Rising Drug Costs: A Peculiar American Phenomenon

By Nolan Abramowitz

Patients in the United States face some of the highest drug costs in the developed world. This has led to an increasing number of Americans being unable to afford medications that could dramatically improve or save their lives. Take, for example, Brien Anderson, a lymphoma patient, who was prescribed Imbruvica, a new groundbreaking cancer drug. After one year of taking the medication, Mr. Anderson was able to go into remission. However, his private insurance company told him they would no longer pay for the drug due to rising costs. He would have been forced to pay over $10,000 per month because his income was high enough to disqualify him for drug support programs. Unable to afford the medication, his health began to deteriorate and he had to undergo surgery. Likewise, Jacqueline Racener, a Medicare patient with leukemia, was also forced to stop her prescription for Imbruvica because she faced costs of over $7,000 per year. Half of Imbruvica users are on Medicare and face similar costs, causing them to forgo life sustaining treatment. Imbruvica is listed at over $115,000 and was developed by Johnson and Johnson and Pharamacyclics LLC, resulting in $1 billion in sales for 2015.

A recent report from the Journal of the American Medical Association (JAMA) found that drug prices are higher in the United States than elsewhere in the world because US manufacturers can set their own prices; the government allows protected monopolies due to patents; and the FDA takes a long time to approve generic drugs. Furthermore, drugs that treat rare diseases can be protected indefinitely with patents for a single manufacturer under current US patent laws. Most importantly, the study found that drug prices are not justified by increasing research and development costs. This is because most R&D costs are met by grants from the National Institute of Health (NIH) and from various venture capital firms. Drug manufacturers only spend on average 10-20% of revenue on R&D. Pharmaceutical companies, especially those that manufacture rare drugs, are taking advantage of inelastic demand to raise prices to unaffordable levels.

Furthermore, Medicare and Medicaid, the largest insurers in the US, are not allowed to negotiate prices. These same Medicare patients, who represent almost a third of US retail drug spending, also cannot receive direct aid from drug companies. Even individuals with private insurance plans are not immune from rising drug prices. Over the last few years, more Americans have moved away from traditional copay insurance plans where they would pay predictable prices for prescription medications. To save on basic insurance costs, these individuals have switched to high deductible plans that can cause unpredictable drug prices for an extended period of time. Many cheaper insurance plans offered on state health insurance marketplaces through the Affordable Care Act have deductibles as high as $6,000 that don’t cover many types of drugs. Insured Americans are having a harder time getting approved for the medications they need because their insurance companies are dropping coverage of certain medications, requiring extensive referral processes, or limiting the amount of time medications can be used for.

Increasing drug prices will continue to impact the health and financial stability of millions of Americans. In 2015, the average person in the US spent $858 on prescription drugs. On the other hand, the average across 19 other developed nations was just $400 per person. Moreover, in 2014, the increase in drug prices was 12.6%, which far outpaced inflation numbers that have been hovering around 0% to 2% for the past three years. In addition, price hikes for other medical costs such as surgeries and doctor visits have been relatively low compared to the increases in drug prices. Seventeen percent of overall health care expenses are devoted to paying for prescription drugs. Moreover, the cost of the most widely used brand name prescription drugs increased 125% from 2008-2014. Well known examples include: Mylan pharmaceuticals increasing the cost of Epipens from $57 in 2007 to over $500 in 2016, Turing Pharmaceuticals increasing an anti-malaria medication 500% to $750 per pill from $13.50, and Hepatitis C drugs made by Gilead cost $900 to $1000 per pill. Not only are costs increasing for patients, but an increasing number of insurance companies are changing their drug coverage plans.

Increasing drug prices have caused many patients to rely on nonprofits such as the Patients Access Network Foundation to help cover prescription drug costs. However, it is hard to qualify for these programs, so some patients are still stuck facing costs they can not afford. Moreover, some drug manufacturers offer subsidies as well. However, these programs can hurt health care in the long run by inducing individuals to buy certain drugs based on discounts, hurting competition in the industry. Larger companies are able to offer more enticing discounts and outperform their generic competitors. In the long run, these large companies would increase demand for their product, increase their public relations, and eventually increase prices.

Mylan Pharmaceuticals is a prime example of drug companies taking advantage of a lack of competition in the auto injector industry for allergies. When Sanofi’s, a competitor, was forced to perform a voluntary recall on its Auvi-Q auto injector, Mylan was able to vastly increase the price of its EpiPen device. The price of EpiPens has increased to over $500 from just $57, but there have been no increases in manufacturing or R&D costs. Mylan has also been taking advantage of Medicaid by classifying itself as a generic drug to pay less in rebates. Medicaid requires a 23.1% rebate for brand name drugs, but only a 13% rebate for generics. This way Mylan was able to save hundreds of millions of dollars and continue to increase its profit. The firm spent over $35 million in TV ads in 2014, up from $4.8 million in 2011. Mylan is taking advantage of the sense of security parents feel when they have EpiPens for their children and are willing to pay high prices to keep their children save from life threatening allergies. In the end, parents are just paying for peace of mind. Since the price increase, Mylan’s CEO Heather Bresch’s total compensation has increased from $2.4 million to over $18 million.

The government is taking steps to take the burden off of patients so they can afford the medications they require. By 2020, new Medicaid and Medicare resolutions will be passed to take away policies that lead to higher drug prices. The government needs to ensure more transparency about prices in the industry and allow a competitive drug marketplace to form. Also, insurance companies should make their customers more aware of cheaper generic alternatives. The FDA could help increase competition by decreasing application approval timelines and regulations facing generic drugs. There is currently a backlog of 4,000 generic drug applications, up from a consistent level of about 400 applications a year until 2002.

The healthcare industry needs to be more strongly regulated by the government because all of its actions have direct human costs. Current policies allow pharmaceutical companies to take advantage of the economic conditions they face, leading to high drug costs that are unique to the US. Policy makers must act to reduce drug costs and make prescriptions more affordable so medical breakthroughs can reach the people that need them the most.

The Bubble

Cameron Griffith

Economic bubbles have historically come as a complete surprise without any telltale signs of an impending crash. Today, the signs of the largest housing bubble in history stand hundreds of stories tall in China, with no one seeming to care.

In the past decade, dozens of “ghost cities” have sprung up across China. These cities cost billions of dollars to build and are capable of housing millions of people. The most famous of these ghost cities, Ordos, boasts rows and rows of newly completed skyscrapers, lush parks, art museums, and concert halls, most of which stand completely unoccupied.

The rapid growth of the Chinese middle class is largely responsible for this enormous bubble. For many Chinese, real estate is the only asset class in which they believe they can make sound investments, as domestic stock markets are considered too volatile for risk averse investors. Furthermore, bond yields are kept artificially low to encourage development, and the Chinese government limits the amount that citizens are allowed to invest in international assets. As a result, the rising Chinese middle class has been forced to find an alternative investment for its newfound wealth.

In the past year the Shanghai stock exchange plummeted from its all-time high, losing nearly 40% of its value in the span of four months, while, during the same period, housing prices in Shanghai rose 31.2% according to the National Bureau of Statistics. The combination of all these factors has led Chinese middle class investors to the conclusion that real estate is the safest investment opportunity available to them.

Investment in real estate has led to a significant increase in the demand for new housing projects as many middle class families buy one or two extra apartments to meet their investment needs. This brings us to the other half of the problem: strict government quotas for provincial GDP growth. Every year the national government stipulates a certain level of GDP growth which provincial leaders must meet or else face harsh penalties. The easiest way for leaders to meet these standards is to invest heavily in the construction of entire cities filled with massive apartment complexes. And because of ballooning demand, these apartments are often bought instantly, even though the new owners have no intention of living in them.

The entire system creates an upward spiral of growth, with new apartment buildings being built faster than Chinese urbanization can fill them. The severity of the problem is outlined by the China Center for Urban Development, which found that the land used for urban construction rose by 83.41 percent from 2000 to 2010, while the Chinese urban population saw an increase of just 45.12 percent in that same period. The result of this disparity is vast, uninhabited, concrete jungles that leave provincial governments with inflated GDPs, and the central government none the wiser.

Were it not for the Chinese government’s comprehensive use of a variety of financial tools and public policies to ensure consistent economic growth, it is likely that this runaway construction would have already resulted in one of the largest financial bubbles in history.

In order to maintain steady growth in the housing market China’s central government employs several contractionary and expansionary policy measures which have so far been largely effective. When housing prices rise too rapidly, the government tightens credit requirements, raises down payments, and imposes restrictions on the location and quantity of apartments that citizens can buy. When the government detects a cooldown in the housing sector it does just the opposite by loosening credit restrictions and lowering the required down payment.

These drastic policy measures have made it much more difficult for those wishing to purchase a home or invest in real estate for the long term.

Richard Li, the head of investing at Zhong Tai Construction Group in Guangdong, said that “Moving in the same direction as government policies leads to investments which yield much less risk.”

Li added that it is more beneficial, from an investment standpoint, to anticipate governmental policy changes than it is to try and understand typical market indicators.

The world is waiting to see what the end result of these policy measures will be, but if we examine the devastating effects that the US housing crash had on both the domestic and international economy a clearer picture of the potential of this economic time-bomb emerges.

Both bubbles share the same root cause, in that home buyers expect already-rising real estate prices to continue to rise. In the United States, housing prices had risen continuously since the mid 1990s, while housing prices in Shanghai and other major Chinese cities have seen upwards of 30% increases in recent years. These staggering figures indicate how, in both cases, green-eyed investors can become blind to the realities of the market based on the fallacy that what has happened will continue to happen.

Shortly after the US financial crisis in 2008, it became clear that the economic implications of the housing market crash would resonate for years to come. The Case-Shiller housing index shows that house prices plummeted from their record highs to a ten-year low, leaving millions of people underwater and forcing them to foreclose on their homes. Millions lost their savings in the coinciding market crash, and have been forced to postpone their retirement.

In China, this phenomenon will only be intensified. As few jobs in China offer any form of retirement planning, and the Chinese financial sector lacks few investing alternatives, many people rely solely on real estate investment to meet their long term financial needs. A report undertaken by the China division of Citibank estimates that 65% of personal wealth in China is tied up in real estate, compared to 35% in the United States. This means that when the housing market collapses, millions of Chinese families will lose their retirement savings, college funds, and possibly even their homes.

This grim outlook has not scared off Chinese investors, many of whom have faith that the government will be able to mitigate the threat of a housing market collapse, as they have proven adept at ensuring consistent economic performance.

According to Li, “the purpose of government regulation and control has been achieved” and that “China's real estate sector will not end up in the same bubble as Japan, nor will it suffer the same crisis that the United States did.”

The optimism of the rising Chinese middle class, coupled with the meticulous control of the Chinese government, have created the perfect conditions for the largest real estate boom in history. Although this deft control of the housing market has been successful at staving off disaster thus far, the government is only adding fuel to the fire by allowing the housing bubble to grow far larger than it would under free market conditions and ensuring that the fallout from the eventual crash will most likely be even more devastating.

Brexit (n) brexit: The Future of the United Kingdom and Europe

By Grace Shi

Britain’s vote to leave the European Union on June 23rd was a historical decision that will change the country’s position as a pillar of stability, rock the unity of Europe, and bring nationalism back to the forefront of Western political conflicts. On October 9th, Prime Minister Theresa May announced that Article 50 of the Lisbon Treaty—which formed the EU—will be triggered by the end of March 2017, marking Britain’s formal exit from the EU. Due to growing isolationist tendencies, UK will likely pursue hard Brexit, meaning that Britain will terminate its membership in the EU’s single market and no longer carry the obligation to abide by EU laws and regulations.

Before the referendum, polls showed that immigration was the single largest issue that would affect how the Brits voted. The older generation overwhelmingly voted to Leave, with 61% of voters aged 65 and above voting Leave, compared to 75% of voters aged 18-24 voting Remain. A generational gap is evident, where older voters were more hostile to multiculturalism and social change. The belief that limiting immigration will turn back the cultural clock reveals the deep-seated cultural anxiety felt by Leave voters.

Although advantages of limiting immigration may include higher overall employment for citizens, studies have shown that immigration is actually beneficial for the economy because it leads to higher labor productivity. Data shows that EU migrants contribute more through taxes than they take out through state benefits. With no free movement of people, British youth will have limited freedom to pursue education and employment in EU countries. Taking a hard line on immigration will also hurt the UK’s ability to attract talented human capital.

The results from the referendum reflected the growing belief that British money is better spent inside its own borders. With a hard Brexit, the UK will no longer be obligated to contribute to the EU budget. In 2015, Britain paid £12.9 Billion ($15.7 Billion) to the EU. By leaving the EU, the British government can better control uses for this money, which could go towards anything from increased funding for the National Health Service to improving infrastructure.

Exiting the Union would also mean that Britain can have the freedom to negotiate its own trade deals. Taking advantage of this opportunity, they are open to pursue relationships with dynamic Asian countries and to strike a deal with Canada. However, the UK will have limited access to the EU’s single market. This means Britain will take an outsider stance—similar to the US—and negotiate on World Trade Organization terms. The UK will then be subject to tariff and nontariff barriers—burdens it did not have to bear when it was a member of the single market.

Uncertainty regarding the direction of hard Brexit negotiations will lead to slower growth in the UK, at least for the next few years. By 2030, the UK’s GDP is predicted to be 5% lower than its GDP if it remains in the EU. This is due to decreased international trade—caused by increased costs of trade, decreased foreign direct investment, and stagnating immigration.

While the pound has been depreciating since the June 23rd referendum—due to the unexpected Leave vote—May’s indication in the beginning of October that the UK would pursue hard Brexit caused the currency to plummet dramatically. Although a depreciated pound has benefitted the UK’s manufacturing sector by making British goods cheaper for foreign buyers, barriers to trade will damage the UK’s service sector—which accounts for about 80% of the country’s GDP. Businesses will find it harder to deliver services to its major consumers—the EU countries— causing an increase in the UK’s trade deficit. London, which has been the main financial center of Europe, may have to cede its position to financial capitals in the EU, such as Frankfurt and Paris. As a result, Britain’s financial industry could lose up to £38 Billion ($46 Billion) in revenue and 75,000 jobs, resulting in fewer efficient synergies and create a negative pull on the economy in the UK.

To counter the economic effects of Brexit, the Bank of England cut interest rates to a record low of 0.25% and introduced term-funding programs, making it easier for households and businesses to borrow money for investments. Loose monetary policy avoided the possibility of a recession, and actually raised 2016 GDP growth prospects from 1.7% in July to 1.8% in October. The rise in the growth forecast suggests that the UK has weathered the aftermath of the referendum surprisingly well.

While the short-term prospects of the British economy are not as dire as economists expected, Brexit plans moving forward are concerning. Within the UK, Parliament has questioned May’s stance on hard Brexit, particularly her hard line on immigration and opposition to EU rules for single market access. While she claims new trade deals will be negotiated for “maximum freedom” to trade within the single market, it is evident that the Brexiters want the benefits of hard Brexit without regard for the consequences.

Many of the EU leaders have countered the UK’s stance on Brexit. French President Hollande has said scathingly that the UK wants to “leave but pay nothing.” One German official has said that negotiations are “not about friendship.” France and Germany, the two most powerful EU nations, want to make an example out of the UK for leaving the Union. The objective is to prevent other members from leaving by making the consequences clear. Many EU members depend on the Four Freedoms—particularly the free movement of people—and the uniform rules governing the single market.

Although the solution to this conflict of interests remains unclear, it is evident that Brexit will be a major impact on both the UK and the EU. The UK is the fourth-largest importer in the world, and the largest single export market of the EU. On the other hand, 44% of UK exports go to the EU. Both sides depend heavily on each other, and it is in no one’s interest to put too much pressure on trade relations. This conflict of interests will underlie negotiation talks, and pursuit of brinkmanship politics by both sides will make Europe vulnerable to outside threats and internal breakdowns.

Eastern Europe may become less stable, since Brexit could be a signal that Western Europe is abandoning its eastern counterpart. The UK as one of Europe’s most powerful militaries is critical to the Western alliance. If Britain pursues isolationism and limits immigration, terrorism creeping into the EU from the east may pose a more significant threat to the region. Within the country, some believe that as long as would-be immigrant terrorists are not admitted, the UK can wash their hands of the problem. Other nations may see this as an act of racism or religious discrimination, deepening the divide in Europe.

Brexit threatens to destabilize decade-old unity. Because of the interconnected and complicated global economic and political relationships that are at play here, one country cannot emerge on top while others are struggling. The nationalist notion that domestic British benefits supersede grave international concerns will likely weaken international relationships and cause irreparable damage globally if this every-man-for-himself ideology persists.

While Brexit can be seen as an attempt by Britain to rediscover nationalism and sovereignty, it can also be seen as radical isolationism. Although it is clear that growth in the UK will slow due to the initial costs of Brexit, it remains to be seen how much freedom the country is willing to forgo to maintain relations with EU nations and how much the EU values its current relationship with the UK.

Small Blind, Big Find: Upstate New York's Casino Dreams

By Leora Katzman

Since the demise of the tourism industry in the Upstate New York region decades ago, gambling has been seen as the potential panacea for the upstate economy. After decades of long-term planning, in 2013, Governor Andrew M. Cuomo passed the Upstate New York Gaming Economic Development Act.  This act finally legalized casinos in Upstate New York allowing up to seven gambling parlors in the state.  Many residents question whether the potential benefits of these casinos are realistic given the growing competition in the gaming industry closer to the New York metropolitan area.

In December 2014, a special committee of the state Gaming Commission selected three casino resort projects – Montreign in the Catskills Region, del Lago Resort & Casino in the Finger Lakes region, and Rivers in the Schenectady region.  In the summer of 2015, a fourth casino was added in the state’s Southern Tier near Binghamton.  The del Lago Resort & Casino in Tyre, Seneca County, located in the heart of New York’s Finger Lakes region, is the closest casino to the Ithaca area.  While it is a world-class resort and casino, the larger goal of the site is to inspire growth and tourism throughout the Finger Lakes region.  Construction is well underway on the $440 million Seneca County project and the resort casino is scheduled to open in February 2017.  The 4-star resort style hotel promises to hire 1,800 full-time employees and offers 2,000 slot machines, 75 table games, 205 hotel rooms, and a wide variety of dining and nightlife options.

While many residents are optimistic about the economic impact of the casino plan, others question whether the potential benefits are feasible.  Many speculate that the revenue expectations are unrealistic because of fierce competition in the industry.  The casino industry already faces high saturation, which is confirmed by the casino closures in Atlantic City, and cost cuts at Foxwoods in Connecticut.  Additionally, there are plans to open casinos in more desirable locations such as the New York City and New Jersey areas, which may siphon off potential gamblers from the upstate casinos.  Another concern is that the gambling thirst is already being satiated by lotteries, scratch-off games, Internet gambling, fantasy football sites and March Madness pools, diminishing the appeal of casinos.  There are also fears that these new casinos would cannibalize the already existing upstate Indian casinos, which offer table games and slot machines parlors, known as “racinos”.  Speculators also highlight that casino jobs are likely to offer employees relatively low pay instead of wages that would enable economic uplift; federal labor statistics show that most gambling-related jobs average less than $30,000 per year.  Additionally, an indirect consequence is that locals may be lured by the casinos and lose income due to gambling addictions.  Lastly, conservationists express concern that these casinos will cause environmental degradation including severe damage to nearby woodland areas.

Although these concerns are legitimate and must be taken into account, the potential economic benefit of these casinos will likely outweigh the costs.  The Cuomo administration evaluated casinos in Pennsylvania and Maryland and used them to estimate employment growth in Upstate New York of nearly 3,000 permanent jobs and 6,700 temporary jobs in construction.  Governor Cuomo and his supporters insist that immense job creation will emerge from the introduction of casinos to the state.  Additionally, the benefits from the increased tax revenues will lead to increased education aid or lower property taxes in all localities in New York State, no matter where the casinos are located; a report by the Budget Division released before the 2013 casino referendum suggested that New York would collect an additional $238 million a year in revenue for these purposes.  The report also suggested that local government aid would increase by $192 million. Furthermore, the casinos will boost local economies and existing tourism infrastructure in Upstate New York, which has faced decades of decline.  In the Finger Lakes region, the casino will increase revenues for local businesses such as wineries, breweries, and the cheese trail located in the Seneca County area, specifically.  The project has already sparked new developments in the Tyre community such as the construction of a convenience store, gas station, auto dealership, and donut shop.

While the casino industry is beset with fierce competition and there are certainly disadvantages associated with gambling parlors, these casinos will likely boost tourism and local economies while allowing the state to capture millions of gambling dollars that are currently being spent elsewhere.  As a result, this casino project will provide a spark for economic boost, which will truly benefit the Upstate New York area.

Back on the Grid: Rethinking American Infrastructure

By Isaac Greenwood

In the early morning of April 16, 2013, two unknown assailants fired shots from high-powered sniper rifles for over 19 minutes at an electrical substation near San Jose, CA. Officials quickly responded to the scene, and while they were unsuccessful in apprehending the gunmen they were able to successfully reroute electricity from another station and prevent a mass blackout in Silicon Valley. The incident nonetheless incurred $15 million in damages. Two years later, officials in Bakersfield, CA responded to reports of men with flashlights and found slashed wires and equipment at an electrical substation which serves over 16,000 people. Rather than single incidents, these attacks represent a significant trend of vulnerability amongst the American electrical system and infrastructure at-large.

        Political candidates from both sides of the aisle have long lamented the woe-stricken traditional or American infrastructure. Planes, trains, and automobiles are all subject to crumbling networks of airports, railways, and highways which have not been maintained since their creation years ago. In its annual Infrastructure Report Card, the American Society for Civil Engineers gave American infrastructure at-large a D+ grade  and suggested an additional $3.6 trillion in investment by 2020. However, projects to renovate existing problems have long stalled as states, who fund over 90% of local projects, continue to pay off debt incurred during the Recession. State and local spending on infrastructure fell from 2.5% of GDP in the mid-2000’s to less than 2% today, a 30-year low. Even the main federal source of funding, the federal gas tax, has not seen an increase since 1993, remaining at just 18.4 cents per gallon.

        In response to magnified calls for improvement, the Treasury Department unveiled new policies last year which would encourage regulators to incentivize infrastructure investments after revising for risk structure and factors. These policies have come under criticism from Republicans such as Senator Phil Gramm, Chair of the Senate Banking Committee, for their similarity to the Community Reinvestment Act (CRA) of 1977 which proliferated subprime mortgages and the private funding of the public sector. The law, which has evolved significantly over its 39-year lifespan, brought credit to many low income areas and municipalities that would have otherwise struggled in acquiring funding. The role of the act in the Financial Crisis remains contested, however, as some like economist and Nobel laureate Paul Krugman cite faulty mortgage-backed securities as the prime instigator. Regardless, politicians in Washington should propose revamped funding guidelines and re-examine the CRA as states continue to deal with outstanding debt.

        In addition to accounting for traditional forms of infrastructure, contemporary funding for infrastructure must also include renovations to the exposed electrical grid.  The American electrical grid, largely created over the past 125 years, remains fragile and at-risk to third party assaults. An 11-minute blackout in San Diego, CA in late 2011 resulted in a power loss for 2.7 million residents across three states as sewage and airports failed. A 2012 report by the National Research Council of the National Academies of Sciences found electrical substations the most subject to terrorist attack within the grid. In response to the 2013 attack, the Federal Energy Regulatory Commission conducted a survey which found nine substations had been attacked in similar manners, as well as thousands of disruptions from rodents. These substations are often guarded by no more than wire fence and padlock.

        Attacks like the aforementioned will become more common in the increasingly sophisticated technological environment. Russian hackers successfully created a power outage last December in a coordinated cyber-attack which affected more than 80,000 residents in Eastern Ukraine. As demonstrated by the 2010 Stuxnet incident, in which an Israeli virus destroyed various Iranian nuclear centrifuges, cyber warfare presents an ever-growing threat and American infrastructure should be well-prepared to defend itself against threats from state and non-state actors.

        The U.S. currently invests less than 2% of GDP in infrastructure, paled in comparison to Europe’s 5% and China’s whopping 8.6%. While the state model may have worked in the past, current economic situations dictate the federal government must take an increased role in providing for much-needed infrastructure improvements. Military spending currently accounts for over 50% of discretionary spending and future budgets should be revised to include certain infrastructure projects under the scope of national defense. Redefining infrastructure to include the electrical and “cyber” grid, Stuxnet and other instances reflect the need for continued spending on infrastructure security given their exposure to this newfound form of war. From this perspective, infrastructure, in addition to the widely relied upon electrical grid, could classify as defense spending in order to receive more annual aid.

        Another proposal involves the creation of a Department of Infrastructure to oversee the various projects from a federal level. Instead of the current system in which maritime, highway, and other areas are separated across administrations, the newly created and unified department could coordinate spending and include the Army Corps of Engineers in addition to the Environmental Protection Agency. This would improve the efficiency through which potential projects are evaluated in a manner similar to the British Infrastructure and Projects Authority.

The federal government should act swiftly in aiding states on local projects to help alleviate the burden of debt. Rather than fall prey to partisan politics, President-Elect Donald Trump and Congress should make these costly yet necessary reforms rather than continue to let the American grid crumble.

A New Frontier: America’s Profitable but Problematic Marijuana Industry

Lucas Goldman ‘20

Marijuana — a leafy, green plant native to Eastern Asia — has incited a rat race in America. The sight of entrepreneurs flocking to the frontier of opportunity opened by this newly regulated industry is a rendition of America’s craze for gold in 1848. A “green rush” is underway.

    Marijuana entrepreneurs, called ‘ganjapreneurs,’ are rightfully attracted to the emerging business landscape as cannabis continues to gain legal status across the country. New findings about marijuana’s therapeutic powers in treating conditions from PTSD to common back pain are encouraging the public to see cannabis in a new light. Between 2004 and 2014, American’s approval of cannabis legalization surged from 34% to 58%. Since Colorado and Washington became the first states to legalize the herb in 2012, others have followed in their footsteps. Five more states — Massachusetts, Arizona, Maine, Nevada and California — have recreational legalization ballot propositions this November. Marijuana sales are following a similar upward trend, rising from $4.6 to $5.4 billion between 2014 and 2015, and are forecasted to reach $6.7 billion by the end of 2016.

    However, there are myriad obstacles scaring off prospective ganjapreneurs and burdening those who already made the risky leap into the lucrative industry.

    “These businesses have to fight everybody: the federal government, the state, even the city” explains John Tayer, the president of Boulder, Colorado’s Chamber of Commerce. Cannabis business owners confront an uphill battle well before they even launch their ventures.

    High barriers to entry ward off a majority of undedicated ganjapreneurs from the start. For example, the Massachusetts recreational marijuana proposition lays out a costly procedure for marijuana business applicants: $1,500 for stage one applicants, $30,000 for stage two applicants and $50,000 in annual registration fees. Worse yet, applicants often face a long, uncertain waiting period  — characteristic of the hastily-designed and understaffed government departments tasked with handling the applications.

    Meanwhile, marijuana businesses are at the mercy of a system of convoluted and highly unsettled laws and regulations. Business owners must simultaneously adhere to state and local policies while facing the threat of penalty from the federal government who still sees cannabis as a schedule I narcotic — a legal status shared by heroin, ecstasy and some of the other most harmful drugs. For shrewd, well-dressed businessmen used to the predictability of highly regulated industries, this legal uncertainty is uncomfortable, perhaps even unbearable. Tayer explains, “Business owners must navigate a volatile system of regulations. Should an incident occur, say with an edible, new regulations are likely to follow. Business owners better adhere to the new rules or face heavy scrutiny from the law.” Not everyone is cut out for such trailblazing, the industry is truly rough.  

    For successful marijuana dispensaries with valuable inventories, insurance is another grave concern. Dispensaries, stocked with cash, expensive edible products, and pounds of cannabis, are prime targets for robberies. In addition, they are vulnerable to federal raids at any moment. Accordingly, insurance is essential. However, from the eyes of insurance companies, these businesses are often deemed too risky to serve as profitable clients.

    Tax policies place those dealing with the growing, processing, and selling of cannabis at another disadvantage. Section 208e of the internal revenue code states that businesses that handle controlled substances are prohibited from receiving tax deductions. Therefore, operating costs associated with handling the marijuana such as employee wages and rent are not deducted from the business’s income. The only deduction these businesses receive is the cost of the good itself.

    Banking causes another painful headache for ganjapreneurs. Understandably, banks are tentative about interacting with cannabis businesses because of federal laws prohibiting them from accepting illegal ‘drug money.’ As a penalty for violating these rules, banks fear they may lose their FDIC accreditation. Consequently, marijuana business owners are stuck with an awkward dilemma: huge stacks of cash that they cannot deposit. For those who choose to simply hold onto their earnings, they must invest in expensive security equipment. Meanwhile, some business owners pursue cash investments such as real estate or a variety of other unconventional solutions.

“I even heard about a man who bought a train car to fill with cash and bury in his backyard,” Tayer recalls.

In the face of such daunting adversity, only a select breed of entrepreneurs persevere. Terrapin Care Station, a revered and still expanding brand of dispensaries and retail marijuana products owned by Chris Woods, serves as a quintessential success story. With several prominent locations in Colorado, Chris attributes his prosperity to three core principles: social responsibility, sharp compliance with regulations, and shrewd quantitative skills. “We work hard to engage and give back to communities,” Chris explains proudly before continuing, “Meanwhile, we practice responsible growing and educate the public to acquiesce the concerns of those opposed to the process.”

However, even some who possess the aforementioned winning attributes cannot succeed in the industry simply because cannabis is still illegal in their states. Despite the tide of state-level legislation and mandates from over half of the population to legalize marijuana, federal action will take time to unfold due to the scale of the task and various legal complications. Consequently, the legal gray areas complicating the marijuana industry are likely to remain for the time being, making entry into the realm of businesses directly handling the herb inherently risky. But with the emergence of numerous headaches and technical issues throughout the marijuana supply chain comes a plethora of opportunities for businesses dealing indirectly with the industry. Inventive entrepreneurs are already at work, growing their creative remedies into successful ventures. This second wave of entrepreneurs wisely taps into the industry’s deep pockets without confronting the legal hurdles plaguing those who directly handle the product.  

    The evolution of the indirect sector of the marijuana industry is occurring in co-dependence with the industry’s main branch. For example, specialized insurance companies like Cannasure have emerged in response to the large desire for marijuana insurance. These unique insurers are able to charge higher premiums to account for the considerable risk they incur. They also often require businesses to install elaborate surveillance systems to prevent burglary and usually refuse to cover government seizures under their insurance policies.

CanopyBoulder is another unique member of this second wave of entrepreneurs. This company is an incubator specifically geared towards assisting businesses with ancillary services and products in the marijuana industry. They provide capital and mentorship to marijuana related startups with ideas ranging from grow software to consumer safety and beyond in return for a single digit equity stake in the business.

Ultimately, these companies show the legal marijuana industry works similarly to any other industry. Success comes from forming a unique solution for a common problem.

“Those venturing into the marijuana industry are sharp, aggressive, and financially intelligent – but more importantly, they are big risk takers,” explains Tayer, identifying one factor that stands out in the marijuana industry — risk. But even this distinction is becoming less pronounced. As the dust begins to settle, large companies are tentatively venturing into the industry.

This summer, Microsoft announced its partnership with Kind, a California start-up that developed software to track marijuana from seed to sale — a sign that the volatile “green-rush” is metamorphosing into a legitimate industry. Tayer reassuringly explains that, “It was a bit like the wild west out here, but it’s starting to settle down.”