Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: We've talked a lot about energy infrastructure specifically. Are there other parts of U.S. infrastructure, non-energy, that interest you most?
· John Arnold
[00:00:00] S1: The housing discussions that are happening across the nation are really fascinating. A lot of the YIMBYism, or Yes In My Backyard – as a combatant to NIMBYism – originated in California, largely because California had some of the highest housing costs and the fastest growing housing costs, and some of the most stringent restrictions on trying to build new housing. And it had gotten so bad that there started to be this pushback against all of that. What we've seen is similar to permitting reform, this has become a very bipartisan issue, of "Make it easier to build housing." We see it from not only California, but you see it in Montana, you see it in places like Austin and in the Northeast. And so, it has kind of superseded politics. I think politicians are now realizing that this affordability issue is front and center for voters. And that’s driving this renewed focus on cost of electricity, renewed focus on cost of groceries, and on housing. People are asking their mayors, governors, the federal government, "What about housing? What are you doing to reduce the cost of housing and make it easier for people to buy that first house?" If you don't have a response as a politician, you're just not going to win a race these days. President Trump came out and made this comment about, "I want housing prices for those who have a house to go up." He also talks about making it more affordable to buy a house. You can't do both unless there is just a massive government subsidy. I think that's one of the risks of this affordability push. It's been decades in the making from all these regulations, all these restrictions on building things in this country. There aren't easy solutions to overcome this, besides just big subsidies. The real solutions take time, and the problem is that that window is longer than the political cycle. If you're a politician and you're facing re-election every two or four years, you have to have an answer today about, "What you are doing that you can actually see during my term?" One of the easiest things to do there is, if you have access to the budget, which federal politicians do, you just start subsidizing things. Which makes the problem worse in the long-term, but the electorate likes it in the short-term.
· Patrick O'Shaughnessy
[00:00:00] S0: I'd love to apply your system thinking to some other areas that you've studied carefully and been really involved in with the foundation. Before we do that, maybe describe your goal for the foundation overall. One of the things I've heard you say that's so interesting is that foundations should get less powerful over time. Individual foundations, that is. As someone that's running a big one, that's an interesting thought, I'm curious why you think that. So maybe before getting to some of the things that you focus on, just frame, why have a foundation if you want to get weaker over time?
· John Arnold
[00:00:00] S1: Any institution gets less effective over time. I think it's true of companies. I think it's true of countries or governments. I think it's true of foundations. You have your best, most innovative times when you're still relatively young as any organization. So I'm very cognizant of some of the downsides of having perpetual foundations. One of the roles of a foundation is to take risks that the private sector and governments aren't incentivized to take. There might be political risks, there might be economic risks. Because there's less accountability on foundations, they can provide that capital and resources to try things that others aren't willing to do. But those are risky. Oftentimes, those will fail. I think organizations become more bureaucratic, more risk-averse over time, and so they're not able to do one of the main functions of a foundation. There's this difference between charity and philanthropy. Charities often are designed to meet short-term needs, and philanthropy is more on trying to create long-term solutions. We do both of those. We're mostly on the long-term solution side, but we also give money to our local food bank. We give money to help the local hospital. It's harder work. It requires having bigger staff. It requires having a longer time frame, and being willing to live with ambiguity and likelihood of failure on many of the things that we're doing. I talk about, the easiest money to raise is a university that's going to build a new building, because a donor has trust in that institution. They know that if I give a dollar, I can point at the brick that my dollar went to. Sometimes you even have your name on that brick. You see directly where your money's going. A lot of the work that we do, which is based on trying to improve these big systems in America, whether that is the healthcare system, or the criminal justice system, or infrastructure, our public finance system, education. It is long-term work and progress is slow, but we really act as this conduit between researchers and policymakers, trying to do this experimentation, and do evaluations and research about what works and what doesn't in these systems, and help people think about new ideas, and how will you test them, and how can we translate them into something that's useful for policymakers to improve the outcomes of these systems.
· Patrick O'Shaughnessy
[00:00:00] S0: What about criminal justice? Describe your work in that part of the world. What progress have you made? What progress do you think needs to be made to that system?
· John Arnold
[00:00:00] S1: We first got involved in this – we just started passively funding the Innocence Project. The Innocence Project tries to go look at cases of people that have been convicted of a crime, and do new DNA testing on some of the evidence, and see whether that evidence that was used as part of the conviction actually points to them as the perpetrator of the crime or not. The Innocence Project has been able to overturn many, many, many convictions. There’s a lot of very sad individual stories there. But I think most important from the Innocence Project is they're really looking at what was this process that led to this wrong conviction, and how do we improve the system to lead to fewer incorrect prosecutions and convictions. So they were using the individual to try to improve the system. With that entry, we started looking more and more into the criminal justice system. We heard a lot of anecdotes about some of the inefficiencies or failures of the system. We took a step back and said, "Okay, where can we try to help in this system?" A lot of the criminal justice principles came from the great crime spike that happened in the 60s, 70s, 80s in this country. It culminated with a bipartisan crime bill under Bill Clinton in the early 90s that was really about getting tough on crime, and it was about increasing the penalty for if you're caught doing things. Meanwhile, the researchers have known for years that what's more important than the penalty if and when you're caught, is the probability you get caught. A lot of people who are committing crime don't have the ability to process, "If I get caught, will I have a five-year sentence or a ten-year sentence, and that's going to change my behavior?" A lot of it is more, "Am I going to get caught or not?" There were lots of questions about things like, how do you do pre-trial detention? This time between when you're arrested for a crime and when you're convicted in courts of a crime. What should happen to you in that time frame? We got asked to come into New Jersey to help them think about that. Kentucky, a Republican state, was one of the first to really try to redesign the system when their existing system was deemed unconstitutional. So, thinking about what's important in that decision process – what many states have decided is what's important is, are you a threat to others?