Why Italy’s Referendum Matters


This weekend, Italians will vote on constitutional changes proposed by Prime Minister Matteo Renzi.  And although the vote is technically about reforms the 41-year old former Mayor of Florence wants to implement, Italians no longer see it that way. It's now a vote about the nation, its leadership, and possibly even its future relationship with Europe. Anti-establishment populists have rallied the citizenry against Renzi and the governing elites. This Sunday’s vote, The Economist notes, is effectively a “Renzi-ferendum.”

The irony is that Renzi rose to power on a promise to radically reform the Italian government. But even before he was elected Prime Minister in 2014, he was known as “The Demolition Man” (Il Rottamatore) of Italian politics. He earned the nickname by incessantly lampooning the government and pledging to upend the country’s political establishment. Today, he’s deemed part of the establishment.

Believing institutional paralysis to be one of Italy’s biggest problems, Renzi is trying to improve the country’s governability by assuring greater political stability and streamlining the legislative process. Specifically, Renzi’s plan would reduce the size and authority of the Senate, clarify responsibilities in areas where regional and central government jurisdictions overlap, and remove a layer of local government.

In part because of the Senate’s existing powers, the country has had 63 governments (not a typo!) in the last 70 years. But, as The Economist notes, “the mayfly-like lifespans of Italian governments is not the sole reason” that it is difficult to govern Italy. Legislative gridlock is another.

Because of equal powers given to both houses in the parliament, legislation can bounce between the two bodies until it is approved in identical form. It’s not unusual for bills to be debated for years. For example, a bill that makes torture an offense has been discussed in the Italian parliament for 27 years, most recently in July.

Given these dynamics, you might imagine support for the reforms would be strong. You’d be mistaken. Renzi’s announcement that he would resign if the referendum failed changed the dynamics around the upcoming vote. It went from being about the reforms to being about him. One poll cited by The Guardian found “only 40% of Italians say they will vote on the reform package; 56% consider their vote to be more a verdict on the prime minister, his government and, by implication, the state of the nation.”

Further, Mario Margiocco asserts “to vote ‘no’ is to vote against the system and all its corruption…and who isn’t against corruption?” Even The Economist, citing risks to the emergence of a unaccountable strongman, advised “No is how Italians should vote.” The last poll published before the vote indicated 55% opposition to the reforms.

The economy isn’t helping Renzi’s cause. The country’s GDP is smaller than it was before the financial crisis. But because of population growth, GDP per capita is today roughly where it was in the late 1990s. Employment levels in Italy are the second lowest in Europe, slightly better than Greece, and the country’s debt to GDP ratio is above 130%. And the banking industry, Europe’s fourth largest, is teetering under $400 billion of problem loans, equivalent to more than 20% of the country’s GDP. At one point earlier this year, Monte dei Paschi di Siena, the world’s oldest bank, had problem loans of more than 50 times its market capitalization. The overhang of bad loans is starving Italian entrepreneurs and small business owners of capital they need to grow.

There’s also the migrant crisis. According to the UN refugee agency and the Italian government, more than 170,000 asylum seekers have reached Italy by boat so far this year, exceeding the standing record set in 2014. One reason for the recent surge, notes The Guardian, is that greater Turkish policing and aggressive deportation threats by Greek officials have resulted in “the Italian route once again becoming the main migrant gateway into Europe.”

Unsurprisingly, the combination of economic malaise and record migrant inflows is bolstering populists. Two groups in particular stand to win if Renzi loses: the populist Five Star Movement and the anti-immigrant Northern League. Both are anti-establishment organizations that question the value Italy receives from being part of the European Monetary Union or from using the euro as its currency. As a result of this set-up, the stakes of the December 4th vote are enormous. A Renzi defeat may affect Italy's future relationship with Brussels.

Could this weekend’s vote lead to Italy’s exit from the European Union and a reversion to the lira? The logic is straightforward: Renzi loses, anti-establishment parties come to power, Italy exits. A believable story, for sure. Because of these dynamics, my friend John Mauldin has said “a ‘no’ vote would be the death knell for the euro.” And if you believe, as I do, that Europeans will ultimately choose individual countries with their own currencies instead of opting to join the United States of Europe, then a Renzi loss might help speed along an already unfolding process.

“A ‘no’ vote would be the death knell for the euro.” - John Mauldin

But on the other hand, it’s also possible that a ‘no’ vote doesn’t directly affect the euro’s short-term viability. A poll published earlier this month found that only 15.2% of Italians were in favor of leaving the single currency, “with 67.4% declaring themselves true single currency believers.”  Although our recent experience with polls in the United States and the United Kingdom may lead us to skeptically interpret their conclusions, our prior faith in polls was based on their historical accuracy. It would be foolish to dismiss the data entirely.

If the referendum fails to pass and Renzi resigns, one thing is certain – market volatility and political uncertainty will increase. One report suggests that investor confidence would plunge and up to 8 Italian banks might fail if the reforms are rejected. The fear might spread to Europe more generally, leading to a materially weaker euro as capital flees the continent. If this happens, the US dollar would likely strengthen. And Italy might call for an early election next year, creating a situation in which, as noted by Bloomberg, “governments accounting for more than 75% of the euro area GDP would be in play in just one year.”

A Renzi victory, on the other hand, might turn the anti-globalization tide and help Italy attract much needed capital for its banks and economy. It might even deter citizens of France, Austria and other countries from voting in populist leaders. As for the currency impact, that is less clear.

In either case, the hard work of reforming the Italian system (and fixing Europe) still lies ahead.

Our Bulging Thanksgiving Waste


As part of a long-standing White House tradition, President Barack Obama is widely expected today to pardon two turkeysTater and Tot. And while only one of them will earn the title of “National Thanksgiving Turkey,” both will enjoy a future living in Virginia Tech's Animal and Poultry Sciences Department where students and veterinarians will tend to their needs.

The practice of freeing birds from the White House butcher block is not new. In fact, it goes back to 1863 (before Thanksgiving was acknowledged as an official US holiday), when President Abraham Lincoln granted his son Tad’s wish to save a holiday turkey’s life. According to Smithsonian Magazine, “Ronald Reagan was the first president to use the word ‘pardon’ in connection with a Thanksgiving turkey” and it was President George H. W. Bush who began a yearly tradition of freeing a holiday bird.

Despite the relatively recent fascination with the White House pardons, the turkey has had a firm spot in the minds of American leaders since the country's independence. Benjamin Franklin actually proposed the turkey be the official bird of the United States. When the bald eagle was chosen instead, Franklin penned a note to his daughter lamenting the choice, suggesting “the turkey is a much more respectable bird” while contrasting it with the eagle’s “bad moral character.”

Of the more than 212 million turkeys raised and consumed in the United States during 2015, few look forward to the bucolic settings that await Tater and Tot. According to the National Turkey Federation, 88% of Americans consumed about 46 million turkeys last year during Thanksgiving. And given the average bird weighed 16 pounds, Americans appear to have eaten a grand total of approximately 736 million pounds of turkey at Thanksgiving dinner last year.

But such calculations can be deceptive. You see, not all of the purchased meat was actually consumed. The U.S. Department of Agriculture projects a shocking 35% of turkey meat does not get eaten during Thanksgiving. Where does it go? Into trash cans. That equates to over 200 million pounds of turkey that finds its way into landfills. And while this number might seem high, it’s not far from United Nations Food and Agriculture Organization’s estimate that one-third of global food produced for human consumption is lost or wasted.

The U.S. Department of Agriculture projects a shocking 35% of turkey meat does not get eaten during Thanksgiving.

Food waste impacts global hunger, has meaningful costs, and affects the environment. The 1.3 billion tons of food wasted globally is enough to feed the billion people or so that are regularly hungry. And we Americans are particularly wasteful. The amount of food wasted in the United States in 2010 was enough to fill the Empire State Building 91 times! Merely reducing this waste by 20%, notes the National Resource Defense Council, would generate enough food to feed 25 million people. Minimizing food waste on a global scale could feed hundreds of millions of hungry people.

Food waste is also expensive. The Chicago Council on Global Affairs estimates that global food waste has an economic cost of $1 trillion. Within America, food waste costs an average family of four approximately $600 per year, according to research conducted at the University of Arizona. Further, the US Environmental Protection Agency estimated that it cost $1.3 billion to dispose of food waste in landfills in 2008. None of these figures incorporates the opportunity costs of producing food. National Geographic noted that “an area significantly larger than Canada was plowed to grow food...that no one would eat.” Think of how that land might otherwise have been used!

And when it comes to the environment, food waste is not an innocent bystander. Because of the anaerobic process by which food waste decomposes, landfills are big producers of methane. Research from Princeton University notes that methane is “30 times more potent as a heat-trapping gas” than carbon dioxide. The result: food waste is a significant contributor to climate change. In fact, the United Nations highlighted the magnitude of the problem: “waste generates about 8 percent of global greenhouse gas emissions.” And if you were to aggregate food waste into a country, it would be the third-largest producer of greenhouse gases behind the United States and China.

Global food waste has an economic cost of $1 trillion.

So what can be done? Despite the daunting challenge that food waste presents, there are actions we can take to help reduce the problem. We need to begin by acknowledging the severity of the problem and capturing more comprehensive data. As the old management adage goes, you can’t measure what you don’t measure. We can also improve infrastructure related to food systems. This will reduce losses that take place in the supply chain due to spoilage or damage. And we might consider feeding food waste to livestock. Doing so would save enough grain to feed 3 billion people, according to the United Nations Environment Programme.

We can also work on clarifying the meaning of food date labels. Research conducted by the Natural Resource Defense Council and the Harvard Food Law and Policy Clinicfound “the current system of expiration dates misleads consumers to believe they must discard food to protect their own safety,” despite the fact that dates are merely guides by manufacturers suggest likely peak quality. The result of this “dating game” is that an estimated $165 billion of edible food is thrown away. Simple standardization might prevent waste-inducing misinterpretation of food dates.

But there are also seemingly small tweaks to our daily lives that can add up to have big impact. Consider that “scores of US colleges have cut by 25% to 30% the amount of food that students take, and waste” by merely removing cafeteria trays, notes National Geographic. This thanksgiving, rather than plating individual meals, you might offer family and friends food via a buffetthereby allowing them to take only what they want. And of course, you can always reduce portion sizes, a move that will both ease the pressure on your waist and reduce waste.

Best wishes for a Happy Thanksgiving!

Learning From Great Sports Pranks


Later this week, Harvard and Yale will face off in their annual football showdown. “The Game,” as fans have called the competition for decades, began in 1875, before modern rules existed and has been played nearly every year since. As you might imagine, there have been many memorable games over the past 141 years.

The 1894 Game, known as the “The Bloodbath in Hampden Park,” is remembered for its list of injuries which included a broken leg, a snapped collarbone, a bleeding eye, and a collapsed nose. One player suffered a hit that left him in a coma. The public outcry at the violence led to a suspension of the competition for two years.

One of the more famous matches occurred in 1968, when, with only a few minutes remaining, Harvard came back from a 16 point deficit to tie the game. (Incidentally, the actor Tommy Lee Jones was playing for Harvard as an offensive guard at the time.) That game was immortalized in the 2008 documentary Harvard Beats Yale 29-29.

Matches like those are legendary, but the richest tradition of The Game might just be the pranks. One of the most famous ones occurred in 1982. Interestingly enough, the perpetrator was not from Harvard or Yale. During the second quarter, a large balloon emerged from the field, hovered, and popped. It had “MIT” written all over it—literally. MIT students had rigged the balloon using freon and a vacuum cleaner motor, buried it in the field, and triggered it from the electrical room to inflate.

That wasn’t the only time MIT students pranked the Game. At the 1990 Game, they launched a rocket from the 0-yard line that draped a large “MIT” banner over the goal post. At the 2006 game, MIT students poked fun at Harvard by altering a part of the scoreboard at Harvard stadium. Specifically, they changed the Harvard crests, which normally read “VE-RI-TAS”—“truth” in Latin—to read “HU-GE-EGO.”

All the fun isn’t reserved for MIT students. As a Yalie, I’m particularly proud of a prank orchestrated by Yale students during the 2004 Game. A group of them, pretending to represent the “Harvard Pep Squad," passed out pieces of construction paper to unsuspecting Harvard fans. Thinking they carried a pro-Harvard message, they raised them up when instructed. Unbeknownst to them, they spelled out “WE SUCK.”

The Harvard-Yale Game shenanigans are part of a long, grand tradition of pranks played during athletic competitions.  In a 1982 college football game between Stanford and the University of California, Cal achieved a remarkable come-from-behind victory. With only seconds left, the Bears threw five laterals in one play and delivered the ball into the end zone. The Cal player had to swerve through the Stanford band, which had stormed the field, thinking its team had won. It was such an impressive maneuver that fans came to call it “The Play.”

The next week, however, Cal fans woke up to a story in their school newspaper that the play had been ruled incomplete, and that Stanford had won. The catch: it was all a sham. Stanford students had distributed fake editions of The Daily Californian with the phony story, even including an altered photo a ref seeming to call off the play.

And it’s not just collegiate sports that attract jokesters. In 1985, Sports Illustratedbroke a story about a promising young pitcher named Sidd Finch who was being evaluated by the Mets. The article described Finch as “a 28-year-old, somewhat eccentric mystic” who could throw a ball 168 miles per hour—the fastest ever recorded, by far. Finch, the article noted, was a Harvard dropout who had trained in Tibet and one day walked up to a Mets minor league coach muttering “I have learned the art of the pitch.”

According to journalist George Plimpton, the Mets were evaluating this strange talent with great secrecy. Plimpton’s piece was published on April 1st, 1985. The 6,000 words profile, was, of course, an elaborate prank. When it was published, though, not everyone got the joke. According to the New York Times, “Two major league general managers called the new commissioner, Peter Ueberroth, to ask how Finch's opponents could even stand at the plate safely against a fastball like that,” and “The St. Petersburg Times sent a reporter to find Finch.”

The list of great sports pranks is practically endless. In the 1990s, the baseball player Ken Griffey Jr. would make bets with his manager, Lou Piniella. Owing him steak dinner, Griffey Jr. determined to settle his debt in the most inconvenient way possible. He had a 1200 pound cow brought into Piniella’s office!

Although likely apocryphal, rumor has it that an MIT student once spent a summer feeding pigeons in Harvard’s football stadium while blowing a whistle. During one of the season's competetions, hundreds of pigeons apparently flocked to the ref and disrupted the game's flow. True or not, the concept would surely make Pavlov proud!

Because of this strong prank tradition, many sports fans know that what's happening off the field can be just as interesting as the match itself. Looking broadly, with a skeptical eye, can help us rapidly identify unexpected developments and the messages they transmit. It's also important to appreciate improbable and unanticipated events emerging from the proverbial left field. In fact, remembering to look beyond the borders of the game is a rule of thumb that can serve us well in most areas of life.

Infrastructure Boom Coming


Americans on Tuesday will vote to elect the next president of the United States. It is not clear who will win, but one thing is certain: the next commander-in-chief will have promised a large package of infrastructure spending.

Democratic candidate Hillary Clinton has a plan to spend $275 billion over five years. Her plan includes $250 billion of direct public investment in priorities like roads, bridges, airports, and clean energy. A further $25 billion would fund a national infrastructure bank. Clinton has stated that these investments would be one of the two major initiatives of her first 100 days in office. (The other would be comprehensive immigration reform). Donald Trump, the Republican candidate, has said he wants to double the amount of infrastructure spending proposed by his Democratic opponent.

Why the bipartisan interest in infrastructure? For one, we have failed to address it in the past. According to William Galston, "Over the past three decades, America has systematically underinvested in infrastructure by about 1% of GDP each year, resulting in a shortfall of trillions of dollars.” As a result, we are a nation of bridges, roads, and airports that the American Society of Civil Engineers (ASCE) gives an overall grade of D+. Despite ranking third on the World Economic Forum’s Global Competitiveness Index, the United States ranks 11th on infrastructure. In 2013, the ASCE estimated that the United States needed to invest $3.6 trillion by 2020.

We are a nation of bridges, roads, and airports that the ASCE gives an overall grade of D+.


The timing of these demands may not be bad, given today’s tantalizingly low interest rates. US 10-year Treasury bonds are yielding less than 2.0%.  At some point, rates will rise, resulting in the need to pay more interest on borrowed money. But financial costs are not the only consideration. As Philip K Howard writes, "Delays due to infrastructure bottlenecks cost about $200 billion per year on railroads, $50 billion per year on roads and $33 billion on inland waterways.” Not fixing crucial conduits of commerce exacerbates everyday inefficiencies.

The benefits from investing in infrastructure would be numerous. First, it could give the economy a much needed and almost immediate boost during a time of stubbornly low growth. According to one paper, "In the short-run, a dollar spent on infrastructure construction produces roughly double the initial spending in ultimate economic output.” Infrastructure investment could also boost long-term growth. Over 20 years, the authors of that paper note, every $1 spent on infrastructure can generate $3.20 worth of economic activity. According to McKinsey, investing dollars in this way could "boost GDP by about 1.3 percent,” and create 1.5 million jobs.

A second, less-discussed benefit of investing in our physical infrastructure is it would likely help fight climate change. According to a report summarized in the Guardian, "60% of the world’s greenhouse gases are associated with ageing power plants, roads, buildings, sanitation and other structures.” This means that investing in clean energy and improving our transport system might have a needle-moving impact on the challenges of climate change.

Sure sounds like spending on infrastructure is a no-brainer, right? Not so fast; there are important caveats. For one, as Politco’s Danny Vinik points out, there are already widespread labor shortages in the construction industry, so a wave of new projects might simply shuffle resources rather than generating net new economic activity. According to the National Association of Homebuilders, the U.S. currently has200,000 construction jobs unfilled. A survey conducted by the Associated General Contractors of America found that 69% of contractors were "having difficulty filling hourly craft positions.” And imposing new demands on a tight labor market may generate higher wages and stoke inflation, disproportionately affecting small and medium sized businesses.

There are already widespread labor shortages in the construction industry.


Another limitation is the massive challenge of actually implementing infrastructure investments. Many projects funded by the 2009 stimulus package took much longer to get off the ground than anticipated. As President Obama admitted, "there’s no such thing as shovel-ready projects.” Of course, this is not an argument against pursuing them, but it probably does limit the speed at which these projects will impact the economy. Notable exceptions, Larry Summers points out, include deferred maintenance projects, which "do not require extensive planning or regulatory approvals.”

Regardless of the difficulties, however, there is no doubt that the United States is in massive need of infrastructure investment. One barrier to making it happen, notes comedian John Oliver, is that it’s not “sexy.” As he points out, millions of us head to the movie theaters each summer to see movies that depict “our infrastructure threatened by terrorists or aliens." “But,” Oliver adds, “we should care just as much when it’s under threat from the inevitable passage of time. The problem is, nobody has made a blockbuster movie about the importance of routine maintenance and repair….Or they hadn’t—until now.” Oliver then presents a movie trailer rendering of what a Hollywood endeavor focused on infrastructure upkeep and investment might look like.

Hollywood blockbuster or not, the infrastructure boom is coming – regardless of who occupies the White House next year. It won’t solve all of our economic problems, and it may even exacerbate some situations, but it’s needed and will help.  But perhaps the best thing we can all do is to stop thinking about infrastructure investing as an economic tool. Instead, as advised by Roger McNamee of Elevation Partners, we need to "start thinking about it as a strategy...economic stimulants produce Bridges to Nowhere. Strategic investment in infrastructure produces a foundation for long-term growth."

Is America’s Military Losing Its Edge?


The United States spends more money on its military than any other country in the world. The American defense budget of almost $600 billion is more than four times that of China’s. In fact, the International Institute for Strategic Studies (IISS) notes the US spends almost as much as the next fourteen countries – combined.

But rather than simply leave the interpretation of this data to readers, IISS warns this large budget does not necessarily buy sustainable US military superiority.  In February of this year, John Chipman, director general of IISS, noted that the proliferation of military-relevant technologies has large strategic consequences that appear to be undermining Western might.

This point was driven home during a recent talk at the Harvard Kennedy School by former Under Secretary of Defense for Policy Michèle Flournoy. She explicitly stated “our military technological edge…is no longer a given, because many of the technologies we rely on are becoming ubiquitous.”

These concerns are being raised at a time when global instability appears to be accelerating. For much of the past fifteen years, military efforts shifted to focus on fluid non-state actors –such as ISIS, al-Qaeda, and al-Nusra–that emerged as the primary adversaries.

“Our military technological edge…is no longer a given” – Michèle Flournoy

More recently, however, we’ve seen an acceleration of state-sponsored military activity. Consider three events that have happened in the past five years: Russia annexed Crimea, China built islands and military airfields in the South China Sea, and Iran has embarked on a plan to subdue parts of Arabia. Here's another data point: Saudi Arabia now has the third largest defense budget in the world, behind the US and China.

And it’s not just the threat environment that has been uncertain. The Pentagon’s budget has also suffered from a lack of predictability. Flournoy’s advice to the next president was to “reach out to Congress and try to get a four-year budget deal as a national security issue.” She went on to note that “the Defense Department has not had a predictable budget top line for a long time…they’ve been living from continuing resolution to continuing resolution, the threat of sequestration hanging over their heads.”

One impact of budgetary uncertainty is that current operations are regularly prioritizedover maintenance and training. Charles Peña of the Cato Institute notes that only 443 out of 1,040 Marine aircraft are ready to fly, half of the Navy’s F18s are out of circulation, and Army Aviation is only able to provide around 11.5 out of 14.5 required training hours per month to its soldiers.

One impact of budgetary uncertainty is that current operations are regularly prioritized over maintenance and training.

The result is a meaningful degradation of the US military’s ability to fight a major overseas war.  While the prospect of a major overseas war appeared remote a mere five years ago, recent Chinese and Russian activities make the possibility seem less distant today. And the focus on non-state actors has transformed the American military in ways that may make it less equipped to take on another country. The active-duty Army has fallen from around 780,000 soldiers in 1991 to a current 470,000 – the lowest level since World War II.  Similar dynamics are affecting the other services.

In March of this year, Congressman Mac Thornberry, Chairman of the House Armed Services Committee, asked Marine General Joseph Dunford, Chairman of the Joint Chiefs of Staff, a very direct question: “Do you agree that we have a significant readiness problem across the services, especially for the wide variety of contingencies that we’ve got to face?” General Dunford’s response was equally direct: “Chairman, I do, and I think those are accurate reflections of the force as a whole.”

General David Petraeus, who retired from the Army after commanding coalition forces in Iraq and Afghanistan, disagrees with this sentiment. He and Michael O’Hanlon penned an opinion piece titled “The Myth of a US Military ‘Readiness’ Crisis.” They argue that today’s overall budget of around $600 billion exceeds the Cold War average budget of around $525 billion, that more than 90% of equipment is mission-capable, that training for “full-spectrum” operations is resuming, and that today’s military is battle-tested and experienced. They also note that “Pentagon budgets to buy equipment now exceed $100 billion a year, a healthy and sustainable level.” The bottom line, Petraeus and O’Hanlon note, is that “while there are areas of concern, there is no crisis in military readiness.”

“Pentagon budgets to buy equipment now exceed $100 billion a year, a healthy and sustainable level.” - General David Petraeus and Michael O'Hanlon

Readiness crisis or not, most analysts and policymakers agree that the US military is today the most capable armed force in the world. As General Dunford made clear: “It’s about the standards we’ve set for ourselves, which are incredibly high.”

Army Chief of Staff General Mark Milley assured lawmakers earlier this year that the military’s ability to fight against terrorist groups is not in question, noting “you can take it to the bank.” But he went on to emphasize the material risks emanating from a war with Russia, China, Iran or North Korea. “We can collectively roll the dice and say those days will never come and that’s a course of action; that is not a course of action I would advise,” Milley noted.

While General Milley’s comment may seem alarmist, it’s worth pondering the scenarios that may not be in our immediate field of consideration. We may not see a great-power conflict in the near future, but what might transpire if we did? Perhaps the US military budget is too large today, but could it be too small for our future needs? Sure, force levels are shrinking, but how might that be a strategic advantage? Yes, the Middle East seems particularly unstable, but might Saudi Arabia's escalating military expenditures point to even greater forthcoming instability?

In a world of massive uncertainty, we need to think creatively about possible scenarios because, in the wise words of baseball legend Yogi Berra, “The future ain’t what it used to be.”

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