A few weeks ago, Senator Bernie Sanders announced his candidacy for President of the United States. Joining a crowded field of Democratic hopefuls, Sanders called on his supporters to “complete the revolution” that he began in 2016. And, just as he did in 2016, Sanders is making wealth inequality a central issue of his campaign. When Sanders called for a $15 national minimum wage in 2016, the idea was derided as ‘radical’ and ‘extremist.’ Since then, both New York and California have passed legislation, raising their minimum wages to $15 per hour (the CA bill calls for an incremental increase, gradually raising the wage to the target level). Additionally, numerous cities across the U.S. have imposed a $15 minimum. Notably, Sanders’ most recent attempt to pass a Senate bill raising the nationwide minimum wage to $15 was co-sponsored by Senator Cory Booker, Senator Kamala Harris, Senator Elizabeth Warren, Senator Kirsten Gillibrand, and Senator Amy Jean Klobuchar—all Democratic candidates for President. Indeed, the entire Democratic roster of candidates now seems to support the wage hike. While it was once a revolutionary idea, it has become the rallying cry of the Democratic Party.

Certainly, the idea has its merits. Raising the minimum wage can create incentives to work. Theoretically, ‘voluntarily unemployed’ workers may be encouraged by the prospect of earning $15 an hour as opposed to $7.25—essentially, the more a job pays, the more likely people are to do it. Further, some evidence suggests a correlation between wages and marginal productivity. That is, when you pay workers more, they actually become more productive. Perhaps most compelling is the moral argument. As Senator Sanders has said countless times, “if you work full-time, you should not live in poverty.”

However, there are strong counterarguments counseling against the wage increase. A minimum wage is, in effect, a price floor. In a perfectly competitive market, setting a price floor above the natural equilibrium will invariably lead to excess supply. Stated in non-economic terms, a minimum wage will increase unemployment. If companies have to pay each worker more money, they will naturally hire fewer workers. At the same time, as mentioned above, the higher wages will incentivize more people to join the labor force. Due to the concurrent expansion of the labor force and reduction in hiring, we would see a massive glut in the supply of labor—simply put, a surplus of jobless workers.

In reality, the analysis is more nuanced. It is affected by the elasticity of labor-supply and a host of other factors. In fact, in some rare market scenarios (such as a monopsony), a minimum wage can actually increase employment rates. Still, as a general rule, a minimum wage translates to higher unemployment. Crucially, young people would be hit hardest by this increase in unemployment. Firms hire workers based on their marginal revenue product (MRP). With less experience and knowledge, younger workers tend to have a lower MRP. As such, they are the first to hit the chopping board when firms are looking to trim fat.

Hence, the debate rages on: Is a $15 minimum wage the path to greater and more widespread prosperity? A bigger pie and more equitable slices? Or, alternatively, is it a path to severe unemployment, particularly for young inexperienced workers? Amazon provides a perfect case study which may help us answer this question.

In 2017, Amazon acquired Whole Foods Market, Inc. Under mounting pressure from activists and politicians (including Sanders himself), Amazon raised the minimum wage of Whole Foods workers to $15 per hour. The move was applauded by Sanders, who commended Amazon for paying its workers a living wage. However, since the wage hike, Whole Foods employees have seen their hours drastically reduced. One worker experienced a 33% reduction in his hours—the cut was so drastic, he actually earns less money now, despite being paid a higher hourly rate. Part-time employees, who overwhelmingly consist of young people, saw the biggest cut with their hours dropping from 30 per week to roughly 20 per week. Meanwhile, full-time employees suffered a less dramatic cut, with hours falling from 37.5 per week to approximately 35 per week. One worker lamented, “Just about every person on our team has complained about their hours being cut…Some have had to look for other jobs as they can’t make ends meet.”

This comports with the above-described economic model. By setting a price floor above the natural equilibrium, Amazon created a surplus of labor—more employees were eager to work, but the company was correspondingly forced to pay fewer workers, since each worker now costs more. And, as per the economic theory, younger part-time workers were disproportionately impacted; their hours-reduction was almost 4 times greater than that of full-time workers. If the Amazon case study is representative, then a $15 national minimum may not be the best way to help low-skill workers. In an economy where many minimum-wage jobs are already disappearing due to automation, a wage hike would only further diminish the availability of these vanishing low-skill positions. Instead, subsidizing education, constructing affordable housing units, and expanding an earned income tax credit may be more viable options.

Higher Minimum Wage May Have Unintended Consequences

Berkshire Hathaway, run by legendary investors Warren Buffett and Charles Munger, published its annual letter to shareholders on February 23, 2019. Some commentators speculate that Mr. Buffett subtly criticized President Trump in that letter. The passage reads, “It is beyond arrogance for American businesses or individuals to boast that they have ‘done it alone.’”

Those words may appear to reference President Trump. But, it would be a mistake to let one’s distaste for our President cloud one’s judgment. Make no mistake: Mr. Buffett was referring to himself.

Berkshire Hathaway is a successful American company. Its long record of outperforming the markets is unrivaled. Warren Buffett is undoubtedly the reason for this success. Even so, Mr. Buffett recognizes that he could not have done it alone. During the financial crisis of ’07-08, Mr. Buffett lobbied the government to provide a cash infusion to the financial institutions in which he held a significant stake. Berkshire Hathaway invested $26 billion in the largest banks that were about to implode, $7 billion of which was Mr. Buffett’s personal stake.

Perhaps Mr. Buffett was simply discharging his duties as CEO. Maybe he was simply acting rationally within a system designed to promote this type of behavior. He might have benefitted his shareholders by employing his political capital. Maybe he even helped save the economy by pushing the government to do more.

But the Oracle of Omaha he is not.

A successful investor, by Mr. Buffett’s own definition, is someone who invests in productive ventures for their long-term value. But, someone who uses his enormous influence to lobby the government for a handout of epic proportions, albeit indirectly? We have a word for that in this country: a crony capitalist.

The Crony Capitalist of Omaha

Lingerie seller Victoria’s Secret will be closing 53 stores this year as the brand continues to suffer from underperformance and low sales. The store closings comes on the heel of 30 store closures in 2018, demonstrating a consistent decline on a year-to-year basis in the company’s storefront earnings.

The loss can be attributed to the desertion of the brand by many women to larger retailers. Both Amazon and Walmart have launched women’s underwear collections that have attracted customers away from Victoria’s Secret. Furthermore, with the recent announcement by Target that it will be releasing three new lines of low cost women’s underwear and sleepwear things promise to become even more difficult for the retailer. This is especially true since Target’s new private label brands are designed to appeal to teenage girls, a demographic that makes up a large part of Victoria Secret’s customer base. This means that new competition from Target could severely impact the company’s bottom line.

On the other end of the spectrum are emerging brands such as Savage X Fenty, American Eagle Outfitters’ Aerie and ThirdLove. Many of these brands tend to cater to a larger range of body types and have more friendly ad campaigns that perhaps are better suited for the #MeToo era. ThirdLove also pointed to its improvements in bra design, citing better fitting bras as another reason many women were choosing to shop there as opposed to at Victoria’s Secret.

Further, hypersexualized ads and runway shows may be contributing to Victoria Secret’s recent struggles. The fact that the Victoria’s Secret fashion show demonstrated its worst ratings ever may be indicative of the fact that super glamorized celebrity models may no longer be attracting customers for the woman’s underwear seller. Many of Victoria’s Secret’s competitors seem to think so. Startups like ThirdLove and Adore Me have opted to use average women as opposed to models in an effort to draw further potential customers away from Victoria’s Secret.

That said, a major image change for the retailer may not renew the flagging brand. Over the last 20 years Victoria’s Secret has become a titan in the women’s underwear industry by relying over-the-top sex appeal and well-known models. A move to pivot now could alienate the woman for which the ad campaigns are still attractive and strike other’s as inauthentic.

Sales at Victoria’s Secret stores open at least a year fell 7% last quarter, while its stock has declined more than 40% over the past year.

Victoria’s Secret Will Be Closing 53 Stores in 2019

Out on the desert plains of west Texas, while searching for the Permian Basin, you may find yourself lost in geological time and space. This vast collection of basins, reefs, and platforms stretches across a land area of 86,000 square miles, nearly the size of Ghana and slightly larger than Belarus. Containing the world’s thickest deposit of rocks from the Permian geologic period, spanning 47 million years some 299 million years ago, the Permian Basin stretches from the southeast corner of New Mexico down to the Rio Grande, placing it on the Texas side of an international border and possibly a wall.

So what makes this stretch of beautiful, austere, yet otherwise unremarkable land so highly valued? Under this land lies a veritable bonanza of shale oil, a fossil fuel source extracted from sedimentary oil shale through a series of complex chemical processes. The Permian Basin is an epicenter for the shale oil boom and is poised to dramatically place the U.S. back into pole position as a top producer of hydrocarbon fuel.

Oil company Exxon has recently signed an agreement with Microsoft to use their “cloud technology” services to efficiently extract the basin’s oil shale resources, “[c]overing 9.5 billion barrels of oil and natural gas across 1.6 million acres.” Given that Microsoft has long lagged behind its competitor Amazon in furnishing cloud services, Microsoft’s investors are keenly interested in this highly lucrative and long-term contract. The company intends to deploy sensors, statistical analysis, and remote data storage (i.e. “internet of things,” “machine learning,” and “cloud storage” respectively) to help Exxon rapidly and efficiently take advantage of the Permian Basin’s resources, likely with recent gestures by Saudi Arabia’s Aramco to expand its natural gas holdings in the Red Sea in mind.

Alas, we must ask as investors, consumers, and, most importantly, global citizens whether another “oil boom” is what we need as the pressures of climate change bear down on our local ecologies and economies. The rugged interior of west Texas, especially the Trans-Pecos, has long been an environmental haven and one of the most biodiverse parts of the United States. Rapid natural resources extraction in the region will not only contribute to the global fossil fuel addiction, thus contributing to climate change, but will likely harm a far too undervalued ecological region. As Exxon and other companies face the prospect of securities litigation, they run the risk of further damaging their reputation and their bottom lines. Microsoft may wind up with a far better deal out of this arrangement than Exxon in the coming years.

Exxon Meets Microsoft in the Permian Basin

The New York Times reported that Hudson Yards, the 28-acre complex of office buildings and luxury housing, has received almost $6 billion in government assistance and tax breaks. This deal follows the failed Amazon headquarters deal, where Amazon would have received $3 billion in tax breaks and created 25,000 jobs.

Hudson Yards is an expansive real estate development that will be home to many high-end retail shops, major corporations’ headquarters, and luxury apartments and condos. New York City spent about $2.4 billion to extend a subway line to the site and is providing $1.2 billion for four acres of parks and open spaces within the complex. These numbers are included in the $6 billion number cited above.

The project’s adversaries say wealthy businesses should pay their fair share and should not rely on government incentives to take on projects. Opponents specifically criticize Hudson Yards developers’ receiving over $1 billion in property tax breaks. However, supporters say the government incentives will pay for themselves by creating a new business district, thousands of new jobs, and making significant overall improvements to the neighborhood at large.

Many are comparing Hudson Yards to the Amazon deal, however, that comparison is misguided for a number of reasons. First of all, the project was first conceived following September 11^th, when New York was in a state of economic downturn and overall disarray. Nobody knew what the future held for New York City and the housing crisis was not what it is today. Indeed, 20 years in the making, the tax breaks and incentives the wealthy developers have received appear suspect. However, it is understandable that New York City, in the wake of a crisis, would jump at an opportunity to create more housing and a new business district that would be sure to bring in money in years to come. In comparison, in the current economy and housing crisis, the harm the Amazon deal would cause is much more foreseeable and unnecessary. Indeed, it would create jobs, but those jobs would be for relatively high earners who will add stress to the city’s housing predicament.

Similarly, the projects themselves are vastly different. Hudson Yards is adding 4000 units of housing to New York City’s market, including 400 below-market-rate units accessible through the city’s affordable housing lottery. Though Amazon would have created a vast number of jobs, most of those jobs would have been for software engineers and other skilled workers. In comparison, Hudson Yards will have numerous restaurants and retail stores, which will create unskilled jobs. Additionally, the expansion of the subway line and the creation of parks will require manual labor.

All in all, it is unfortunate that cities need to incentivize large companies to take on projects. The property tax cuts are particularly discouraging. But it will take tax reform across the board to resolve this issue. Corporations simply will not spend the money unless they have no alternative option. Cities will continue to strive for long-term, wide-scale economic benefits, even when they might harm individual taxpayers in the interim.

Hudson Yards Received Big Tax Breaks, But Don’t Compare it to Amazon

On February 27, a proposed class-action lawsuit was made public alleging Kraft Heinz, CEO Bernardo Hees, and Brazilian private equity firm 3G Capital concealed injury to Kraft Heinz’s brands and internal operations. The company is the fifth-largest food and beverage company globally and owns brands such as Capri Sun, Jell-O, Kool Aid, and Lunchables. The lawsuit comes on the heels of 3G’s questionable sale of $1.23 billion in stock sixth months prior to the processed foods company’s abysmal earnings report late last month. Kraft Heinz Co took a $15.4 billion write-down on its iconic Kraft and Oscar Mayer brands, signaling a broader shift by consumers to healthier and cheaper private-label products. In response, the company slashed its dividends and announced that it would be subject to an accounting probe by the U.S. Securities and Exchange Commission.

The lawsuit further alleges that the defendants acted in concert to allow 3G to sell the stock at artificially inflated prices. In response, Hees explained in an interview with Reuters that the transfer was made within a “window to liquidity” for an investor exiting a 3G fund.

Though shareholder lawsuits are common following unexpected bad news, it is no surprise that investors are raising suspicions around the sale—while the $1.23 billion in stock was sold by 3G at a share price of $59.83 each, other investors are left struggling to make sense of a 27.5% drop in stock price. The plunge is perhaps most surprising because of Kraft Heinz’s other largest controlling shareholder—Warren Buffett’s Berkshire Hathaway. Buffett’s investing strategy has long emphasized timeless American classics, such as Coca-Cola and Wells Fargo, with all five of his largest positions being in American companies. However, with changing consumer tastes and an abundance of alternatives within the marketplace, it is unclear as to whether the hit will be limited to Kraft Heinz alone. Buffett and Berkshire Hathaway are not named as defendants in the case.

Kraft Heinz Faces Class-Action Lawsuit

Ahead of the March 29 date when the United Kingdom (UK) is set to leave the European Union (EU), U.S. companies are fright with worry about the worse-case scenario. Brexit, short for “British Exit,” reflects the UK’s decision to leave the EU, a political and economic union of 28 countries which trade with each other and allow citizens to move freely between the countries. After British Prime Minister Theresa May’s exit agreement defeat in January, not too many remain hopeful of a smooth transition period.

What does all this mean for U.S. companies? In a “no-deal” scenario, the UK would sever all ties with the EU with immediate effect, providing no guarantees to citizens’ for rights of residence and significantly disrupting businesses through lengthy tailbacks of lorries, new checks on cargo, and overall instability. Travel might also be affected, making what used to be an easy trip for salespeople, technical personnel, and executives and drawn out process of clearing customs and less assurance of easy movement.

What’s more, Brexit has already impacted the flow of the U.S. economy. The day after the Brexit vote in 2016, the Dow fell 610.32 points, reflecting investors’ growing lack of confidence in the market. When the euro and pound fell, both increased the value of the dollar, which has the opposite effect of making American shares more expensive for foreign investors. The weakened pound also makes U.S. exports to the U.K. more expensive, and as American’s fourth-largest export market, it affects the U.S. farming and manufacturing sectors. A no-deal Brexit will not only affect U.S. stocks, but bond yields might also take a hit, forcing investors and other entities into government bonds for more safety. This means an effect on investment and retirement accounts for regular Americans.

There’s no use in ruminating over what the U.S. could have done to preliminarily prepare. What matters now is getting on the front-end of what could prove a bumpy ride. U.S. companies using the U.K. as a gateway to free trade with the other 27 EU nations might start considering creative and innovative solutions for a new gateway. On the up-side, Brexit as a symbol of anti-globalization could mean that the UK is taking a step down from the financial main stage. With the uncertainty flowing through the U.K. about the ability to keep its international clients, U.S. preparation could mean significant gains and a chance to reclaim its place as stable global finance giant.

Surviving Brexit – US Companies Should Prepare to Avoid Massive Brisruption

Tech companies have long regarded elite schools like UC Berkeley and Stanford as rich talent pools integral to their hiring pipelines. And since the schools receive fees from the companies for the privilege of recruiting on campus, the relationship is generally considered to be a symbiotic one.

However, in recent months, students at Berkeley and Stanford have protested the on-campus recruiting efforts of companies including Salesforce, Amazon, and Palantir because of their contracts with Immigration and Customs Enforcement (ICE) and Customs and Border Protection (CBP).

Student groups like Students for the Liberation of All People (SLAP) at Stanford, with the support of national organizations such as Mijente and the Immigrant Defense Project, allege that by providing services such as facial recognition, hiring technology, and predictive deep learning systems to ICE agents, these companies are not only complicit in but profiting off of the humanitarian crisis along the southern border.

Palantir, for example, has a $41 million contract with ICE to provide an Investigative Case Management system, partly supported by FALCON, another Palantir platform that tracks immigrants’ cross-border activities. Microsoft contracts with ICE to provide cloud computing software and deep learning for identification of immigrants. Palmer Lucky, the controversial founder of VR company Oculus, has been working on a defense technology company that would create a “virtual border wall” using infrared sensor, radar, and cameras.

Student activism serves as yet another example of how tech companies are being asked to reconcile their profit-seeking behavior with both their largely progressive employee base and their largely progressive public image. While as public companies, Salesforce, Microsoft, and Amazon have a fiduciary duty to maximize profits for their shareholders, the recent blowback has shown that there are limits to putting profits over people—limits that, if they have enough of a chilling effect on these companies’ recruiting pools—are bad for business.

Bay Area Students ICE out Tech Companies

A federal judge in the Northern District of California dismissed a class action lawsuit against Walmart and several other retailers in February. The class representatives were three individuals who shoplifted from Walmart stores in Georgia, Texas, and Florida. They alleged that the retailers engaged in a racketeering conspiracy by forcing them to either enroll in restorative justice classes or face prosecution.

Each of the retailers partnered with Corrective Education Company (CEC), a Utah-based firm. The shoplifters claimed that the retailers routinely took suspected shoplifters to a back room to threaten them with arrest and prosecution. Suspected shoplifters were allegedly forced to both provide a signed admission of guilt and pay up to $500 to enroll in a CEC class. CEC would reportedly award the retailer a portion of the enrollment fee.

The court initially found that it lacked personal jurisdiction over Walmart and most of the other retailers. The shoplifters therefore turned to a provision in the federal racketeering statute that gives courts personal jurisdiction over any defendant who participates in a “single nationwide conspiracy.” However, they could not demonstrate the existence of a nationwide conspiracy without proof that any of the retailers knew the other defendants were partnered with CEC.

Ultimately, the shoplifters chose not to sue CEC. But, CEC has seen its fair share of legal trouble. In 2017, a California Superior Court convicted CEC of extortion under California law. San Francisco City Attorney Dennis Herrera praised the decision and added that “we should all be concerned about privatizing our justice system.” CEC told KTVU that it was “dismayed” by the ruling and felt sorry for future shoplifters who could face “a lifelong scarlet letter because of one bad choice.”

Federal Judge Kicks Class Action Brought by Shoplifters

Tesla had a very public and turbulent 2018. Tesla has always been a unique company. When the Model S first came out, most people had never seen anything like it: an all-electric car with a computer sized display screen, and speed, matching or beating the top sports cars on the market. While Tesla has always seemed to be at the forefront of innovation, its founder, Elon Musk, as well as issues with production and reliability have plagued the company.

Most recently, Tesla announced that it would be closing most of their retail shops and focusing on online sales. This comes after a seemingly endless array of bad news coverage. In August and September of 2018, Musk began to create waves in the media with his increasingly erratic behavior. He was filmed smoking weed on a podcast, he had a very public relationship called into question, tweeted baseless and derogatory statements about a Thai rescue diver, and caught the eye of the SEC with his tweets about taking Tesla private.

As a result of this, Tesla’s stock tumbled to more than 30% below the all-time high they hit in 2017. In addition, the Chief Accounting Officer, Dave Morton, resigned after only a month on the job, citing concerns about the public attention the company garnered. While Tesla finally announced the long promised $35k Model 3, this news was delivered alongside plans to make price cuts on all of their models and the announcement of retail closings. Tesla shares closed Monday down 10% just in the past month. While they have expanded and begun to deliver model 3 orders in Europe, they simultaneously lost the Consumer Reports recommendation due to Model 3 reliability issues.

Through all of the turmoil, Tesla remains a groundbreaking company and Musk recently revealed plans of a new crossover car in their lineup, the Model Y. It remains to be seen which force will prevail: Musk’s erratic behavior and Tesla’s inability to sustain consistent and reliable growth, or Tesla’s forward thinking and innovative work product which continues to push the boundaries of society’s views on the car industry. With the onslaught of Tesla stories in the news daily, it may not take too long to find our answer.

The Curious Case of Tesla