Should We (Literally) Trash Cash?

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November 8, 2016 was a big day. Millions of citizens were stunned, literally unable to believe what had just transpired. Economists issued dire warnings, suggesting a negative shock to future growth. Many took to the streets in protest. Within a week, election commission officials started raising concerns over potential fraud. And over the next few weeks, dozens died. It will be a long time before the events of November 8th are forgotten. Separately and completely unrelated, on the other side of the planet and on the very same day that spurred these events, America elected a new president.

November 8th will be remembered in India for a long time to come. In a televised speech to the nation, Prime Minister Narendra Modi announced that cash notes representing 86% of the country’s circulating currency would no longer be accepted as legal tender come midnight that same evening. The existing 500 and 1000 rupee notes that he demonetized, Modi explained, could be exchanged for newly issued notes before the end of the year. For those willing to provide identification when exchanging notes, the exchange period would be open until March 2017. (At current exchange rates, a 500 rupee note was worth about $7.50; a 1000 rupee note, $15.)

Given that the unexpected announcement came amidst news reports that the US election might affect the subcontinent’s relationship with America, Indians were caught completely off guard. In fact, many were stunned. And in a fast-growing economy with a large informal sector and in which it’s estimated that around 90% of transactions take place using cash, trashing most of the cash in circulation was not unlike throwing sand into the gears of a machine running at full speed. Furthermore, because hundreds of millions of Indians lack formal bank accounts, the impact was felt most by the poorest. The gender impact was also uneven, given that 80% of women in India, the UN reports, are unbanked.

Long lines at banks and ATMs quickly became commonplace, generating what the BBC reported as widespread chaos. One laborer noted “it was like someone had picked my pocket” as vendors refused to accept his currency. It’s estimated that at least 70 people have died as a result of the demonetization. Overworked bank officials, as well as those denied medical services because of inappropriate currency denominations, are among the dead. “Day of Rage” protests erupted across the country, and as they did, the terms of the demonetization changed on an almost daily basis, leading to even greater confusion and uncertainty.

As a result, economic activity in India is plunging. According to the Wall Street Journal, home sales are stagnant, political discussion about the scheme has brought the Indian parliament to a standstill, and tourists are paralyzed by the inability to use the Indian currency in their possession. The cash crunch is also rippling through supply chains, leading manufacturers to cut jobs, lower production, and reduce demand for raw materials. Former Prime Minister Manmohan Singh has suggested India will suffer a drop in GDP of around 2% as a result of Modi’s “monumental mismanagement” of the demonetization effort.

So what was Modi thinking? He noted his primary objective was “to break the grip of corruption and black money.” Modi further stated “black money and corruption are the biggest obstacles in eradicating poverty.” Indians hoarding bills would be forced to deposit or exchange them, allowing tax authorities to delve deeper into the sources of such funds. More tax revenues might lead to greater social spending and government support.

To prevent fraud during the exchange process, the government imposed limits on the amount of currency that could be swapped by any individual. To keep track of the limits, banks began to mark the left index finger of those who had exchanged old notes for new ones with permanent ink. But because this is the same method used to prevent election fraud, the Election Commission noted the marks might disenfranchise voters in ongoing local elections.

Another related goal of the effort, Modi noted, was to nudge the country towards “the realization of our dream of a cashless society.” According to research commissioned by MasterCard, India has one of the highest cash-to-GDP ratios in the world at around 12%, meaningfully above China (9.5%), the United States (7.5%), Mexico (5.3%), Brazil (3.9%), and South Africa (3.7%) but well below that of Japan (20.7%). Heading towards a cashless society would increase India’s effectiveness in monitoring tax compliance, tracking terrorist financing, and of course spotting financial crime and corruption.

India is not the only country to eliminate large-denomination notes to attack corruption. In 2000, Canada retired its C$1000 bill because of its frequent use in criminal transactions. But because the notes retained their status as legal tender, many of them remain at large. Separately, Singapore is phasing out its S$10,000 note. And just this week, Venezuelan President Nicolas Maduro made the 100 Bolivar note illegal in an attempt to thwart “Colombian smuggling mafias.”


In 2000, Canada retired its C$1000 bill because of its frequent use in criminal transactions.


Critics suggest that such efforts are ineffective at truly stopping large-scale corruption, however. Arun Kumar, author of the The Black Economy in India, estimates that only 1-2% of illicit wealth is stored in cash. Most, he notes, is stored in gold, in property or in Swiss bank accounts.  Further, Kumar notes that demonetization does not address the mechanisms or flow of dirty money—it only attempts to address the stock of prior gains from corruption. To truly target corruption, many believe essential policies include institutional reforms strengthening the rule of law, better law enforcement, and public awareness campaigns.

Nevertheless, arguments from academics to trash cash keep building. The Curse of Cash, a recent book by Kenneth Rogoff, supports the claim that a large portion of high-denomination paper currency is used to enable tax evasion, finance terrorist operations, and support underground economies in illegal drugs and human trafficking. (Rogoff wants to phase out the US$100 bill.) A paper by Peter Sands, a Senior Fellow at the Harvard Kennedy School, also recommended eliminating high-denomination notes to deter these activities. And Larry Summers, former US Treasury Secretary, has called for a global agreement to stop issuing notes worth more than $50 or $100.

To understand how these decisions might impact those transporting large sums of money in cash, consider the weight of US$10 million in various currency denominations. A criminal carrying such a sum in US$20 bills would need to lug 500kg (more than 1000 pounds!) of paper notes. In US$100 bills, the weight would drop by 80% to 100kg, about the weight of a large man. If using €500 notes, he would only have to carry slightly over 20kg. And using the Swiss CHF1000 notes could reduce the burden to a mere 11kg.

In a highly dynamic and uncertain global economy, there will always be nefarious actors trying to operate in the shadows. One way of targeting illicit activities is to increase the frictional costs of such doings by eliminating high-denomination notes. And although such efforts admittedly focus on symptoms more than the root causes of corruption, there is little downside in pursuing such an approach. We should of course insist on improved compliance and enforcement of a strong rule of law. But we should not dismiss trashing cash as a potentially useful tool to nudge better behavior.

Silicon Valley’s Nourishing Poisons

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The emergence of digital technologies has transformed just about every element of our lives. It has enabled countless new business models, reinvigorated entrepreneurial spirits, and spurred the development of thousands of new products and services. There is no doubt that connected digital systems improve our lives.

But digitization has also created new vulnerabilities. Just ask senior executives of Home Depot, Target, Anthem, or JP Morgan about the risks of employing cyber systems to manage customer data.  Each company had the records of tens of millions of their customers stolen. And it’s not just customer data that’s at risk. After Sony Pictures was hacked, confidential information about employees and production plans were posted online. The hackers also tried to intimidate the company’s sales channels when it posted a vague threat against theaters showing the movie The Interview.”

But cyber risks can be much bigger than data or identity theft. Cyber attacks can disrupt the operations of digital systems. Las Vegas Sands, a global casino company, suffered a wiping attack that crippled the company’s operations. Twitter, PayPal, and Spotify have had their services disrupted by hackers. And Saudi Aramco had roughly 30,000 computers destroyed by a hacktivist group called the “Cutting Swords of Justice.”

And these are just a few of the known cyber attacks. On July 8, 2015, the websites of United Airlines, the New York Stock Exchange, the Wall Street Journal, and popular financial blog site Zero Hedge were all shut down for supposedly “technical reasons.”Coordinated cyber attack? Sure seemed like one to me. There are probably thousands of similar cases.


Cyber risks can be much bigger than mere data or identity theft.


The same technologies that enable us to rapidly order an Uber or to instantaneously download the latest book by Michael Lewis can also empty our bank accounts or steal our identities.  In short, cyber is a two-sided coin. About two years ago, Richard Danzig, former US Secretary of the Navy, delivered a speech he titled “Surviving on a Diet of Poisoned Fruit.” In it, he noted the very systems that enable wide scale collaboration and information sharing also allow for unprecedented intrusion. Cyber systems, he stated, both nourish and poison us.

Consider the case of Estonia, arguably the most connected country in the world. The small country was an early adopter of many e-government initiatives. It was the target of a 2007 cyber attack in which hackers effectively disabled the entire country, disrupting systems used by Estonian banks, ministries, broadcasters, newspapers, and even the parliament.

Last week I had the opportunity to speak with and listen to retired four-star Air Force General Michael Hayden, former head of the Central Intelligence Agency and the National Security Agency, at an event organized by First Republic Bank in Boston. Hayden’s message: We don’t fully appreciate the magnitude of the transformation that cyber systems are enabling. But it’s urgent that we do, and that we do so rapidly.

Hayden suggested we treat cyber as an entirely new domain, just as the military has done.  Doing so will allow corporate boardrooms and IT managers to focus on managing cyber risks more effectively. To help us rethink risk management in this new domain, Hayden pointed to the three primary factors driving risk: the threat environment, vulnerabilities in our defenses, and the consequences of an intrusion.

The threat level can be thought of as our level of participation in the cyber domain and the number of type of hackers who may want to inflict harm.  If we had zero participation in the domain, we wouldn’t have any risk. But it’s not a binary consideration: a company’s HR systems, for instance, could digitally store all employee records except for social security numbers. And it’s also possible to monitor threat risk by understanding and monitoring likely attackers. In fact, some cyber security firms are beginning to offer such services.

Most of our cyber risk management efforts are targeted at minimizing vulnerabilities. Citing FireEye’s Kevin Mandia, Hayden noted that most of our efforts are focused on developing stronger defenses, firewalls, and the like. And while worthwhile and generally effective, no amount of effort will ensure penetration-proof protection, he noted. The probability of hackers getting through cyber defenses will almost certainly be greater than zero for some time to come.

Minimizing the consequences of cyber attacks, however, is a big opportunity. It requires a company and its IT managers to be self-aware and focus, as Hayden noted, on resilience, response, and recovery after an attack. Today, it often takes months for organizations to identify that an attack even took place. By focusing on rapidly identifying an intrusion and limiting its impact, organizations have the ability to greatly reduce the risk of catastrophic effects resulting from cyber attacks.

The stakes are simply too high for cyber risk management to not get the attention it deserves. Cyber attacks have the potential to generate massive destruction and widespread loss of life. Think I’m being overly-dramatic? Think again.

Earlier this year, German utility RWE disclosed it had identified a virus implanted by hackers in the software that manages the movement of fuel rods at one of their nuclear power plants. It was caught and contained quickly. But in October, International Atomic Energy Association (IAEA) Director Yukia Amano confirmed cyber attacks have targeted nuclear power plants, noting that non-critical operations had been disrupted. The impact of a cyber attack that disabled safety and control systems at a nuclear facility could be enormous.

Further, Leon Panetta, former Secretary of Defense, has warned that cyber attacks “could derail passenger trains, or even more dangerous, derail passenger trains loaded with lethal chemicals…they could contaminate the water supply in major cities, or shut down the power grid across large parts of the country.” And last year, Director of National Intelligence James Clapper bluntly stated that although an attack was not immediately likely, the United States “must be prepared for a large, Armageddon-scale strike that would debilitate the entire U.S. infrastructure.”

We need to think about cyber risk management more broadly, as General Hayden recommends. Dr. Danzig had it right. We’re drinking a nourishing poison. And while we should obviously minimize threats and address vulnerabilities, the blunt reality is some cyber attacks will be successful. So if we are to truly enjoy the nourishment digital systems provide, we better not allow the poison to kill us.

Why Italy’s Referendum Matters

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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

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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

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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

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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?

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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.”

Learning From Nigerian Money Changers

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Earlier this month, I was in Nigeria for some meetings. One of the most striking things about the country’s economic situation was the parallel currency market. Despite a seeming end to the controversial dollar peg in June, the naira continues to sell for different prices in different places.

Officially, it takes 315 naira to buy one US dollar. However, I was told during my trip that the underground exchange rate was, drumroll please…around 465. That’s not a typo. The official exchange rate and black market rate supposedly differed by almost 50%.

Skeptical that such a big disparity actually existed, I decided to change US$50 into naira. I went to a particularly touristy spot at the Eko Hotel on Victoria Island, a location with lots of souvenir stalls selling everything from locally-produced jewelry to African masks and carvings. Upon arriving, I asked a vendor where I might change some money. He smiled and introduced me to his boss, who asked, with an ear-to-ear grin, “US Dollars?”

He offered me 450 naira for each dollar; I protested, suggesting the rate should be closer to 500. We settled on 470.  I handed him US$50, and he handed me 23,500 naira – almost 8,000 more naira than I would have received at a bank.

Aside from providing intellectual fodder for curious foreigners, the dysfunctions in the foreign exchange market are also impacting importers as they struggle to secure greenbacks to buy foreign goods.  Further, investors have been reluctant to buy assets in a currency that is overvalued on official exchange rates and appears likely to fall.  In part because of the shortage, inflation is now running around 18%.  And the International Monetary Fund expects the Nigerian economy to shrink 1.7% this year. High inflation, low-to-negative growth – not a good combo!

There are many reasons why the currency is losing value, including the country’s dependence on oil for government revenues and foreign exchange.  As an oil price-taker, Nigeria is subject to global developments over which it has little control. But the spread between the official and underground rates is the result of a conflict between government policies and market-driven prices.  And my experience changing money taught me the forces of supply and demand—not policies—were winning the battle.  Unsurprisingly, the volume of foreign exchange traded at the official price had declined by 90% as the difference between market and official prices widened.


The International Monetary Fund expects the Nigerian economy to shrink 1.7% this year. 


Nigerian President Muhammudu Buhari is not new to wrestling with the naira. When he led Nigeria in the 1980s, he refused to devalue the currency as part of an IMF restructuring plan.  Soon thereafter, a coup removed him from office. He’s back, this time as the result of a democratic election and peaceful transition of power.

Clearly, Nigeria’s economy is in desperate need of reform. How should the leadership address the country’s difficulties? In recent decades, one school of thought, known as the “Washington Consensus,” dominated.  It emphasized the liberalization of markets—including those for foreign exchange—privatization of state-run firms, and austerity measures to control runaway budgets.

As the global financial crisis eroded faith in market liberalism, consensus around these prescriptions faded. In June, three IMF economists published a paper—entitled “Neoliberalism: Oversold?”—arguing that the costs of austerity and capital account liberalization can outweigh potential benefits.  Besides potentially generating instability and hurting growth, they can also drive inequality, which, the economists argued, can further harm economic performance. Most importantly, however, the authors emphasize there is no perfect one-size-fits-all set of reforms.

So is Nigeria moving towards more or less government involvement? The short answer is yes. Rather than cutting budgets, Buhari has boosted infrastructure spending to counteract the downturn. And he has tried to control the currency market rather than allowing market forces to fully determine foreign exchange rates.  But Nigerian leaders have also signaled intentions to sell state property, including presidential jets and energy assets. Buhari’s government is also working to attract foreign capital, in part by allowing private investors to manage infrastructure.

So perhaps the best description of the Nigerian approach is the one offered by the finance minister, who stated at an IMF/World Bank meeting that “we have our own local remedy” for addressing the country’s economic problems.


“We have our own local remedy”—Nigerian finance minister 


Outside of government, business leaders remain firmly in the camp of market-oriented liberalization, infrastructure investment, and less government bureaucracy. Noting the need for the country to raise more than $15 billion in the coming years, Nigerian billionaire Aliko Dangote argues that the country should sell state assets and take out loans from China or elsewhere.  Bola Onadele, the CEO of the Nigerian securities exchange FMDQ, believes the naira needs to float completely.

My money-changing experience in Lagos reminded me of Argentina in late 2015, where the “blue market” rate for dollars was 14.5 pesos versus the official rate of 9.9 pesos to the dollar. The wide spread was unsustainable, and in December of 2015, following a political upheaval that led the country towards more market-oriented economic management, the Argentine government removed capital controls.  With business-friendly reforms in place, Argentine President Mauricio Macri is now courtinginternational investors, who have already bought up billions of dollars in newly issued government bonds. And the IMF is predicting the Argentine economy will expand 2.8% in 2017. Global investors are taking notice, and the Merval index is up more than 30% in dollar terms since the December devaluation.

Like Argentina, Nigeria will likely have to suffer through the pain of fully floating its currency in order to recover. This may generate more inflation, possibly even hyperinflation. Recall that many Southeast Asian countries suffered through massive devaluations during the Asian Financial Crisis only to emerge a few years later with high growth and strong economies.

That’s not to say that policymakers shouldn’t take short-term pain into account when choosing a course of action, since it can generate instability, with enormous ramifications in the long run.  Most important, they need to remember that local context matters. For most situations, cookie-cutter approaches are doomed to fail. 

Organs, Weapons, and Weed

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When governments prohibit economic activities, underground economies often pop up. These range from black markets for officially prohibited items like military-issue weapons to gray markets serving shoppers wanting to avoid regulations.

One of the most controversial underground economies is the market for organs. In 2013, for instance, five Kosovars, including a urologist and an anesthesiologist, were convicted for trafficking in organs sourced from desperately poor individuals. According to the New York Times, “many were never given any compensation and were released without adequate medical care.” A Turkish surgeon connected to the case, known as “Dr. Frankenstein” in the Turkish media, remains free. In Europe, organ trafficking has also arisen in connection with the refugee crisis. Migrants who can’t pay for their journey have been murdered for their organs, which can make the traffickers €15,000.


One of the most controversial underground economies is the market for organs.


 

And sadly, organ trafficking is not confined to Europe. For example, according to the BBC, Iraq has become “a new hub for the organ trade across the Middle East.” Poverty has driven Iraqis to selling their organs illegally. A kidney can go for $10,000 dollars. Similar practices are reportedly widespread in India, Pakistan, the Philippines, and Egypt as well.

Some of the most gruesome tales of organ harvesting come from China. A report by human rights activists released this summer claimed that there are as many as 100,000 transplants a year in the country, and many of the organs are harvested from the bodies of executed political prisoners. The government only officially acknowledges 10,000 transplants per year. Beijing is trying hard to convince the world that it has stopped the practice, but not everyone is persuaded.

Some believe that the prohibition on organ sales is immoral, since it creates artificial scarcity and therefore costs lives. Others are skeptical, arguing that the poor would effectively be coerced into selling pieces of their bodies. For better or worse, as long as people with healthy organs need cash and people with cash need healthy organs, underground markets will likely pop up.

The black market for weapons is another highly consequential underground economy. Just look at Ukraine. Thanks to the conflict between the government and separatists, the country “has turned into a supermarket for illegal weapons.” Smuggling is on the rise, and concerns are growing that there could be a glut of weapons leaving the country when the conflict is over. And look at what happened in Libya, where the fall of Qaddafi’s regime led to a massive outflow of weaponry that flooded Mali and Nigeria.

In Somalia, it’s believed that as much as 40% of the guns the government imports are ending up on the black market. And in Iraq, hundreds of thousands of weapons the US issued during the war are now circulating, unaccounted for. According to the New York Times, “the effectively bottomless abundance of black-market weapons from American sources is one reason Iraq will not recover from its post-invasion woes anytime soon.”

Underground markets for non-prohibited goods also pop up to skirt restrictions on how they are traded. Just look at what’s happening as marijuana is legalized in the United States. In our nation’s capital, for instance, recreational use is allowed, but non-medical sales are not.

The result: “a gray market...sprung up in the city, daring entrepreneurs to accept ‘donations’ to various causes in exchange for gifts of pot or even engage in straight up bartering for the plant,” according to the Washington Post.

Likewise, because the federal government still considers marijuana an illicit drug, businesses in states like Colorado, where non-medical sales are legal, cannot access banking services, and have to deal in cash. These activities are not strictly illegal, but clearly operate in a gray area.

Similar gray-area situations include parallel markets for paper money in countries upholding currency pegs. In places affected by political and economic turmoil—including Nigeria, Egypt, Angola, and Uzbekistan—the street prices of currencies regularly diverge from official prices when governments try to manage their value. There is little incentive to buy at the unattractive official rate when peddlers may offer significantly more local currency for a foreigner’s dollar.

We tend to think of markets as the open, above-ground institutions described in economics classes. But we miss a lot by ignoring the shadow economies that exist all over the world. European countries found this out when they added illicit activities to their national accounts, boosting the GDPs of Italy and Spain by roughly one percent. To navigate uncertainty in today’s complex, interconnected world, we must avoid ignoring phenomena like underground markets that may not fit into our standard framework.

Weather To Vote

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In democracies, elections are supposed to capture the will of the people. But what if a seemingly irrelevant factor like weather could determine the outcomes of major electoral contests and referenda? This possibility has reared its ugly head a number of times in recent months.

Take Britain’s EU referendum, for example. On the day of the voting, heavy rain fell on “Remain” strongholds like London, which received a typical month’s worth of precipitation. The bad weather caused flooding and even forced some polling stations to move. According to the Guardian, “thousands of commuters were stuck at Waterloo station as trains were either delayed or cancelled because of flooding, with several people tweeting that they would miss the 10pm deadline to cast their ballot.”


What if a seemingly irrelevant factor like weather could determine the outcomes of major elections and referenda?


Even the proverbial lighting struck (literally!), damaging power lines and disrupting train service. Despite delayed commutes, electoral officials refused to extend voting hours. In the end, Leave won with 51.9% of the vote, beating its rivals by 1.3 million ballots.

More recently, Colombians shocked the world by rejecting the peace deal that was supposed to end the half-century civil war between the government and left-wing FARC rebels. Prior to the voting, polls projected a two-thirds majority would accept the deal, but it was ultimately rejected by 50.2% of voters, a margin of 54,000 ballots.

One possible factor in the “No” side winning out was Hurricane Matthew. It swept overthe country’s Caribbean coast, dumping heavy rain and suppressing turnout in a region favorable to the deal. Weather also delayed the opening of some polling stations, and despite repeated pleas from voters, electoral officials rejected calls to extend hours. Overall turnout was just under 40%, but in the rain-hit north, only 25% voted. Among those who did vote in that region, the deal won approval by a margin of over 20 points. Analysts point to the low turnout of key supporters as an important driver of the outcome.


Overall turnout was just under 40%, but in the rain-hit north, only 25% voted. Among those who did vote in this region, the deal won approval by a margin of over 20 points. 


Just how strong is the weather effect on elections? Fortunately, there are some estimates, and they point to a clear relationship between more rain and fewer voters. Studies in the United States and the Netherlands found that 2.5 centimeters of rain correlated with a 1 percent reduction in voter turnout. Researchers also found that bad weather in the United States tends to help Republicans, with 1 inch of rain delivering them an additional 2.5% of votes; by their math, Al Gore might have won the 2000 presidential election if the weather had been more cooperative. Because the Democratic Party has a disproportionate share of marginal voters, it is more likely to be hurt by bad weather.

In addition to affecting turnout on election day, bad weather can also constrain future voting behavior. In one study, economists found that “a 1 percentage point decrease in current turnout reduces future turnout by 0.6–1.0 percentage points.” It seems voters who stay home due to rain form a habit of staying home during elections.


Al Gore might have won the 2000 presidential election if the weather had been more cooperative. 


The relationship between weather and turnout is proportional: the more extreme the weather, the more extreme its impact on turnout. Take the case of Hurricane Sandy, which devastated the east coast of the United States a week before the 2012 presidential elections. A 2015 study found that “turnout declined on average 2.8%…between 2008 and 2012 in counties in which disaster declarations were issued for Hurricane Sandy.” The non-disaster counties only experienced a 0.8% decline in turnout, meaning Sandy might have been responsible for up to a 2.0% drop in voter participation.

As the southeastern United States reels from the impact of Hurricane Matthew, it is worth asking what effect it might have on the presidential election. Officials last week told 2 million residents of Florida, Georgia, and Carolina to evacuate. “This storm will kill you,” Florida governor Rick Scott warned. The timing was unfortunate, because the original deadline for voter registration in his state was today, October 11.

Despite his exhortation for 8% of the state’s residents to evacuate and the disruption to mail and government services last week, Governor Scott refused to extend the deadline. But surely the number of last minute registrants can’t be that high, right? Not really. In 2012, over 86,000 people registered in Florida in the last eight days before the deadline, with Democrats outnumbering Republicans 2-to-1.

It’s also worth recalling that President Obama won Florida by only 74,309 votes in that year. It’s no surprise, then, that the Florida Democratic Party sued for an extension of the deadline by a week. And on Monday evening, a federal judge granted an extension, but only until 5pm ET on Wednesday, October 12. There will be additional hearings to determine if the deadline should be extended further. With 29 electoral votes at stake in a state with a history of controversy in presidential politics, it’s wise to watch Florida closely in the coming weeks.


As the southeastern United States reels from the impact of Hurricane Matthew, it is worth asking what effect it might have on the presidential election.


The impact of heavy rain around crucial referenda and the Florida voter registration deadline reminds us that seemingly irrelevant factors like weather matter. They can cast the “deciding vote” in the most critical of times. (Another example is the influence of climate change on the Syrian civil war.) Bottom line: To successfully navigate today’s radical global uncertainty, it’s crucial we consider the potential impacts of apparently tangential developments.

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