0:00

This is The Reason Interview with Nick

0:02

Gillespie. Before you do

0:04

anything else, please subscribe to

0:07

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youtube.com/the at sign and then

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The Reason Interview. That's youtube.com/at

0:14

The Reason Interview. My guest

0:16

today is John Arnold, the

0:19

former Enron Wunderkin turned billionaire

0:21

philanthropist who's determined to hack

0:24

America's most expensive and least

0:26

accountable public sector systems in

0:28

areas like criminal justice, education,

0:31

and pensions. Fun fact,

0:33

he was once called the most hated

0:35

man in pension land by governing magazine

0:37

due to his reform efforts. We

0:40

talk about why those public pensions are

0:42

so out of control and how to

0:45

fix them, how Medicare squeezes

0:47

billions of unnecessary dollars out of

0:49

taxpayers, and how Enron

0:51

scammed its investors, not despite

0:53

regulations, but in full view

0:55

of them. And we discuss

0:58

why, despite all our problems,

1:00

he's still betting on America to get better,

1:02

not worse. Here is the

1:04

Reasoned Interview with John Arnold. John

1:10

Arnold, thanks for talking to me. Great to

1:12

be here. So you and

1:15

your wife, Laura, head up

1:17

Arnold Ventures, which is a

1:19

gigantic philanthropy. I want

1:21

to get into that. And I also want

1:23

to start by asking you, you signed on

1:26

to the giving pledge. Explain

1:28

what the giving pledge is and

1:30

why you said, yeah, this is

1:32

us. So the giving pledge is

1:34

a non -binding pledge that somebody

1:36

signs that says we can give

1:38

away at least half of our

1:41

assets to the philanthropic sector

1:43

at some point. And it

1:45

started in the early 2010s,

1:47

right? Thereabouts? Exactly. Yeah. Exactly.

1:50

And I think we were always inclined

1:52

that way. I think

1:54

we have the benefit of getting to

1:56

see, you know, 100 plus years

1:59

of very significant wealth in this country.

2:02

And the good things it can do and also the bad

2:04

things it can do. And I think

2:06

one of the learnings of seeing

2:08

different families deal with the wealth,

2:11

especially second generation and third generation,

2:14

is that, you know, at times it brings

2:16

families together and at times it divides. I

2:18

mean, they're Canadian, but this

2:21

is the MacArthur Foundation, right?

2:23

Where the older generation of

2:25

the MacArthur money, what

2:27

it was a guy who is

2:29

conservative, his son who publishes Harper's is

2:32

very liberal. So there's partly there's that

2:34

right, but I can I ask, you

2:36

know, it's a truism within kind of

2:39

libertarian circles that, you know, people like

2:41

Henry Ford, or build

2:43

gates, have done much more for

2:46

society by building the products that

2:48

made them billionaires rather than the

2:50

philanthropy they do. Absolutely. I

2:53

think the private sector solves most problems

2:55

and I think that's the default. If

2:58

a problem exists, the private

3:00

sector should try to do it. Now, at times,

3:03

it's not incentivized to do it or there are

3:05

bad incentives. And so

3:07

then the government is kind of round two.

3:09

So you think about like public goods, right?

3:11

The private sector is not going to fund

3:13

those in the right way. And

3:15

so that there is a role for

3:17

government to come in and do the

3:19

things that private sector is not. And

3:21

then I think philanthropy is third. In

3:23

some ways, it's maybe the least effective

3:25

of the three, even though all the

3:27

inefficiencies associated with government that you

3:30

know, philanthropy is looking for things

3:32

where the private sector and the public

3:34

sector either don't have the incentive or

3:36

the will to try to address those

3:39

issues. Or yeah, I mean, part of

3:41

it is just a knowledge problem, right?

3:43

Where nobody's thinking about these problems and

3:45

maybe the private sector is an incentivized

3:48

to do research on them in the

3:50

public sector isn't either. Exactly. Or,

3:52

you know, the public sector might

3:55

not be incentivized, you know, the public sector is driven

3:57

by politicians, right? And so you got to think about

3:59

what are the incentives for politicians. And one of

4:01

those is you want to talk about things that

4:03

work. And if you fund something as a politician,

4:06

if you champion something, and it

4:08

doesn't work, your political opponent in the next

4:10

race is going to use it against you.

4:12

Look at all this money you lost. Do

4:14

you, you know, there's a truism, particularly, I

4:17

think it's on the kind of right side

4:19

of the political spectrum to say, well, you

4:21

know what, philanthropy worked, charity worked, and then

4:24

the government, particularly in the progressive era in

4:26

the early 20th century, started usurping. You

4:28

know various kinds of functions that

4:31

you know groups often based on

4:33

ethnicity or some other or Something

4:35

else, you know some other affinity

4:38

got pushed out of the market. Does

4:40

that ring true to you? I think You

4:42

take 100 years ago, 200 years ago, things

4:44

were much more built around the family. The

4:46

families were bigger, families stayed together, you stayed

4:48

on the same piece of land often. And

4:51

so one generation took care of the next. Or

4:54

whenever one generation got too old, then you had

4:56

the kids taking care of the parents. And

4:59

that's not how we live today. And so

5:01

kind of over time, as people have become

5:04

more nomadic across the US, and I think

5:06

there's a lot of benefit to that. And

5:08

that's how people want to live, at least

5:10

today. then it's kind of

5:12

changed what the family dynamic is. And

5:15

so sometimes, you know, the kids can't take care

5:17

of the parents or vice versa, or

5:19

you're away from your family. And

5:22

so I think the role of

5:24

government's probably changed just as family

5:26

dynamic has changed. How you are

5:28

famously a Houstonian, how are you

5:30

one of these people who say,

5:32

I am like a 10th generation

5:34

Texan, or like how long have

5:37

you been planted in Houston as

5:39

a... raised in Texas, born in

5:41

Dallas. My brother was born

5:43

in... Dallas is practically Canada though. right? I

5:47

brother was born as

5:49

was born in Pennsylvania. So parents moved

5:51

between my brother and me. Yeah, came

5:53

down for opportunity. I came down for

5:55

a job. I think that's why a

5:57

lot of people move to Texas. Yeah,

5:59

and certainly whether moving or now, right?

6:01

Yeah, exactly. Did so let's talk your

6:03

areas of interest are kind of interesting.

6:06

I mean, you you fund a lot

6:08

of K through 12 education stuff. And

6:10

you were big on the KIP. schools,

6:13

knowledge is power program. That's what

6:15

it's an acronym for. You do

6:17

criminal justice, you do pension reform

6:20

and you fund some of reason

6:22

foundations work on that. And

6:24

then also things like open

6:26

science or the integrity of

6:28

science. How do

6:31

you pick what your

6:33

foundation funds? We're involved in

6:35

about a dozen different areas. add

6:39

on housing and infrastructure policy and

6:41

health care costs. I

6:44

think the tie amongst them is that experience

6:46

in the K -12 reform movement,

6:48

which I've been part of for

6:50

over 25 years now, was kind

6:52

of a learning that top

6:55

-down implementation of programs is

6:57

very difficult and just doesn't

6:59

work, especially for a bottoms

7:01

-up type of field like

7:03

K -12 is. So much

7:05

of school successes about the

7:07

teacher and the principal that

7:09

are in the building. And

7:12

so the question is, if you're the

7:14

bureaucrat from above trying to push down

7:16

this new curriculum, trying to say like,

7:19

the school should do X, Y, Z. even

7:22

when the research shows that they're successful,

7:24

it's just very hard for that stuff

7:26

to scale and be successful. And so

7:28

we've very much over time, you know,

7:30

got a theory of change in K

7:33

-12 just about policy rather than programs

7:35

and about the rules and incentives of systems

7:37

and drive behavior. talk a little bit about

7:39

that. Is it that, you know,

7:41

in one of the stats, I remember this

7:43

was decades ago, I did some education stuff

7:46

and one of the most amazing facts

7:48

you know, that I came across, and

7:50

maybe it's not that interesting, but in

7:52

1930, there was something like 130 ,000

7:54

school districts in America. Basically, every town

7:57

was its own school district. There are

7:59

now fewer than 13 ,000. So

8:01

there's been, you know, the

8:03

population has exploded compared to, you

8:05

know, 100 years ago, and the

8:07

number of school districts has declined.

8:09

I mean, there's just so much

8:11

more centralization. But what you're saying

8:13

is that in education, you find

8:15

the real change happens kind of

8:17

dispersed throughout the system. Right.

8:20

So we're thinking about it from,

8:22

again, from the system standpoint about,

8:25

I guess, with the first principle

8:27

that government shouldn't be both the

8:30

service provider and the regulator. Right.

8:32

can't regulate yourself. There has to

8:34

be an accountability mechanism from coming

8:36

from somewhere else. Now,

8:38

technically, the state regulates the

8:41

school district. In reality, the

8:43

state is very, very reluctant to step in.

8:45

The politics involved in that are very difficult

8:47

on both sides. And so,

8:50

historically, you've had the school district just

8:52

be accountable to itself. And that may

8:54

be an elected school board, and there's

8:56

all kinds of types of problems, I

8:58

think, with single district elected school boards.

9:01

And so the question is, what's

9:04

the right role of government? And

9:06

we think that government should be

9:08

a strong regulator of of non

9:11

-profit service providers, i

9:13

.e. charter schools. So this kind of

9:15

goes back to my first entry was

9:17

with KIP and this charter school that

9:19

was getting very different results from the

9:21

school down the street that was educating

9:24

a same demographic. you

9:26

know, is there a secret sauce to

9:29

education other than involvement by all of

9:31

the stakeholders, you know, particularly parents, but

9:33

also teachers, et cetera? God, I wish

9:35

there was. I think K -12 is

9:37

the field that's just been hardest to

9:39

crack. And it's not just in

9:41

the US. There's no urban school system that

9:44

looks at it and say, oh, they've nailed

9:46

it. And they're the ones that have to.

9:48

I mean, the first city that comes up

9:50

with a better than average school system, however

9:52

you define that, would be like the greatest

9:55

city in the world. Everybody would want to

9:57

live there. Right. It's

9:59

ironic is that this problem

10:01

vexes the world as well.

10:05

Kind of famously, Wendy Cobb, who started

10:07

Teach for America, she ended up starting

10:10

Teach for All because she was getting

10:12

so many requests from people in other

10:14

countries saying, we're struggling with our schools.

10:16

Help us. And so she started

10:18

Teach for All and she works in dozens of countries

10:20

now. But kind of

10:22

every country, especially for the

10:25

low income and at risk

10:27

populations, really struggles with education.

10:31

pension reform. You in 2017,

10:33

Governing Magazine referred to you

10:35

in a genuinely flattering article

10:37

as the most hated man

10:39

in pension land. What

10:42

is your interest in pension reform? And

10:44

what's if charter schools are kind of

10:46

the big picture takeaway for education, hit

10:48

through 12 education, what's the big reform

10:51

in pensions? Yeah, well, I will fact

10:53

check that is true. Certainly,

10:56

there's a time when we were the most

10:58

hated people. So

11:01

I think 49 out of 50 states

11:03

have a balanced budget amendment. And the

11:05

purpose of that is to say that

11:07

the current generation should be paying for

11:10

the services that the current generation is

11:12

getting. It shouldn't be punning the

11:14

cost to the next generation. And

11:16

more or less that balanced budget

11:18

amendment works with one big exception.

11:22

And that exception has gotten so big you can

11:24

drive a truck through it and that's public pensions.

11:26

And so what's happened is that oftentimes that

11:29

you have a public union contract that

11:32

comes up and politicians have to make

11:34

a choice. They say either we give

11:36

them more money for their kind of

11:38

annual raises, which means we

11:41

either have to cut services or raise taxes,

11:43

or we can punt this. We can

11:46

offer them instead of raising their salaries,

11:48

we can give them more benefits. And

11:51

that's kind of the secret way to hide

11:53

the cost. And we don't have to make

11:55

this hard trade off. Why do state employees

11:57

buy into that though? Because this is, you

11:59

know, a lot of the times, I mean,

12:01

it kind of happens. But often, you know,

12:04

like, why wouldn't they be like, no, no,

12:06

we want, we'll take 50 % of what

12:08

you say you'll pay us in the future.

12:10

We'll take that now. Yeah. And the irony

12:12

is that, you know, when you do studies

12:14

and look at how much would you trade

12:17

off in pension benefits for current income? the

12:20

state should be paying more in current income

12:22

because that's what most employees actually value. And

12:24

it would be less money over the long

12:26

haul. Over the long haul, but that's not

12:28

where the political incentives are, of course. But

12:30

I think the reason is that

12:33

it's become a reason as to

12:35

why people will join is that

12:37

they understand that they get less

12:39

money today with a very, very

12:41

generous benefit in the future. And

12:43

I guess there is a long

12:45

period of time, particularly Right

12:48

after World War II where that the

12:50

fringe benefits or whatever, you know the

12:52

compensation package might have been more if

12:54

you got job security and like a

12:56

Cadillac retirement plan and health care plan

12:58

that made sense Yeah, so we're still

13:00

kind of locked in that. What's what's

13:02

the best way out of this trap?

13:04

So I think there's three components. One

13:06

is get rid of the abuses. So

13:09

there are some loopholes in the system

13:11

like you could not take a vacation

13:13

for the final 10 years of your

13:15

career and use all that. You spike

13:17

the pension like the last year or

13:19

two. You buy other people's overtime and

13:21

suddenly your salary might have been 70

13:23

grand, but you make $200 ,000 your

13:25

last year and that's what you're paying.

13:27

And then you get 70 % of

13:29

$200 ,000 right until you die. Until

13:33

you're killed. And

13:36

so, you know, those what I call

13:38

kind of loopholes or abuses, that wasn't

13:40

how the intent of the system, right?

13:42

So that's a component of it. I

13:44

think it's a relatively small component. And

13:46

that's kind of been locked down, right?

13:48

I mean, most of that's been much

13:50

of that's been taken care of. You

13:53

know, that was really reading about some of

13:56

those abuses caught my eye and got me

13:58

very interested. And then as you start to

14:00

research, you understand that it's the funding design

14:02

and benefit design that are driving. the major

14:04

problems. And the funding design

14:06

is how much is the city or

14:09

state putting away today in order to

14:11

meet that benefit tomorrow. And

14:13

you can play lots of games there. Either

14:15

you can just blatantly underfund it based upon

14:18

the actual real tables, or you can make

14:20

these very aggressive assumptions. And so

14:22

there's kind of famously that the more

14:24

you assume that the your investments will

14:26

make over the years the less money

14:29

you have to put aside today and

14:31

so and you have states like California

14:33

Illinois, etc. I have really done a

14:35

bet I mean they've they've exploited that

14:37

yeah where they're like yeah you're gonna

14:39

be making you know 10 % average

14:42

return on these investments that we're not

14:44

even making so we don't have to

14:46

fund as much right now exactly And

14:48

everybody's kind of in on the game.

14:50

And what was curious to me as

14:53

I started digging in and started talking

14:55

to unions and started talking to some

14:57

of the representatives is they recognize these

14:59

return assumptions are too high, but they

15:01

don't want them changed. They don't want

15:03

them lowered. They should, because

15:06

that would force the state or state

15:08

to put more money in today to

15:10

make it, you know, ensure, raise the

15:12

probability that that payout exists in the

15:14

future. They are convinced

15:16

that whatever the city or state

15:18

is supposed to pay, they

15:20

will end up paying, they'll find a way, and

15:23

they are worried that if you

15:25

lower the return percentage assumption that

15:28

that draw on money today will

15:30

put more kind of force the

15:32

issue and encourage reform that they

15:35

don't want to see. So then

15:37

is it I mean is that

15:39

is the big answer a shift

15:41

to define contribution rather than to

15:44

find benefit plan? If

15:46

you at private sector people have

15:48

a hybrid you have Social Security

15:50

and you have a 401k or

15:52

IRA right and so there's this

15:54

component of it that You don't

15:56

want to let people kind of

15:58

risk everything in a private investment

16:00

portfolio and you know end up

16:02

65 years old with nothing right

16:04

And so that's what social security

16:06

allows is kind of a guaranteed

16:08

stream that's there for as long

16:10

as you live. And that's important.

16:13

And so we think that something that looks

16:15

like a hybrid system is right for kind

16:18

of 90 % of Americans, why not the

16:20

100 % Americans? And that seems to be

16:22

gaining ground. I mean, in the way that

16:24

school choice has certainly been exploding over the

16:27

past couple of years after a

16:29

lot of build up, but it

16:31

seems like more states, more localities

16:34

are okay with the idea of

16:36

creating defined contribution plans for public

16:39

sector employees. Yeah, certainly for new

16:41

employees. I think there's a principle

16:43

of, you know, don't change the

16:46

benefits that have already been earned.

16:49

I think there's some other ways, some other reforms

16:52

you can do in order to make sure that

16:54

the risk is shared between the state and the

16:56

employee. What are

16:58

some of those? One is

17:00

that your cost of living

17:03

adjustment is lower if the

17:05

fund is underfunded by a

17:07

certain amount. If

17:09

the investment returns are not

17:11

meeting the assumption that both

17:13

the employee and the state

17:15

share some of that risk

17:17

rather than it being 100

17:19

% on the state. Talk

17:21

about your interest in healthcare.

17:24

What's the main focus of

17:26

Arnold Ventures' interest in healthcare

17:28

policy? Yeah, so we looked

17:30

at it and as we

17:32

kind of decided one day,

17:34

we looked at what are

17:36

the topics that interest us,

17:38

including public finance and education

17:40

and criminal justice, that

17:42

the tie amongst those was this

17:44

policy component and these large systems

17:46

and market failures associated with it.

17:49

And so here's this huge healthcare

17:51

system. It's just obvious that we

17:53

need to start thinking about that.

17:55

And so one of the draws

17:57

was, I know that

17:59

there were a number of

18:02

abuses that or inefficiencies that

18:04

experts had identified, but

18:06

it was one that special interests were

18:08

very powerful in. And so that's why

18:10

- What is the main one of

18:12

those? So there's many.

18:14

So there's a big question

18:16

about How do you price

18:18

pharmaceuticals that are necessary to

18:20

quality of life but have

18:22

a regulated monopoly and that

18:24

are paid for by the

18:27

government? What's the pricing of

18:29

that? There's questions

18:31

about, so in Medicare

18:33

Advantage, you see

18:35

insurance companies have figured out loopholes

18:37

that if we upcode our patient

18:39

population, that is, we make them

18:42

look less healthy than they are.

18:44

then we get higher reimbursements. So

18:47

they tell their doctors, you know,

18:49

you need to spend time and go make sure,

18:51

like, ask every question about, you know, their health,

18:53

that even if this doesn't bother the patient at

18:56

all, they would never have mentioned it to the

18:58

doctor and it doesn't affect their quality of health,

19:00

whatever. If the insurance company

19:02

can check it on their records, they get

19:04

a higher reimbursement, right? And so you kind

19:06

of live in a world where every patient

19:09

is below average health, right? Or

19:12

things like site neutral policy. So

19:14

hospitals get higher reimbursements from Medicare

19:16

than a doctor's office that's in

19:19

the suburbs does. And

19:21

so what happens, the hospitals figure this out, they

19:23

buy the doctor's office, it's the same doctor in

19:25

the same location doing the same service. But now

19:27

it's a hospital. But because the

19:29

sign on the front door changed, you

19:32

know, the rates go up 50%. Are

19:34

you, there's been talk about doge, you

19:36

know, more generally, but getting, turning to

19:38

Medicare and Medicaid fraud. And I know

19:41

Obama's chief economic advisor for a while

19:43

was Christina Romer, a highly respected economist,

19:45

who at one point had published a

19:48

study where nearly 30 % of Medicare,

19:50

she said 30 % of its expenditures

19:52

could have been cut without any effect

19:55

on patient income. So there's a lot

19:57

of I don't know if it's waste,

19:59

fraud, or abuse, but there's a lot

20:02

of looseness in that system. Do

20:04

you think Doge or somebody,

20:06

like how do you cut

20:08

Medicare expenditures without having every

20:10

senior citizen in their personalized

20:13

rascal suit or marching or

20:15

driving on DC? Right. And

20:17

the fundamental principle is we

20:19

don't want to touch access

20:21

to care. Right. That's

20:23

not the right way to try

20:26

to lower costs in the healthcare

20:28

system. It is going after this

20:30

proverbial waste, fraud, and abuse. And

20:32

a lot of this stuff has been identified.

20:36

We've identified some of it. Many other

20:38

people have identified most of it. It's

20:40

always been more of a political problem. And

20:43

again, the health care... is

20:46

the most powerful of any in

20:48

the United States. It is just

20:50

amazing how many dollars and how

20:52

many bodies they have in DC

20:55

to try to make sure that

20:57

the system doesn't change. How do

20:59

you cut that? Yeah, so it

21:01

almost needs a forcing mechanism. And

21:04

you find that whenever Congress wants

21:06

to introduce something new, and

21:10

also feels compelled to pay

21:12

for it. So in the

21:14

IRA, Democrats put

21:16

in pharmaceutical pricing provisions

21:18

in it to save

21:20

money. And now

21:23

with the TCGA extension, that's probably going

21:25

to cost $4 .5 trillion or so.

21:28

And at least in the house reconciliation

21:30

instructions, they've mandated at least $2 trillion

21:32

of savings. And so

21:34

now you have this forcing function

21:36

that necessitates finding money, finding savings.

21:39

And without that, Congress

21:42

wouldn't act. They

21:44

know this stuff. The people in the

21:46

committee, they know it. But this is

21:48

just part of the political process that

21:50

until they need to pay for something

21:52

that they want even more and are

21:54

willing to infuriate all those lobbyists, then

21:56

it doesn't happen. And so we have

21:59

this very interesting window that's going to

22:01

happen sometime this year, right,

22:03

where it actually is, okay, we

22:05

need to find hundreds of billions

22:07

of dollars of savings in the

22:09

healthcare system. And there's more and

22:11

more consensus that that Congress doesn't

22:13

want that to come from access.

22:16

Right. And so then you have to go into

22:19

the waste front abuse. Criminal

22:21

justice year in Texas. Texas

22:24

I don't know if it's still the kind

22:26

of prison capital of America But you know

22:29

it was a big thing what what's your

22:31

interest in criminal justice and you know, what

22:33

are the you know What are what are

22:35

the best ways to kind of make the

22:38

criminal justice system? More I

22:40

was gonna say less punitive. I don't

22:42

actually I mean to be more efficient

22:44

better gas Yeah, yeah, I kind of

22:46

joke that we were government efficiency before

22:48

government efficiency was cool. We just We

22:50

didn't have a catchy name for it.

22:52

We call it evidence -based policy and

22:54

program integrity. And it's like

22:56

just thinking about the criminal justice system

22:58

and the goals of it and the

23:00

stakeholders. And so you can think about

23:02

the goals. Obviously, public safety is goal

23:04

number one, right? You can never lose

23:06

that. But there's

23:08

also the rights of the accused

23:10

and convicted, the kind of the

23:13

financial cost of the system, the

23:15

collateral damage to neighborhoods and to

23:17

families. And you can think

23:19

of more. And so the question is, how

23:21

do you balance those? And

23:24

especially, how can you improve some of

23:26

the other goals while maintaining or improving

23:28

public safety? And so that's kind of

23:30

our fundamental view of the field. And

23:34

we think there's been a lot

23:36

of things. And I think the

23:38

field has gone from the crime

23:40

bill under Clinton, which when crime

23:42

was climbing, you found the steady

23:44

trend and you know a very

23:46

rational response by Congress that was

23:48

you know just facing the wrath

23:50

of crime in the neighborhoods and

23:52

you had you know black communities

23:54

were calling for and actually leading

23:56

a lot of that effort right

23:58

because of the the damage that

24:00

the criminal activity was having in

24:02

these neighborhoods but we're in a

24:04

very different world right now and

24:06

kind of the amount of crimes

24:08

going down it's been on the

24:10

steady trend down And we've seen

24:12

the effect of that tough -on

24:14

-crime mantra in a number of

24:16

areas. And even Texas saw this.

24:18

So Texas very much had a

24:20

tough -on -crime mantra up until

24:22

about 2007, when there's this big

24:24

kind of famous prison bill that

24:26

came up that says, we need

24:29

to build seven new prisons and

24:31

stepped back and looked at the

24:33

financial cost of that and said,

24:35

OK, we've got to either raise

24:37

taxes or cut spending in education.

24:39

Or like, what if we just do

24:41

things smarter, right? And so it

24:44

went from tough on crime to smart on crime.

24:46

And I think that was the realization

24:49

that a conservative state is looking at

24:51

this saying we can maintain or even

24:53

improve public safety while we run the

24:56

system better. So a lot of it

24:58

is like forcing government to say, okay,

25:00

this has a this has a bill

25:03

that you have to pay kind of

25:05

in the here and now and then

25:07

people suddenly become much more creative, right,

25:10

and how they deliver education or health

25:12

care or safety, public safety. Right.

25:15

So I think there's components of it.

25:18

The criminal justice system is

25:20

just so complex from the

25:23

police, the DAs, public defenders,

25:25

the judges, the jails and

25:28

prisons, reentry system, including

25:30

parole and probation. And

25:32

we kind of work on all of

25:34

that. Yeah. And You know, there's no

25:36

magic bullet in this. There's silver bullet

25:38

in this. It is, you know, this

25:40

is constant. How do you make the

25:42

system slowly better over time? One

25:45

of the you do a lot of

25:47

work on gun violence as well. And

25:50

this for a libertarian audience, I think

25:52

people will be surprised by some of

25:54

the findings that you found the correlation

25:56

between gun ownership and gun violence. What

25:59

what has your, what has Arnold Ventures

26:01

broadly kind of found through its research

26:03

on guns? Yeah, like many issues, we

26:05

kind of get pulled into things. And

26:08

so we often find that policy makers

26:10

are struggling with an issue and they

26:12

come and say, you know, what's going

26:14

on in this field? And so obviously

26:17

there's been a lot of concern about

26:19

mass shootings and about homicides in general,

26:21

and the role of guns in those.

26:23

And so the question to us was,

26:26

you know, What is the evidence show?

26:28

And we very much view that as

26:30

part of our role in public policy

26:32

is generating data. Yeah, both generating research

26:35

as well as translating the research to

26:37

policymakers. And so we ended up funding

26:39

a lot of research on guns as

26:41

well as trying to translate that to

26:44

policymakers. And unfortunately, you

26:47

know, there's not a lot of good answers, right?

26:49

And so I think that one of the learnings

26:51

from it is that, you know, there's a limited

26:53

number of interventions, but, you know, if you look

26:55

at the things that, you know, are both constitutional,

26:58

as well as, you know, understand

27:01

and appreciate the hundreds of millions of guns that

27:04

are on the street today, as

27:06

well as that are effective, right?

27:08

It's a very small and in a

27:10

very broad sense. You know,

27:12

going back to say like the

27:15

mid nineties, there are many more

27:17

guns in circulation and it's legal

27:19

to own or carry guns. Gun

27:21

crime is generally down. But then

27:23

if I'm recalling correctly, some of

27:25

the research I did, I think

27:28

was through a ran study that

27:30

you guys funded finding that, you

27:32

know, for women, particularly having a

27:34

gun in the house raised the

27:36

court. There was a strong. 10

27:38

or 12 percent higher than average

27:41

correlation with suicide, things

27:43

like that. So part of it is

27:45

just figuring out what has actually happened.

27:47

Yeah, I think we've seen states institute

27:50

red flag laws saying that for people

27:52

who are not you know, mentally stable

27:54

for a certain time period that the

27:57

state can remove their guns. You

27:59

know, it's controversial. It's controversial in

28:01

conservative states. There's an effort, you

28:03

know, in Texas right now to

28:05

revoke some of those, or, you

28:07

know, to not recognize other states,

28:09

Red Fly Rawls. And

28:12

so there's, you know, a tough

28:14

area. Unfortunately, not

28:16

everything has a great answer to it. And

28:19

sometimes we just say, we

28:21

don't have a great solution. How

28:23

do you define yourself kind of

28:25

politically or ideologically? Because you fund

28:27

market -based groups, libertarian groups. Your

28:29

background is in trading. I want

28:32

to talk a little bit about

28:34

that. Many

28:37

of your policy goals seem to

28:39

be fully in line with a

28:41

kind of progressive mentality. Do you

28:44

think of yourself as particularly this

28:46

or that when it comes to

28:48

ideology or politics? Yeah, I think

28:50

I'd disagree that our answers are

28:53

more progressive. I wasn't taking

28:55

answers. I mean, like the goals. Yeah.

28:58

Actually, I think

29:00

I'd disagree with that. I think what we

29:02

find is policy makers want

29:04

solutions, especially local and state

29:06

policymakers who don't have the

29:09

ability just to spend more

29:11

money at problems. They

29:13

want to know what to do. And

29:15

especially if you can come and

29:18

say, here's what the evidence is

29:20

as to how you can improve

29:22

outcomes for any system without spending

29:24

more money. We find that whether

29:26

you're a Republican or a Democrat,

29:29

that there's a lot of interest there. And we work with

29:31

people on the far left, we work with people on the

29:33

far right. You know,

29:35

it tends to be just very much

29:37

issue specific. So we often

29:39

get asked in, right? And so we're not going

29:41

to show up in some community and say, you

29:44

know, you should do X. It's

29:46

a community that's struggling with a problem

29:48

and kind of ask us for help.

29:50

And we try to provide that. And

29:52

that, I mean, what I think, you

29:54

know, what I find most interesting in

29:57

a lot of ways about what you

29:59

guys are doing is this commitment to

30:01

either open science or science with integrity

30:03

or research with integrity, that

30:06

seems fascinating. That's kind of

30:08

what you're focusing on is

30:10

getting actual data and then

30:12

making sure that this stuff

30:14

is real as opposed to

30:16

you're doing research that just

30:18

happens to find what you

30:20

wanted to find. How

30:22

did you get interested in that? I

30:25

had one thing to the previous question

30:27

because I think a lot of One

30:29

of the criteria that we have on

30:31

when to enter a new area is

30:33

when do we think this bipartisan window

30:35

is going to open? And

30:37

we think, you know, we're very

30:39

hesitant to work in partisan issues. There's

30:42

a lot of groups that are interested

30:44

in partisan side. There's a lot of

30:46

funding and think tanks that are interested

30:48

in partisan issues. And there's kind

30:50

of a Darth that are looking at

30:52

where's the policy window open, kind of

30:54

the intersection of left and right. And

30:56

part of that is that the will

30:58

to try to address an issue comes.

31:01

And then we try to hope on, okay,

31:03

where are the bipartisan solutions? Because we think

31:06

if they are bipartisan, that they'll be more

31:08

sustainable. And the

31:10

next administration doesn't throw it out and

31:12

do their own things. So

31:15

the question on what got us

31:17

interested in an evidence base, some

31:21

of that was my background

31:23

in trading and thinking about

31:25

that there had to be,

31:27

you're always questioning, you

31:29

know, what, you know, are

31:32

you right? Are your assumptions on a

31:34

problem right? And every day you go

31:36

in and like, here's my view. What's

31:39

the counter side? What's the counter argument for that?

31:42

And then I think, you know, trying

31:44

to, you know, enter

31:46

this field of philanthropy, which is

31:49

enormously complicated, without

31:51

especially at the time without great data and

31:54

try to figure out, okay, what's the highest

31:56

value add we can have in the field?

31:58

And that was involved trying to read a

32:00

lot of research and a lot of studies.

32:03

And sometimes we learned stuff from

32:05

that and sometimes we ended up

32:07

more confused than when we started

32:09

after that. And so we realized

32:12

that there was both a dearth

32:14

of supply and demand of evidence

32:16

in policymaking. And so we

32:18

wanted to attack both problems and we

32:20

wanted to go fund a lot new

32:22

of high quality research on kind of

32:25

social policy and social programs, try to

32:27

figure out what works and what doesn't.

32:30

And then second, you can do all

32:32

the supply, you can fund,

32:34

but if nobody's taking it up,

32:36

if nobody's using it, then it

32:38

doesn't do any good. So there

32:40

has to be kind of the

32:43

corresponding, how do you increase demand

32:45

for it? And so like this

32:47

week, we were in Oklahoma with

32:49

Governor Stitt. announcing this new program

32:51

to bring new funding for proven

32:54

programs that meet the highest bar

32:56

of success from the research into

32:58

Oklahoma. And it's 10

33:00

million of our money, 10 million of

33:03

state money, which in the grand scheme

33:05

of things is not that much money,

33:07

but it's an attempt to change the

33:09

culture of how state legislatures start allocating.

33:12

What's one of the issues that

33:14

you're like, okay, we're we're going

33:16

to look at, like here's where

33:18

the good research clearly points, these

33:20

are better programs or policies

33:22

than whatever else was being

33:25

considered. Yeah, I think one

33:27

of the trends has been

33:29

this push for college for

33:31

all, right? And trying

33:33

to put as many people into college.

33:36

And then with the benefit of

33:39

hindsight now, we get to see

33:41

what this 20 plus years of

33:43

college for all, what the results

33:46

are. And I think society

33:48

is looking back and saying, scratching their heads and saying,

33:50

you know, there are a

33:52

lot of people who enrolled who

33:54

did not get certificates or degrees

33:56

that the market valued, right, the

33:58

purpose of going. Although there is

34:00

still a premium, right, to having

34:03

a college degree. Well, generally. So

34:05

I think on average, right, those with

34:07

college degrees, you know, do much better

34:09

financially than those without college degrees. But

34:11

a lot of that is selection bias.

34:13

Right. And so if you think about

34:15

the marginal kid, you know, is it

34:17

right? You know, the right path to

34:19

go to college to go to a

34:21

four year college, two year college, you

34:23

know, certificate program, you know, an apprenticeship

34:25

program, etc. And I think,

34:28

you know, one thing that's been missing there. has

34:30

been good data and good transparency

34:33

on outcomes. And so that's

34:35

really, you know, a field that we've

34:37

been trying to push on is like, whenever a kid's

34:39

making that decision is 18 years old and trying to

34:41

decide, what am I going to do for the next

34:43

four years? At least have

34:45

good data about, you know, kids that

34:47

look like me or have the same

34:49

background, academic background that I do. And

34:52

they go to this school and major

34:54

in this thing or get this degree.

34:56

Like, what are they, how?

34:58

effective as that. And then I guess

35:00

going backwards that also I mean clearly

35:03

you know K through 12 curricula particularly

35:05

in high school has changed so that

35:07

in many parts of the country things

35:09

like vocational and technical education has just

35:12

kind of disappeared partly because if everybody's

35:14

going to college then you're not going

35:16

to have as many shop classes etc

35:18

and if you find out that well

35:20

you know what like a lot of

35:23

people would flourish you know doing a

35:25

trade you could start doing that in

35:27

high school. Right. And I think there

35:29

was, you know, been this longstanding concern

35:32

about tracking kids. Right. And,

35:34

you know, today we track them

35:36

at age 18. Right. Right. And

35:38

the question is, is 18 the

35:40

right age? And if

35:42

we think, you know, kids in

35:44

high school should not necessarily be

35:46

tracked, but they can be introduced

35:48

to programs, right? You can have

35:50

more options open. Yeah. Right. And

35:53

so there's been this very broad

35:55

bipartisan interest in kind of reintroducing

35:57

CTE. back into high school. And

35:59

again, just to show like, you know, if you're

36:01

like to work with your hands, here are some

36:03

careers that are in high demand, pay high wages

36:06

that are open to you. And you know, here's

36:08

an introduction to them. You know, you can still

36:10

you're still on the path to go to a

36:12

four -year school if that's what you choose or

36:14

a two -year school, but here's also a career

36:16

path. It's kind of exciting, right? I mean, we

36:18

seem to be at a point where a lot

36:20

of stuff that's been around for, you know, say

36:23

50 or really 100 years, things like occupational licensing,

36:25

zoning, or the kind of

36:27

post -war education system, a

36:30

lot of it's coming up for review,

36:32

right, which is good. You know because

36:34

it but we're living a different world

36:36

agree Can I ask this is a

36:38

might be a strange question to you?

36:40

But what is it like? What's it

36:42

feel like being a billionaire? Because

36:46

there's not that many

36:48

of you You know

36:50

it They that process

36:52

of going from not

36:54

a billionaire. Yeah, too

36:56

very wealthy, right? It

36:59

was kind of shocking. Yeah, it kind of

37:01

is a shock to the system And

37:04

I think it started to change my

37:07

personality a little bit and then my

37:09

family kind of slaps me up right

37:11

like get back to it like okay,

37:14

and then and then like now it's

37:16

you know My vacations are better than

37:18

you know if I if I weren't

37:20

a billionaire, right? But much of my

37:23

life is kind of the same. Yeah,

37:25

and it's like you get happiness from

37:27

you know success in your family you

37:30

get happiness by you know spending time

37:32

with friends By having high quality moments.

37:34

Yeah, I probably work more hours today

37:37

than I've ever worked in my life

37:39

and so And you launched into you

37:41

know kind of your career or maybe

37:43

not launched into your career, but you

37:46

worked at Enron And you and I

37:48

mean when Enron collapsed you were not

37:50

you were not touched by any kind

37:53

of scandal or anything right now But

37:55

what is it like to you know

37:57

if you Google? If somebody Googles you,

37:59

one of the first things to learn

38:02

is that I think in 2001 or

38:04

2002 or so, right before Enron went

38:06

into bankruptcy, you were given,

38:09

I think it was an $8 million

38:11

bonus and you had made them like

38:13

hundreds of millions of dollars. So in

38:15

a way, it's like, why only eight?

38:17

But what is it like to have

38:19

made your bones at the company that

38:21

more than any other company in our

38:23

lifetime is the poster child for just

38:25

kind of bullshit, fake capitalism? Yeah,

38:28

it was you know, I started

38:30

to Enron directly out of school

38:33

when I was 21 years old

38:35

and it was a fantastic place

38:37

to work Because it was growing

38:40

so quickly. It was really pioneering

38:42

a new industry Everybody wanted to

38:44

be Enron. They know all the

38:47

other Historic natural gas pipeline companies

38:49

were the you know hiring Enron

38:51

people away to go, you know

38:54

copy the Enron business model which

38:56

then allowed a young person that

38:58

you know, could prove that they

39:01

could handle responsibility and was motivated

39:03

to move up much faster at

39:06

Enron than in a different type

39:08

of field. And

39:10

so I was a huge beneficiary of that. My

39:12

timing was kind of exactly right. By

39:15

the time I was 26 years old, I was

39:17

the head trader at Enron. And

39:20

Enron was the largest firm

39:22

in my industry. And

39:24

so just an enormous amount of

39:26

benefit from being there at a

39:29

young age. So what was at

39:31

root, what was the scam in

39:33

Enron? And is it, yeah, answer

39:35

that. I think it was hubris.

39:38

It was a company

39:40

where the culture was,

39:42

we can't do wrong.

39:46

And so what started to happen

39:48

was, Enron,

39:50

had a great thing, kind

39:52

of discovered this new industry.

39:55

It actually was kind of originated

39:57

out of the degreagulation of natural

40:00

gas that happened in the 80s.

40:03

And the energy system in America used to

40:05

be very highly regulated, used to be kind

40:07

of the government would set the price of

40:10

natural gas, and then you get these booms

40:12

and And it was

40:14

clear that that was a bad

40:16

system. Jimmy Carter started to do

40:18

regulation in the late 70s and

40:20

then Reagan and then finally with

40:22

Bush. And

40:25

then so what happened was the

40:27

system used to be integrated. We

40:29

had the producer and the pipeline

40:31

and the end user would kind

40:34

of be the same. It was

40:36

recognition that the natural monopoly of

40:38

those three was the pipeline. And

40:40

so let's separate that out and

40:43

highly regulate that. But the

40:45

producers, that's kind of a naturally

40:47

highly competitive market. And end users,

40:49

that's a highly competitive market. So

40:52

it created the need for someone

40:54

to do the logistics of moving

40:56

gas around. And that was really

40:58

what Enron kind of, as it

41:01

emerged from just a natural gas

41:03

pipeline and production company, it started

41:05

being logistics company. And it was

41:07

serving a huge need for the

41:09

market that still exists through today.

41:13

and earned a lot of money

41:15

from it. And it started trying

41:17

to apply that logistics framework to

41:19

other industries. The power industry was

41:21

deregulating during this time as well.

41:23

And there was parts of the

41:25

water industry were deregulating and the

41:27

growth of broadband and people thought

41:29

you could trade broadband and trucking

41:31

and all these things. And

41:34

this was the rise of

41:36

using the internet for disintermediation.

41:39

And so there was kind of

41:41

a lot of value creation to

41:43

be done. And

41:45

Enron was, you know, started having

41:47

these very consistent and high growth

41:49

earnings. And because of that, it

41:52

got rewarded by the market by

41:54

having a high PE valuation and

41:56

much higher than its peers. Right.

41:59

And then you almost get trapped

42:02

by that, where if you're being

42:04

rewarded because you're growing faster and

42:06

more consistently than the market, The

42:09

problem is that if you ever miss

42:11

that, you lose that huge premium. And

42:14

if not, your stock goes down 5%, but you

42:16

lose 50%. And I think kind of looking back,

42:18

it was very similar to what happened with GE.

42:21

The two companies were kind of

42:23

almost identical in their hubris and

42:25

how they traded relative to their

42:27

peer companies. And you

42:30

saw GE, which came days

42:32

from going bankrupt. It was only

42:34

saved because it was deemed a

42:36

strategic financial institution in 2008. And

42:39

it took 10 years for them to work out. And

42:43

Enron did go bankrupt, of course.

42:45

One of the things that's interesting

42:47

is Enron, almost a year before

42:49

the scandal kind of publicly hit

42:51

and it kind of was vaporized,

42:54

the market started You know

42:56

turning against it. So in a way

42:58

I mean like Enron is held up

43:01

as this you know This is what

43:03

capitalism brings these fake companies that create

43:05

bubbles and then you know destroy the

43:07

lives of people That's one way of

43:09

looking at it as part of it

43:12

also that the markets kind of over

43:14

time like they figure out who's scamming

43:16

and who's not yeah, and I think

43:18

the regulation changed mm -hmm after Enron

43:20

and I think you know people complain

43:23

about it, but one of the you

43:25

know great things about the U .S.

43:27

capital market system is that investors put

43:29

a higher level of trust into American

43:32

companies than they do overseas companies, partially

43:34

because of these regs. And we can have the

43:37

debates about the cost benefit and is it a

43:39

little bit too much? Is it not enough? But

43:42

I think some of that regulatory

43:44

framework is valuable. And

43:47

because of that, again,

43:49

the American companies trade

43:52

at higher multiples because of the

43:54

confidence from investors and they're held

43:56

to higher standards. And

43:59

I think capital markets over time figure

44:01

these things out. The

44:03

frauds, unfortunately, you can't get rid

44:06

of them entirely. And

44:08

whenever it happens, there's always going to be a lot of pain.

44:10

There's to be a lot of pain from the employees. to

44:13

be a lot of pain from

44:15

investors in the communities in which

44:17

these firms operate. But

44:20

I think We've gotten

44:22

better as a society,

44:24

as a financial industry

44:26

of minimizing those over

44:29

time. You

44:31

say, okay, sometimes the regulations go

44:33

overboard, sometimes they're not enough. Coming

44:36

out of the, I guess Enrom

44:39

but the tech bubble more generally,

44:41

there were things like Sarbanes Oxley,

44:43

which supposedly chased a lot of

44:45

companies. over to Europe. They would

44:47

list there rather than the US

44:49

because of some of the clauses

44:51

that were put into financial regulation,

44:53

something like Dodd -Frank coming out

44:55

of the financial crisis. Is

44:58

there a way to get

45:00

regulation right from the beginning

45:02

as opposed to reacting and

45:04

then overreacting and then having

45:06

a correction to that? I

45:09

don't think there is. I think a lot

45:11

of this is just learning by doing. Financial

45:15

industry changes over time. People

45:18

find ways to get around the regulation and

45:20

then you kind of have to adjust it

45:22

or wait for something to blow up and

45:25

get the political will to adjust it. And

45:28

so I think this is the

45:30

benefit of what happens at state

45:32

policy versus federal policy is that

45:34

getting things right the first time

45:36

is very difficult. And

45:39

in state policy, they're willing to go

45:41

back on an issue and fix it

45:43

the next year and adjust it again

45:45

the next year. And you see this

45:47

with housing policies. And they'll pass something.

45:50

And then the industry says, OK, you

45:52

adjust these three things, but you forgot

45:54

this fourth thing. Or this isn't working.

45:56

And you go fix it. Whereas at

45:58

the federal level, it feels like once

46:01

every 20 years, you get one bill

46:03

on an issue, whether that's for health

46:05

care or financial industry. and

46:07

or immigration not even at 250

46:10

exactly exactly and you're stuck with

46:12

the mistakes of it yeah right

46:14

and and then it becomes a

46:16

longer that those loopholes or and

46:18

the bad regulatory regime lasts the

46:21

harder it is to fix it

46:23

and you almost need the whole

46:25

thing to blow up somehow in

46:27

order to get the political will

46:30

to go do it again. You

46:32

have a very lively Twitter presence

46:34

and when I read your stuff

46:36

on Twitter, I'm like, oh, this

46:39

is optimistic in the sense that

46:41

you're engaging questions and they seem

46:43

to be answerable and that we

46:45

can do policy better rather than

46:48

worse. Do you feel like

46:50

we're we're in a good age for

46:52

public policy or for the possibilities of

46:54

things? I mean, how do you how

46:56

do you feel about the next couple

46:59

of years, the next 10 years, the

47:01

next 20 years? Great

47:04

question. First, I think you're

47:06

the first person who's ever said my Twitter feed

47:08

was optimistic. I should remind

47:11

sometimes. You know, I

47:13

think we've always tried to not just

47:15

point out problems but try to be

47:17

constructive and say, okay, here's a problem

47:20

and here's an idea about how to

47:22

make the system better. It's easy to

47:24

sit in the audience and just throw

47:26

peanuts at the people who are coming

47:28

up with policy and actually coming up

47:30

with better policies hard. And

47:33

so we've tried to keep that standard. But

47:35

next 10, 20 years,

47:38

it's always made sense to

47:40

bet on America. Right. It's

47:42

been such a robust country

47:44

under so many different challenges.

47:47

And so America faces some challenges today. It

47:49

faced different challenges 10 years ago. You know,

47:51

faced different challenges in 10 years. And,

47:54

you know, I want to bet

47:56

on it because it's worked. Yeah.

47:58

Do you worry, you know, in

48:00

a kind of Trump 2 .0

48:03

or Trump second term, one

48:05

of the things that I think he

48:07

recognized in a way that, you know,

48:09

say, Hillary Clinton didn't quite as explicitly

48:12

is that we were kind of post

48:14

hegemon or you know he he recognized

48:16

that people were feeling anxious about the

48:18

current time in the future and you

48:21

know he talked about he you know

48:23

that he we could go back to

48:25

a time when you know a single

48:27

you know one male income

48:29

earner could have an industrial job and,

48:31

you know, have, you know, 50 children

48:33

and buy steak every week and all

48:35

of this kind of stuff. It's a

48:37

false vision of the past, but he

48:40

recognized there's a lot of anxiety. And

48:42

we're in a very economically uncertain time.

48:44

Do you feel like when you say

48:46

it's good to bet on America, it

48:48

seems in a lot of ways, people

48:50

don't share that kind of optimism anymore?

48:52

What, what do you do you think

48:54

Trump is the solution going forward or

48:58

you know, where

49:00

do we go to regain our optimism

49:02

more broadly, I guess? Tough

49:05

question. I'm not sure I have a

49:07

great answer for it. I think, you

49:09

know, it's, innovation's gotten

49:12

harder over time. And there's been a

49:14

lot written about this, about, you know,

49:16

the difficulties in finding the next breakthrough,

49:18

right? And so, you know, how much

49:20

of that rise in incomes, which is

49:22

a rise in quality of life that

49:24

happened in the 20th century was picking

49:26

the low hanging fruit. of

49:28

innovations. Because at the end

49:30

of the day, a society can

49:32

only consume what it produces over

49:35

the long term. And so productivity

49:37

and innovation are key to that.

49:40

And if that's getting harder,

49:42

then quality of life gains decrease

49:45

just broadly. It doesn't matter who

49:47

the president is or which party

49:49

is in charge. And

49:52

I think this is where you

49:54

know, tech and, you know, there's all these

49:56

great advancements or promises of next generation

49:58

of technology you know, the

50:00

real chance to greatly

50:02

improve quality of life

50:04

for people. I think you

50:06

know, one potential outcome.

50:09

You can imagine different outcomes

50:11

from the It might end

50:13

up you know, meeting expectations

50:15

and kind of being you know,

50:17

gains, but not transformative

50:19

gains. And I think that's

50:21

the big question is, you know, especially you

50:23

look at the U financial situation and

50:25

U .S. demographics, if

50:27

you spend too much time looking at

50:30

that, it's hard to walk away and

50:32

say, I want to on America because we're

50:34

facing a lot of headwinds. then

50:36

question is, can technology and

50:39

innovation make up for that?

50:41

Well, I guess that's why I

50:43

think you're optimistic because you're not

50:45

saying and you know AI or next technology is

50:48

to destroy us all It's probably

50:50

going to be at least marge along John

50:52

Arnold. thanks so much for talking reason

50:54

been great meeting you.