Presidential Election 2016: Don't Elect A Structural Trap!

Several people have asked me to clarify my position on US politics, specifically the US presidential election. This election year has been fascinating to me, as I think it has unveiled many of insidious underlying issues affecting our country. My fundamental concern for several years now has been the ability of politicians to shift from populist/corrupt bargain tactics of higher growth decades, to the present period of steady state global global growth (often referred to as “run-rate”) and demographic shift. It is absolutely imperative that politicians come to together to resolve an econopolitical status quo which will, with near certainty, turn to a structural trap without careful reform. 

A structural trap is defined by Angel Ubide and Robert Dugger as an economic condition under which capital is unable to shift from unproductive to productive uses due to exogenous constraints rather than lack of liquidity (for non-finance people: ease of convertibility to cash). Dugger and Ubide described correctly our global economic conditions nearly 10 years ago in the paper Structural Traps, Politics and Monetary Policy (http://www.hanoverinvest.com/pdf/StructuralTrapINFI_00701007.pdf). In simplest form, a structural gap is unique in the sense that it confuses central bankers, investors and other parties and bears similarity to a liquidity trap where an economy slogs around at low growth and low inflation perpetually, perceptually because of an inability of the monetary authority to lower interest rates without creating dis/deflationary expectations. A liquidity trap may be resolved fairly simply through a combination of monetary and fiscal measures including lower benchmark interest rates (through unconventional policies), open market operations/lower required reserve ratio, and larger fiscal deficit. A structural trap is a condition under which any of these factors are immutable due to outside constraints- principally politics. Political obstruction has the incredibly deleterious effect of maintaining structural imbalances right at the times where they are gathering the most steam.   

In the US, political obstruction is mostly a recent phenomenon and if one were to look at global political history the same analogue would tend to hold true. The government is least effective when forced to tread the line between what is good for the country and what is desired by its citizens (policy versus voter interests).  Political obstruction is particularly common within countries approaching a crossroads between periods of high growth, political corruption, and public ambivalence, and the problem tends to compound the longer the growth period. Dugger and Ubide use the example of the Japanese Lost Decade, as an instance of a structurally trapped econopolitical system and I have summarized their case below.

Post WWll, Japan was a benefactor of (a) global destruction of productive capacity (b) western allegiance against the growing fear of communism and (c) enormous government rebalancing towards infrastructure and R&D investment away from military spending. Originally an unskilled exporter, Japan carefully worked up the productive ladder as real household incomes increased over time. By 1985, Japan saw diminishing returns from labor arbitrage as the corresponding rise in incomes and inflation began to pressure corporate operating margins. Following the Plaza Accord, the Japanese Yen began a sharp period of appreciation further accelerating capital inflows leading to a highly risk seeking climate of malinvestment in other lower order producers and a domestic asset price bubble which popped when the Bank of Japan ultimately chose to increase interbank lending rates  in 1989.  As asset prices fell, the government was forced to step in and monetize failing state owned banks, who then bailed out other “too big to fail” enterprises on their balance sheets, in turn creating a vast array of unprofitable zombie companies employing many but producing little value.  The government was caught in a structural trap as it could not allow state banks to collapse and spark a collapse in credit and surge in unemployment, but inadvertently kept unprofitable low yielding assets alive in an undead state, crowding out private investment and inefficiently allocating tax revenues.

The corresponding decade is often referred to by economists as “the lost decade” where the Japanese government attempted a number of alternative monetary and fiscal policies but was unable to spark pre-1980s growth levels principally due to demographic shift and resulting effect on lending practices.   Paul Krugman argued that Japan’s aging population and preference for saving only cozied existing undisciplined relationships between corporations and commercial banks, who then engaged in moral hazard with the implicit backing of the Japanese government. He argues that Japan was stuck in a liquidity trap, or a condition in which nominal interest rates could not be lowered due to proximity to the zero bound and investor expectations of deflation (as had caused the spiral of the Great Depression). In this circumstance, the best course of action would be a combination of quantitative easing and running a larger fiscal deficit in order to expand money supply and increase inflation.

Yet these very policies have done little to resolve Japan’s prolonged growth crisis. In recent years the obstacles faced by the Japanese government have yet to fade. The Bank of Japan has engaged in enormous monetary easing going so far as setting a negative discount rate in January 2016 along with enormous liquidity injection via continued quantitative easing programs, yet core inflation has remained muted along with 26 quarters of negative GDP growth since 1990 (or 6.5 years of recession over a 20 year span, or once every 3 years versus the US, once every 9 years over same span).

Unlike Krugman, Dugger and Ubide suggest the entire problem is circular in nature. The aging of the Japanese population led to the election of “senior-friendly” politicians who promised to keep pensions and retirement benefits intact, necessitating the bailout of unprofitable zombie companies, and encouraging bankers and corporate executives to continue borrowing frivolously without fear of consequence.  Additionally the story for the Japanese now is no longer purely physical effects of poor governing, but dangerous ideologies absorbed by people who have seen real wages decline 15% since 1997 peak levels.  Working age people who have seen incomes fade as goods and services remain prices remain stable to rising feel compelled to save more given the rapid turns of the business cycle over the last 20 years. Moreover, the working age population has been forced to shoulder a progressively larger tax burden as the government committed to accrued benefits (pensions, healthcare, social security etc.) even in a period of slow growth. As a consequence, the marginal value of additional policy has perpetually diminished as residents have internalized a de/disinflationary low growth environment.  Lastly, the summation of rising liabilities and falling real wages has dramatically decreased household formation and birthrates within the country as these are both factors which an individual controls.

In a structural trap, the econopolitical system collapses in a manner which perpetually limits potential GDP, real wage growth and prosperity for vast majority of the population. Though this may not be recessionary in a conventional sense, structural gaps tend to shorten business cycles and further income inequality allowing for the further mobilization of radical ideology by free opposition. I want to dismiss any accusation that I am a doom and gloomer of any variety. I actually believe Japan is close to emerging from its structural trap as its population rebalances and the government is able to relax 20 years of regressive tax and benefit policies. What worries me is that the US stands on the opposite side of the cycle and has compounded substantially more wasteful, corrupt, and unproductive expenditure and policy through 50 years of post-world war boom.

The United States government has for years followed a clandestine conman strategy of selling people values in exchange for monies in form of special interests. Suddenly we are hearing about this issue from every candidate as if paying lip service and tabling personal paper trails will somehow convince voters with more information at their fingertips than any other electorate in history. The issue is that politicians for a large part have a dual mandate of inefficacy: (1) pay masters for campaign contributions and assistance in getting elected (2) pay lip service to voters and maneuver around taboo issues which destroy future electability. Masters are largely a group on high net worth and powerful corporate leaders and their vestiges, and paying lip service to issues such as abortion, LGBT rights, gun rights, and amnesty is easy.

Structural traps tend to fall into the category of taboo issues which destroy future electability. The big three are (1) Interest on debt (2) Social Security (3) Medicare and Medicaid expense. Together these three expenditures accounted for 61% of the Federal budget as of October 2015, and holding a gross government expenditure levels constant, will account for 82% of the total budget by 2024 (based on my models). This entails an increase of roughly $836 billion dollars, or roughly 5% of GDP, which can either be collected via digging the hole deeper (1) more debt or (2) spreading the cost across the powerless electorate. For political conmen (and women) the trap lies in the need to both appease interest groups while simultaneously keeping voters satisfied enough to maintain popularity. Funding liabilities with higher taxes and or more restrictive breadth of services (defined time period for draws, raising social security cap etc) while seemingly easy solutions, are a near political impossibility in the current state of the major political parties. Democrats (especially the common denominator) will never cut programs or reform their application and risk losing minority and low income voting blocks. Republicans will never raise taxes or reform existing program conditions asymmetrically against the wealthy (e.g. making top 1% benefit exempt) creating a deleterious standoff with citizens ultimately footing the bill.   

We have already seen this standoff rear its ugly head with the Federal Budget Crisis in 2012. It would be easy to blame this fiasco on the lunatic fringe which ultimately administered the holdout, but this would be both incomplete and ignorant of the equally nefarious nature of prevailing Democrats who squeezed every ounce possible out of the lemon leading into office. The same concept of politicization is the status quo in establishment politics – pit the President against the ebbs and flows of economic noise (but noise within a 50 year positive macro trend) while simultaneously either riding coattails or repudiating the success or error of government intervention. As simply charted below, presidential legacy is nothing more than a function of output, inflation, and required government adjustment within context of party identity.

For example the true reason Jimmy Carter’s legacy is viewed so poorly is mainly because he adopted Nixon’s low rate budget deficit government AND expanded expenditure and installed higher interest rates via Paul Volcker. He was ultimately martyred by the Iranian revolution during which oil prices skyrocketed and inflation followed, though he was a key motivator in finally electing and backing an independent monetary authority unlike the corruption of Arthur Burns.

Consequently, Reagan adopted a world of high inflation, with a couple quarters of hawkish monetary policy (from Carter appointee Paul Volcker) which gave merits to cutting government expenditure (money supply) and mild recession in 1982-1983 could be conveniently blamed on the Carter administration while the proximate 20 quarters of real GDP growth greater than 4.5% could be claimed entirely as his.  Obama has found himself in a Carter-like situation in that while government expenditure has on balance grown below historical average rates, real GDP growth has been weak. The media and his opposition seized the moment to rail against nominal spending, largely ignoring that Obama actually scaled back growth in discretionary non-defense spending (the Neocon central component of wasteful big government) significantly. Meanwhile cutting programs exclusively is not a Democrat forte, and as such the big expansions have largely been watered down and ineffectual government program reforms that even Democrats have shied from in recent weeks.

While Obama may be the most recent example of political martyrdom, absent a political détente, the US faces a difficult future with potentially persistent output gap which confusing central bankers and eating disproportionally into the wealth of the middle class. While the manifestation of this gap will be different than Japan due to cultural values and proclivities, it nonetheless will fundamentally change the nature of the easy business cycles the US has been used to following World War ll.  I think there is only one character among the group of Presidential candidates who can unpredictably grapple with opposition and reverse momentum.  I leave it to you to think about this carefully. Masters would prefer to keep things the same and so would the crony establishment who despite words are ultimately who they are. 

A stock market for pro-athletes, an investor's critique

Recently Fandex, a sports brokerage, revealed a watershed concept of investing in the cashflows of a professional athlete, Arian Foster. In this paper I analyze the opportunity and provide insight as to what we can potentially expect or takeaway from the large scale implementation of sports equity.


Professional sports are the definition of feast or famine. While some athletes like the Lebron James and Peyton Manning's of the world routinely bring home salaries between $50-100 mm per year, most pro athletes barely bring home more than $300k the few years that they do play; which generally vary between 1 and 5 years. In this sense Fantex's decision to securitize cash flows for professional athletes shouldn't come as much of a surprise. Athletes now have a mechanism to both hedge against injury and to be provided risk capital to immediately serve the needs of their families before displaying on-field production (many athletes come from situations of poverty). In the eyes of Fantex, this is an excellent opportunity for the general public (not merely owners and agents) to gain access to these remarkable cashflows and make bets on something they can understand, (1) the CF derived from a players on field performance (ie contract) and (2) the marketability of the athlete (ie endorsement deals). This is in stark contrast to corporate securitizations which are subject to complex accounting rules, capital structures, and growth opportunities. Ultimately, however, no one except for the most novice investor buys a security merely to tell others that they own it (Facebook anyone?). Fantex's first securitization is the $10 mm / 200,000 share (ie $50 a share) IPO of Houston Texans RB Arian Foster. The share promises a yearly return (adjusted for % ownership) akin to 20% of Foster's cashflow.

How profitable is the recent securitization of Arian Foster's cashflows? In order to answer this question I built a full scale financial model to forecast CF and provide reasonable projections of the equity value.

Anyone who knows anything about finance understands that the theoretical value of a share is the present value of all future cashflows. FUTURE, is particularly important here as Foster's likely balloon salary payment to avoid the "Cap Hit" sustained by the organization has largely already been exhausted. As such the model projects Foster's production into the future using a general comparable case and the average decline of an NFL running back. Here it is:

All cells highlighted in yellow a assumptions provided by the user. In this case I assume or use current values of the following:

(1) Depreciation = the average yearly depreciation in endorsements offered to the athlete as a function of his aging and inability to produce on the field. I assumed that starting at age 30 (the historical average point of dramatic decline in NFL RB production), Foster's endorsements would decline by 25% a year until reaching a value of 0. I assumed endorsements would lag his actual retirement by a year as his retirement is unlikely to be pre-planned. That being said, Foster is no MJ or Kobe so its unlikely he will continue to receive endorsements far past his prime.

(2) Balloon Endorsement = the unexpected increase in an athletes endorsements as a function of popularity and/or production up through his theoretical decline (30). Though Foster is currently receiving ~$1.75 mm from current endorsements, its possible that he could obtained additional endorsements over the next 3 years of his prime. This value is the yearly estimation of additional endorsements over the present year (so in this case $1.75 mm +  $ 2 mm).

(3) Tax Rate. Pretty standard, the tax rate charged on Foster's CF. In reality this is probably quite complex.... but in this case its better to give a relatively high estimation (aka fnce 100).

(4) Contract Salary. This is the most difficult projection to make, and once evaluated in context of the model the most important aspect of Foster's expected equity value. While Foster has an agreed upon 5 year ~$43.5 mm deal, the Texans have discretion on how to allocate the cashflows in order to benefit their own financial situation. http://www.spotrac.com/nfl/houston-texans/arian-foster/
provides a decent breakdown of how the Texans will likely excise Foster's contract. This has to do with the teams desire to stay under the luxury tax when possible and take the penalty in certain years when the mentality is "win now" as opposed to the Oakland A's moneyball. The current year is considered a "cap hit" year with Foster's salary ballooning to $13.25 mm. Unfortunately for the investor, much of this salary has already been paid off as the season is nearly half over (I assumed 25% of the salary may not be paid off by the time of the IPO). Next year is assumed to be another balloon payment at $7.5 mm. This is VERY IMPORTANT because the issuers of the IPO note that Foster's average salary remaining on his contract is ~ $4mm a year.... which would be true if you didnt deduct for recent payments.

(5) Endorsements. Similar to contract salary the first year is assumed to be partially excised.... I assumed 65% remained. The next three years are a sum of the initial per year + balloon payment, the next three years are the previous year depreciating at the user defined rate (25%) until 0.

(6) Risk Free. Rate earned by investing in treasuries of the given maturities based on the current yield curve. Obviously this could change over time, but its worth noting that given dovish Fed policy, rates are likely to remain near 0 through at least the end of 2015/ mid 2016. Dramatically rising rates wont be an issue until the end of 2016.

(7) Decline = assumed decline in salary of the player after the age of decline (30). I also assumed that he would get paid with 100% certainly only the guaranteed portion of the contract (assumed at 30%). I based this number off a similar RB LT's production after age 30 and the contract offered to him by the NY Jets. I think LT is a great comparison because he is a similar workhorse back who is both active on the ball and off as a screen playmaker... as such he's on the field a large percentage of downs and plays with more finesse than the brute Brandon Jacobs type of back.

I think its worth noting that LT's dramatic decline in performance is standard across NFL running backs. Very few backs have even been able to put up the numbers LT did after turning 30... and lets just say no NYJ fan remembers Tomlinson as fondly as a Chargers fan.


Takeaways:

(1) Foster is by far and away the winner from issuing equity if we view his decline as standard course for NFL running backs.   It is extremely unlikely that he will reach anywhere near the $50 mm breakeven rate necessary to justify the IPO price on a theoretical basis. Foster benefits even more in present value terms as he receives a ballon financing payment at year 0 as opposed to investors who are hoping they will receive anything 5 years down the line.

(2) Cap Hit is the largest factor in determining the dividend and consequent return on equity of the given share. While Foster may be averaging an "x" salary over the duration of his playing time, investors will receive 20% of future cashflows on an annualized basis. This means returns will vary widely based on how the team decides to exercise Foster's contract. In this case the dividend yield on a share of Arian Foster would be 14.53% in year 2, 4.59% larger than the CAGR of the S&P500 over its history (9.94%). Unfortunately as time passes, the dividend yield falls sharply as Foster's projected income depreciates. Also after receiving a balloon salary payment, Fosters remaining salary is amortized at a much lower rate meaning the yield simply cannot reach previous highs.


This leads us to the main question....

Is it worth buying stocks in pro-athletes? 

IMO:

Questions still remain about liquidity and market participants. Most likely professional investors will only buy these stocks as a joke to gauge potential growth opportunities (especially at this stage). The market will likely be supersaturated with hardcore sports fans who know next to nothing about trading. The market maker (Fandex) will likely make a killing hosing newbie investors the bid/ask spread. More likely than anything the market, with only 200,000 total shares, will be as slow as they come and liquidity will be hard to come by. This will make it hard for the savvy trader to buy equity, collect the cap hit dividend yield (year 2), and exit the market without slipping on share price.

It is an option worth considering in two circumstances:

First, in the case of a deep value purchase following a terrible potentially career ending injury such as Adrian Peterson's ACL/MCL tear, Kobe Bryant's Achilles tear, or Peyton Manning's four consequent neck surgeries. In this case, an athlete could prove the critics wrong and investors could position themselves on the athletes comeback wagon. This would also work best with high profile athletes like the above as I could easily see a broker issuing 2,000,000 shares instead of 200,000 simply due to the athletes popularity. There would definitely be risk of moral hazard with an athlete like an Allen Iverson or Terrell Owens, but with someone with a lot of pride like Kobe or Peyton it could be a win-win.

Second, in the case of a talented fringe athlete needing some guaranteed money to feed his family while spending time in the D league.

From wikipedia: " Many former NBA draftees, waived players and undrafted players have played in the NBA D-League. Some of the called-up D-League players that went on to have successful NBA careers include Rafer Alston, Louis Amundson, Chris Andersen, Kelenna Azubuike, Matt Barnes, Devin Brown, Will Bynum, Matt Carroll, Eddie Gill, Stephen Graham, Jason Hart, Chuck Hayes, Anthony Johnson, Dahntay Jones, Jamario Moon, Mikki Moore, Smush Parker, Bobby Simmons, Ime Udoka, Von Wafer, C. J. Watson, and Mike Wilks.^[17] Aside from these players, there are several successful NBA players who were assigned to the D-League in their first and second season, such as José Juan Barea, Brandon Bass, Andray Blatche, Avery Bradley, Aaron Brooks, Jordan Farmar, Shannon Brown, Marcin Gortat, Ramon Sessions, Jeremy Lin, Danny Greenand Martell Webster"

D league salaries are pathetic so the incentive is there for small time players. Investors would likely have to pay a very low initial investment given the probability of payoff. The risk for moral hazard would also exist in this system, but with low share volume this would be more like angel investing than anything else.

Third, in the case of high profile phenom athletes looking to hedge themselves from injury and receive a higher PV contract, and use the investment to further build brand. This is probably the least likely to occur as someone like Andrew Wiggins (who was offered a supposed $180 mm shoe deal) probably has no need to finance and its unlikely that his brand can get much higher if he actually plays well.


In conclusion, I'm intrigued by the concept but I'm also quite wary of the idea of investing money in a young person who has no idea what they are signing all to make a quick buck. May of these athletes lack financial literacy... look at the number of former pros who ended in debt. Much of this occurs because they are surrounded by greedy people who all want a piece of the pie as soon as possible. It may be too difficult for athletes to ignore the idea of "free" money now, even though it could critically hurt them over their career. Imagine if investors could have bought shares in AI at the current deal (20% of future earnings) at a notional value of even $100 mm. AI would have lost HUGE on that type of transaction from an investment standpoint. With educated athletes like Arian Foster, I give the benefit of the doubt he knew what he knew what he was getting into.

In any case, I digress.

The Tangible Costs of Criminalization; A Case for Drug Policy Reform

In this paper I analyze the alarming trend of militarization and media silencing in the international drug trade and the implications of complete legalization of prolific banned substances on human lives saved and the world economy.

Background

The drug trade has always been considered a taboo issue, even in light of how pronounced it has been in the lives of Americans since the nation gained its independence. There has always been a substance in demand, whether it be tobacco, alcohol, marijuana, or any number of illicit substances in the contemporary market. Moreover, the growth of the industry for illicit substances over the last 50 years has been exponential.

As the 2005 World Drug Report elucidates, “[T]he value of the global illicit drug market for the year 2003 was estimated at $13 billion at the production level, at $94 billion at the wholesale level (taking seizures into account), and at 322 billion based on retail prices and taking seizures and other losses into account.”

When added up, the production, wholesale, and retail sale levels adjusted for losses account for $429 billion dollars or roughly 1% of the worlds $45 trillion GDP in 2005. Now in 2012, it wouldn't be surprising if the trade has grown to account for 3% or greater of world GDP.

Since the demise of the Cali and Medellin Colombian drug cartels in the early 1990s, Mexican drug cartels have stepped into the fold and monopolized the industry. It is now estimated that 90% of the drugs that enter the United States pass through Mexico. One study, noted by Global Envision, reported that “the loss of the drug business would shrink Mexico’s economy by 63 percent.” Others attribute as much as 20% of Mexico’s GDP to this industry. Mexican journalist Carlos Loret de Mola claims that cartels make three times as many profits as Mexico’s 500 largest companies combined and employ nearly 500,000 people.

In 2006 Mexican President Felipe Calderon sent 6500 troops to the state of Michoacan, in the first of several tactical military strikes against cartels. Instead of quelling the violence, this policy had an adverse effect. In order to regain control, cartels began targeting officials and civilians in broad daylight. Moreover, the military strikes fragmented cartels and lead to bloody turf wars between new entrants. It is estimated that 86,000 people have been killed from violence associated with the drug war since 2006, nearly twice the number of casualties of the Iraq War.

Why the Mexican Drug War Should Be, and Isn't Being Discussed

The externalities of the Mexican Drug War are absolutely immense. However, Americans barely know anything about the conflict. Cartels intimidate journalists, so it is nearly impossible to understand their intentions and further plans for growth.  Between 2000 and the beginning of 2012, 55 journalists have been murdered in Mexico and, according to the Committee to Protect Journalists, eight journalists were killed in Mexico last year, with 10 killed in 2012. And this year more murders and threats have been reported.

As for the effects on Americans and the world at large:

 (1) Cartels are incredibly sophisticated and maintain the capacity to fundamentally alter world trade and growth. For example, the Los Zeta cartel was formed by former Mexican special forces commandos who deserted and joined the ranks of the Gulf Cartel before breaking off and becoming a separate organization. These guys are capable of gathering intel like the CIA, via wiretaps on government officials and a careful network of paid spies and lookouts. Also, they have an arsenal of weapons including tanks, armored trucks, rocket propelled grenade launchers, and special forces helicopters. Cartels like Los Zetas are so powerful that the local police and judicial system have literally no capacity to arrest or prosecute them. This allows them to infiltrate other aspects of criminal organization such as racketeering and control entire cities via fear and intimidation. Because cartels feed off poverty for membership, growing organizations can pass recruitment downstream and further interrupt the growth of Central and Latin America as well, and play a hand in weakening world markets by having a hand in all aspects of the local economy. Note the picture below to see a fraction of a cartels earnings, and why they can essentially do whatever they want via bribe.

This picture shows $22 B of cash confiscated from a Sinaloa Cartel boss' home

 
(2) The drug war has escalated war time human rights violations such as civilian murders and torture. As the cartels war with one another and the government, they have made it of utmost importance to keep people under the banner of fear. The Sinaloa Cartel infamously undertook a mass hysteria campaign by posting videos on youtube of gruesome murders of its enemies in both the criminal and public sectors such as the beheading of two informants using a chainsaw. Without intervention, these tactics are becoming more and more commonplace.

(3) Cartels are reinvesting profits from drug sales into even more messed up exploits such as human trafficking.  Conservative estimates conclude that over 100,000 women, a number predicted to increase by the end of 2010, are trafficked out of Latin America annually for the purpose of prostitution. This number is estimated to have grown by a factor of 2 or 3 by the end of this year, making human trafficking the highest growth criminal activity in the world.

(4) Cartel violence is of particular risk to Americans given its proximity. Cartels are most involved in cities that precede immigration into the US such as Tijuana and Ciudad Juarez. These cities are among the most violent in the world, though they are only an hour from the US border (Baja, CA and El Paso, TX respectively). Additionally, as long as the cartels keep growing, the local chain of American gang affiliated sellers will grow as well. These local organizations, though not nearly as powerful as the cartels themselves, are still extremely violent and responsible for a large number of homicides yearly.

A Case For Legalization

The most interesting aspect about the cartel violence and its development is the root cause underlying the industry; American demand for drugs.  Though cartels deal in a variety of illicit substances, marijuana is by far and away the largest export encompassing nearly 50% of American demand. When politicians bring up the debate about legalization, it is largely focused on the moral issue of allowing people to consume substances which may harm them rather than the very real tangible harm that comes from the shadow industry of suppliers. The conclusion here is very clear. Full scale legalization of banned substances would have very tangible impacts, primarily it would remove the need for a shadow industry by allowing corporations to publicly and transparently distribute goods to consumers under regulation by the US government. Furthermore, the US would essentially free itself to 90% (Mexico's share) of an industry that makes up 3% of world GDP, effectively creating a large number of jobs both in the public and private sphere domestically. Though some people would choose to abuse the system, its unlikely that use of dangerous "hard" drugs would proliferate beyond current numbers.  

The only qualms I have with legalization is that destroying the drug trade would effectively displace half a million people in Mexico without taking away their arsenals or desire to cause harm, which could incense crime and violence in the short run. The best way to solve this problem in my opinion would be for Mexico to enforce anti-trust legislation to break up legal monopolies (such as TelMex) which keep overhead costs of business amongst the highest in the world. In any case, corruption and money talk and it would be unlikely that anything would change in the short run. Perhaps the US would step in and try to live up to the promises it made when it signed NAFTA and try to outsource jobs to Mexico instead of China and India. Luckily for Mexico, at least they have some shale gas.

The Paradise of the 2nd World 3rd World

The following paper discusses a commonality I have found between the two Caribbean countries I have visited in the last years (Jamaica and Dominican Republic); the idea that a state can be autonomous and self-content despite the third world living conditions of its citizens.  


How do we rank countries in terms of development?

Economists generally classify countries into pools of "worlds" based on the development of their economies, life expectancy of citizens, and educational attainment levels. A country does not necessarily have to have an extremely high standard of living in aggregate to be considered "first world". For example, the United States is most often considered the paragon of the term despite having wealth stratification comparable to many economically weaker Latin American countries. The one central characteristic of the first world that is undisputed is that the term refers to capitalist countries with highly developed economic infrastructure and access to capital markets. On the other hand, Third world countries have underdeveloped to non-existent economies and are ridden with problems such as Kleptocracy, civil war, malnutrition, and lack of medical care.

The interesting outlier to this case has historically been the Second world, which traditionally referred to Communist nations during the 1900s hey day of the Soviet bloc. Though Communist countries once sustained a middle level of human development and societal infrastructure, much of this was predicated on the exportation of various natural resources such as LNG, precious and base metals, and manufactured goods. Communist countries that lacked these resources quickly became Third world hell holes such as North Korea or the former Yugoslavia. Additionally, even Communist countries with resources had difficultly getting much value because of their preordained commitment to keeping markets closed and noncompetitive  So in turn, I think its wrong to assume that Communism alone is enough to make a nation Second world.

The New Second World

Today, I contend that the term should be used to describe nations with middle level economic growth with the highest gross national happiness (GNH) index scores. Interestingly enough, there is only a slight correlation between development and GNH index scores which seems to imply that a high GDP per capita and nominal health and education are not significant drivers of national happiness. Gallup recently conducted a poll to find the countries with the highest national happiness  According to Gallup’s findings, the happiest people in the world live in Panama and Paraguay, followed by El Salvador and Venezuela, then Trinidad and Tobago, Thailand, Guatemala, the Philippines, Ecuador and Costa Rica.

The OECD recently constructed a HPI (Happy Planet Index). Once again as you can see from the below data, there is only a spurious relationship between "well being" and "happiness".
 

Notice that footprint and well being are only slightly positively correlated and that countries such as Israel are outliers.

Notice the inverse correlation between satisfaction and HPI

Whats the Point?

In the Dominican and Jamaica I noticed I could hardly go ten minutes without having a smile on my face. Maybe it was the warm weather or the people I surrounded myself with, but I noticed this change not only with my friends but also with my family in Jamaica. Even the locals who by all accounts are Third world economically showed a profound desire to prioritize happiness over material pursuits. Now I'm sure there could be bias factoring into play here. Does the lack of a developed economy denote a lower utility weightage to material possession versus carefree living?

My initial thoughts are both yes as well as no. Its equally strange that these countries, excluding Brazil and Chile, have lower levels of satisfaction than traditional first world nations. I think this detail only suggests that wealth brings with it satisfaction though it may bring additional stress factors and unhappiness.  Out of the top 20 HPI countries, only 3 have a GDP footprint sufficient to designate as near first world. Only Bangladesh, Pakistan, Indonesia, and Vietnam are thoroughly Third world. The implication is that in aggregate Second World Third World isn't a warzone like Somalia or Iraq or endemically poor like Chad or Zambia. Instead most of the nations on this list are developing countries with one or more natural resources coupling with tourism as economic drivers. The only universal characteristic of all these nations is warm weather and plenty of sunlight. In the top 20 OECD countries only one (Albania) has a moderate to colder climate.

So in the end, whats the point of growth? A higher GDP has classically denoted lower wealth stratification and consequently a "better" lifestyle, yet these studies come directly at odds with classical conservative euphemism. Moreover, the OECD recently rated the Scandinavian countries and Switzerland as the highest standard of living of any country in the world. Should the United States continue to be the role model for the world when it sees an increasing wealth gap and unhappier people than Thailand?

Why Strict Separation of "Spirituality" and State May Have Caused More Harm Than We Are Willing to Believe.

Recently a terrible tragedy occurred in my hometown. As such,I will not discuss any of the specifics of the tragedy or gun laws, given the sensitive nature of the issue. Instead, this paper focuses on comments made by  former Arkansas Governor Mike Huckabee in the aftermath.

From the Huffington Post:

“I think it’s important that we quit apologizing for having a spiritual conversation,” Huckabee continued. “Quit being ashamed that we believe in God.”

During his own Fox News program over the weekend, Huckabee also spoke about the massacre, tying the supposed removal of God from society to the increased instances of violence. "We’ve escorted [God] right out of our culture and marched him off the public square," Huckabee said, according to Inquisitr. "And then we express our surprise that a culture without him actually reflects what it has become.” 

Huckabee asked for and received an ass whooping from the liberal media primarily because he focused on the issue of God as (a) a call to bring back "God" in the Christian sense and removal of a culture of strict separation of church and state and (b) he suggested that the removal of God from schools was the fundamental cause of the tragedy. However, upon further analysis, there is a good point made here.

The issue at hand that was and is never discussed in detail is the relationship between a society structured from spiritual mores (morals drawn from the general fear of God/ understanding of its role as the hand guiding the universe) and the values carried by its own constituents. I say spiritual mores primarily because the stock response to such a claim would be that religious morality can be bad; ie strict application of Sharia law, the violence caused by the Crusades etc. Instead I will discuss these mores in terms of a general spirituality not subject to conditional responses. 

At my university I can say with utmost confidence that almost every student is borderline atheist. This does not mean that he or she does not identify with a religion culturally or even abstain from participation in religious ceremony, rather it merely suggests that he or she does not think of God and religion as a concrete rule. That is, none of my friends who are Jewish, Hindu, Christian, or Muslim could care less what the other believes; they are all in essence "spiritual" without a God. This does not apply to only the Penn population, but the vast majority of the millennial generation. I would contend there are a few specific reasons for this:

1) Since the 1980s the amount of diversity in the United States had exploded dramatically. Throughout those years the numbers of Indian and other South Asian, Oriental Asian, and Latin American and Mexican immigrants overtook previously Euro and Chinese by the numbers. Cultural acceptance tends to be a lagged process, hence the sudden rise in the number of Indian and Chinese American celebrities and demographic segments in marketing. With the rise in the number of distinct groups with different religious morals and "God[s]", it became hard to discuss God as a specific entity or moral code.

2) The rise of mass exposure technology such as the internet and further developments such as social media has allowed the primarily liberal media and sentiment to flood the airwaves. Not only are liberal ideas more exposed to the youth (people who can actually use evolving technology tools), with technology these ideas are allowed to proliferate at exponential levels. I think to believe this all you have to do is go to reddit and see the kind of threads that get the most upvotes, and question whether people were in fact that indoctrinated just a year ago. Again, religion as a concrete concept became easy to beat up. 

3) The United States has always been a country that has celebrated its freedom, but now we are reaching a new pinnacle for groups who previously lacked a voice. The recent election affirmed a couple instances of gay marriage and legal weed. Again, the strict sense of "God" is easy to argue against here because no one, including myself, believes that we should restrict rights based on spotty and unverifiable claims. 

So basically younger generations have accepted an at-best purely spiritual viewpoint of religion today. I already discussed in my previous post on social media why I think society is becoming increasingly narcissistic and motivated by a "keeping up with the Jones" kind of happiness. This makes people more susceptible to unhappiness and ultimately hurts the productivity of society. The concept of spirituality can alter this notion of social interaction.

In the past when we still believed in religion, it served as a guide for action of two fronts. It provided people with a guide by which to live their lives because by not following the guide they faced the wrath of their maker. This meant that people who didnt follow the rules went to hell and those who did went to heaven. Second, religion provided people with hope for the future by suggesting that their inherent problems were ordered rather the product of pure free will as society dictates today. For example, the Hindu concepts of karma and reincarnation would argue that a person who had done good actions to others despite unfortunate circumstances to him or herself would be reincarnated in a higher social order. This kept social order despite the broad socioeconomic disparities between castes. 

My Advocacy.

Obviously we cant teach kids the Bible in class, or the Torah, or any particular religion. What I'm suggesting is that we incorporate an idea of greater morality into society stemming from spirituality. At best this would again take the good characteristics of earlier time periods and transition those values into the context of our freer and more advanced society today. At worst, we would become exposed to an unscientific (but simultaneously unverifiable concept) of something greater than ourselves. 

The problem with this argument is obviously implementation, but I suggest the following.

1. Exposure to all major forms of religion within social studies classes at a young age, not purely as a cultural argument but also as a dialogue on different beliefs and why people hold them. This would help us maintain an accepting breed of diversity while still making arguments explaining why people believe in greater powers.

2. Discussion of evolution but consequently also the alternative/mutual concept of deism as a spark for the start of the universe. I'm not saying to argue in favor of God, but to merely explain what deism is along with the scientific and verifiable argument for evolution.

3. Families should try to instill morals from both logical and fundamental concepts of what is acceptable. I think people too often tell each other that something is either fundamentally wrong because it is wrong or only tell them that it is wrong because x -> y. Both means should be discussed.

4. We should actually teach ethics as a class in high school. What are the rational theories for ethics, religious theories so on and so forth. Simply assuming a culturally relativist viewpoint is just as bad as an indoctrinated religious viewpoint because it creates a relationship which is all other nothing. By this I mean that the culturally relativist allows anything to be justifiable based on the morals of society while the indoctrinated religious viewpoint makes anything other than the religion wrong. Instead we might as well teach ethical theories from the rationalists and intangible sides.  

In conclusion, I think we are in a strong transition stage as far as our freedoms are concerned. We have more rights than ever, but sometimes I wonder if rights at a loss of order is tradeoff that we will agree with in the long run. However, I do think that technology has the yet to be seen potential to completely render all of these arguments moot by presenting new ways to earn happiness and self satisfaction. Until that point in time, I believe we need to search beyond what we are willing to accept on face to be true in the pursuit of  real truth.