherently flawed.  The world economy is moving to a leveled labor market in which a government and business elite will be the only winners... It should be clear... that globalism has not worked... What all Americans must understand is that global governance will end up destroying the very American nation-state our Founding Fathers intended to create for us to pass on to future generations."

Corsi--who seems similar to Lou Dobbs--fairly summarizes other influential thinkers' views, such as Joseph Stiglitz, who believes globalization has failed because it has operated without sufficient protection for developing countries; however, Corsi's own ideas have several issues:

1.  When America was exporting its own values and products all over the world and imposing its influence worldwide, Americans did not complain about globalization. Quite the contrary--American writers proudly proclaimed the 21st century the era of "soft power."  Now that other countries are gaining sufficient power and influence to export their images and perspectives to other countries, suddenly Americans are unsure of globalization. America seems hypocritical and small for taking such a view rather than seeking to compete on its merits.

2.  Corsi assumes that international governance necessarily requires a loss of sovereignty.  Yet, he never considers that it's worth giving up a small or measured loss of sovereignty to gain a substantial benefit, especially when so much of American innovation and prosperity come from its multinational corporations, which make most of their money overseas.

3.  Corsi assumes that all international governance mechanisms will harm American values; however, if American values are superior, why wouldn't they prevail in negotiations and other economic "battles"?  Corsi writes that in "a world economy, the United States was valued as a consumer country, not as a producer, manufacturer, or exporter." (pp. 162) There is no reason such a scenario must always be true.  With the appropriate level of tax credits and proper negotiations, the U.S. could produce (and export) whatever it likes.  Thus far, however, its tax incentives have failed to be on par with China's, creating predictable consequences.

When America's major source of innovation comes from military R&D, it's no wonder countries like Japan have been more innovative than America with respect to quality-of-life matters and domestic infrastructure.  Of course spending to kill will result in entertainment-oriented and consumer applications rather than constructive ones.  Ships and aircraft carriers don't have too many transferable uses in a landlocked domestic economy other than supply chain advantages (logistics), which benefit transporting consumer goods worldwide, not making everyday life easier for residents.  Innovation is different when it seeks to control and monitor populations in unknown or rural areas compared to when it seeks to make life more efficient in densely populated cities.  America once again looks small when it complains about trade deficits while creating budgeting incentives that guarantee them.

4.  Corsi correctly identifies America's relatively high wages as an impediment to eliminating trade deficits.  However, he once again fails to address them in a concrete or constructive way, assuming always that negotiations cannot resolve such issues.  Even if we assume that wages in America will stagnate over x number of years, there are ways to negotiate against artificial financial manipulation, such as devaluation in other countries' currencies.  One way would be to increase tariffs only one way by x percent relative to any devaluation.  (That one I got off the top of my head, so you can see that an almost infinite number of ways exist to balance trade in ways that force countries to compete based on quality or merits rather than price or labor costs.)

Another example would be the granting of x dollars to the country or corporation whose products are being copied due to lax copyright or IP enforcement.   The real problem is how to calculate such penalties and how to encourage domestic IP enforcement without resorting to lengthy or expensive litigation, and Corsi offers no solutions here.  Corsi and other protectionists lament the idea of international tribunals, but their whole point is to protect companies from having to litigate in other countries' "home courts," where they would be at a disadvantage due to language and cultural barriers, even if using local counsel.  The fact that international tribunals are slow or clunky is no reason to stop globalization.  A hardy people would seek to reform court systems or to implement better oversight, not to give up substantive economic activity due to slow lawyers and ill-prepared judges.  No one argues we shouldn't have the Olympics because some referees make terrible decisions.

5.  Corsi is fantastic when it comes to evaluating and explaining other economists' positions, but his own haven't stood the test of time.  Chapter 7 is titled, "The Plan to Destroy the Dollar."  From pp. 186: "Regional currencies like the euro are merely stepping-stones on the path to the Holy Grail of a one-world currency."

About a decade later, the US dollar and the Japanese yen are the world's strongest currencies, and the euro has been in steady decline.  This is one example of Corsi's narrow academic focus.

Here's another, from pp. 211: "Ironically, the United States may be approaching an era where it will be impossible to buy a U.S.-manufactured auto, or an era marked by a global economy in which the only manufacturers that survive will be the multi-national corporations with car-manufacturing capacity in China, aimed at taking China's low-cost labor markets."  Last time I checked, not only do Ford and GM make cars in the southern U.S., but even Volkswagen and other foreign car companies make cars in the U.S.

One more, from pp. 228: "Avoid Investing in Stocks and Bonds."  Since the publication of Corsi's book, both stocks and bonds have increased substantially.

6.  I did not see any substantive opinions on the state of American K-12 education, which is an interesting omission to the extent the quality of one's education matters as workers compete not just domestically but worldwide.

Corsi would benefit from adding a review of actual terms and conditions of the trade agreements he complains about, but the first half of his book is fantastic because it so clearly lays out many of the issues we face today. 

© Matthew Mehdi Rafat (2016)

Bonus:

Jill Stein supporters are generally smarter than other party supporters but they still don't realize their positions are effectively the same as Donald Trump's, but in different ways. 
Extreme liberals don't want to build a physical wall but they want to stop the free flow of global capital and development or restrict them so thoroughly, it's almost the same in the end. 
Her: "NAFTA costs American jobs, including good management jobs, and allows companies like Ford to take advantage of fewer regulations in other countries. It also reduces tariffs, hurting some industries like agriculture." 
Me: "I like poor people. I have no problem with a corporation helping them in other countries. The problem with the loss of manufacturing jobs isn't NAFTA--it's our own gov's failure to invest in retraining or other higher skilled work programs, along with extended unemployment benefits for displaced workers." 
Her: "But these companies destroy domestic competition when they move, like Walmart destroys mom and pop shops." 
Me: "You have not said how specifically, but if you're arguing Walmart pays better wages or makes products more cheaply than the competition, why is that a problem? Why shouldn't Venezuelans and Mexicans have better access to higher paying jobs and cheaper products? No one is forcing people to take those jobs, so the pay is probably much better than domestic companies. 
I agree working conditions must be monitored, but just because the level of legal protection isn't the same as here doesn't necessarily mean they're being taken advantage of." 
Her: "Over time, the competition destroys domestic industries and smaller businesses in other countries." 
Me: "But if GDP increases over time, then both countries benefit as industries are modernized and newer technologies are introduced to workers and residents who would not otherwise gain access to those advancements without corporate investment." 
Her: "The TPP allows corps to sue entire countries." 
Me: "Yes, because if the country confiscates corp assets, there needs to be a way for the company to protect itself. You have a billion dollars. Would you invest it in Venezuela without legal protection?"
Her: "The money shouldn't be there in the first place." 
Me: "So screw the poor people in Venezuela who would otherwise have greater access to jobs." 
Her: "You're raising your voice. This discussion is over."

Thursday, July 23, 2009

John Mauldin on Globalization and Leverage

From John Mauldin (July 17, 2009):

Globalization is a two-edged sword. On balance, it has brought prosperity to those who have embraced it, with rising lifestyles, better health, longer lives, and more. The more we need each other, the less likely it is that we'll shoot each other. Shooting your customers is not a good business strategy. And while the growth has not been even or smooth, only a Luddite would want to return to the early 1800s or 1900s, or even 1975.

The other edge of that sword? We are connected in so very many ways, far more than most of the world suspected. Who thought that insane lending policies at US mortgage banks would bring the world financial system to its knees, increasing unemployment and leading to a global recession?

I love the statement that killing your customers isn't a good business strategy. Mr. Mauldin also comments on leverage--and it's becoming fairly easy to see that leverage is what killed the golden goose:

In the first few years of the G.W. Bush administration, the banking authorities decided it would be OK to allow five banks to increase their leverage from 12:1 up to 30:1. Which five banks, you ask? Bear Stearns, Lehman, Merrill Lynch, JPMorgan, and Goldman Sachs. How did that work out, just five years later? Three are gone and two survived with large dollops of taxpayer money...Thirty times leverage means that if you lose 3.3%, you wipe out all your capital.

Some stocks fluctuate 3.3% in just one day. Even when I was leveraged just two to one times, I had difficulty sleeping. How did these investment bankers do it? How could they have been so irresponsible, gambling on non-tangible investments? Regular banks are highly leveraged, too, but they usually invest in tangible items like houses.

All this makes me yearn for the good old days--when banks were simple creatures, loaning money at an interest rate higher than their deposit interest rate. Wall Street's unconscionable leverage is exactly why more Americans should look to credit unions for their banking needs.

Note: Barry Ritholtz mentioned the same issue--leverage--in his book, Bailout Nation:

Thus we learn that the tragic financial events of 2008 and 2009 are not an unfortunate accident. Rather, they are the results of a conscious SEC decision to allow these firms to legally violate net capital rules that had existed for decades, limiting broker-dealers' debt-to-net-capital ratio to 12-to-1. You couldn't make this stuff up if you tried. (page 144)

[Update on December 2017: Turns out Ritholtz was wrong. More here: https://willworkforjustice.blogspot.com/2017/09/2008-financial-crisis.html]
If Congress wants to help mitigate the next financial bubble, it needs to pass laws restricting leverage. So far, I haven't seen any proposed bills that attempt to resolve systemic risk in the financial markets. That's a crying shame.

Required blurb: John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to:

http://www.frontlinethoughts.com/learnmore

Friday, April 24, 2009

Rafat's Law of Diversity

Here is what I call "Rafat's Law of Diversity": 

1. One constant variable in life is that change will occur.
Jim Rogers, Street Smarts (2013)
2. The ability to keep up with change and adapt to changing environments provides a competitive advantage.

3. Entities and people who adapt the quickest to change will have an advantage and will be ahead of their competition. In economic terms, this is called the ability to adapt to "creative destruction" (See Joseph Schumpeter).

4. As of 2009, the world population is becoming and has become more and more inter-linked. Globalization is occurring rapidly, causing persons who would have never interacted fifty years ago to now interact and to engage in numerous economic and social transactions.

5. In short, due to globalization, countries and entities are becoming more diverse.

6. Entities that have the ability to interact on a positive basis with numerous cultures will have an advantage over entities that either lack this ability or have less of it.

7. Entities that lack diversity appear to be slower to adapt to change.

8. Entities lacking diversity as their surrounding local or non-local environment becomes more diverse show their internal culture is more resistant to change or that they are unable to gain talent from a diverse range of sources.

9. Entities unable to draw talent from a diverse range of places or resistant to change will be disadvantaged against more fluid, diverse entities.

10. As globalization increases, entities that are more diverse will have both tangible and non-tangible advantages over non-diverse entities.

11. Therefore, more diverse entities will be more competitive than non-diverse entities.

12. As of 2009, Asians are approximately 60% of the world population. As of 2009, persons of African descent are approximately 20% of the world population. As of 2009, the United States has only 5% of the world population. Mandarin and Spanish are more commonly spoken worldwide than English.

13. The United States is a consumer-based economy that relies on domestic and international consumption of its products to increase growth, profits, and influence.

14. To fully maximize one's successful interactions with worldwide entities, one must be fluent in more than one language and well-versed in several cultures.

15. Multinational entities that fully maximize their ability to engage with several cultures will maximize their ability to gain new customers and allies.

16. Entities that fail to maximize their ability to engage with several cultures will be disadvantaged against multinational entities.

17. Familiarity with different cultures and languages will maximize a multinational entity's ability to compete globally, providing it an advantage over entities that fail to maximize their ability to compete globally.

18. "Familiarity with different cultures and languages" may be called "diversity."

19. Multinational entities that favor diversity will be more competitive than entities that do not favor diversity.

© Matthew Rafat

Update on May 14, 2012: according to an April 2012 McKinsey Quarterly report ("Is there a payoff from top-team diversity?" by Thomas Barta, Markus Kleiner, and Tilo Neumann), U.S. companies with the highest executive-board diversity had returns on equity 95% higher and earnings margins 58% higher, on average, than those with the least executive diversity.

Bonus: Individuals or groups speaking on issues is not a free speech problem. Problems arise when individuals use their free speech to gang up on private individuals or politically-disconnected minorities. Such a "minority classification" will vary based on geography. A transsexual in SF would present a different analysis than one in rural Wyoming and still another in the college town of Bloomington, IN, depending on the reach and power of the group. To smooth out such differences in power, the fed gov may and should intervene when speech presents the likelihood of physical harm to an individual targeted by "gang speech." If physical harm is not likely but access to equal protection and provision of gov services is affected, there is still a role, albeit a lesser one, for the fed gov, though in such cases, a "restitution fund" allowing the individual to move elsewhere may be the best solution. "Gang speech" may take many forms, and may include unions, corporations, or any group of powerful individuals targeting a private individual because of the private individual's speech or non-violent but non-conformist behavior. If America is to continue building on diversity as one of its strengths, it must allocate resources to maintaining this unique advantage. Just as freedom is not free, neither is diversity.

Update on January 15, 2017: "When disagreement comes from a socially different person, we are prompted to work harder. Diversity jolts us into cognitive action in ways that homogeneity simply does not." -- Katherine W. Phillips

Update on June 2017: I have created another "law" here: https://willworkforjustice.blogspot.com/2017/04/rafats-law-inflation-elasticity.html