Trey Lockerbie (02:57):
I am so glad to learn about you and meet you. This has been a really fun journey coming through from the GiveDirectly team. And from what I’ve gathered about you, learning what I have, you seem to have been a very enterprising young man. Your first company, you started it when you were 14. And given that you were the youngest billionaire back in 2007, and have now gone into philanthropy full-time, as well as, signed The Giving Pledge, I’d like to start out here by just hearing about your relationship to money, especially early in life, because that philanthropic career seems to have captured you very early on.

John Arnold (03:33):
So we’re starting with a softball question, my relationship with money. I think it’s fair to say that I was consumed by the idea of making money from a very early age. I remember having this conversation with my parents that I wanted to be a millionaire by the time I was 30. And that was my goal. It wasn’t that I wanted a specific career track. My goal was to become a millionaire. And so, I’m just going to reverse engineer how to get there, which started with that summer walking around the neighborhood, knocking on doors, trying to mow somebody’s yard for $15. And the following year, when I was 14, the baseball card craze had started, and my friends were all collecting cards. And I collected baseball cards for five minutes, and then I realized, “Hey, I want to buy and sell baseball cards. I want to translate this into how can I start a business and make some money around it.”

John Arnold (04:23):
And so, that led to kind of a several-year enterprise with me becoming a wholesale distributor of cards, taking advantage of geographic arbitrage and information arbitrage opportunities, sending cards all around the nation, bringing cards in, and earning enough money to pay for a couple of years of college. That concept of how do I make money, I think translated into the books I read in high school. I remember reading Liar’s Poker, reading The Wall Street Journal every day, reading corporate biographies, things like McDonald’s, and even a Donald Trump biography, God help me. And then when I got to college, it was how do I get out of college as quickly as possible and get into the game? So I took heavy course loads that had some AP credits, took summer school so I could graduate in three years, and just get out there.

John Arnold (05:12):
And so, the whole life progression up to that point was I want to be in the business world. And if your goal is to make money, especially back in the 90s, you very easily got steered into the field of finance. And so, here I was. I didn’t really know what investment banking was. I didn’t exactly know what trading was. I had read enough about them both to kind of understand that, that’s where I wanted to be. And so, that steered my career track and certainly in the field of trading, which is probably the one profession that is most directly related to money, right? You have that scorecard with you every day about how are you doing in the market and how does that translate to your own compensation? And that very much steered me from an early age.

Trey Lockerbie (05:57):
Where do you think the urgency came from? Why age 30? What did money kind of mean to you at age 30? Were you planning on retiring at that point? Did you just-

John Arnold (06:06):
Nah.

Trey Lockerbie (06:06):
Want freedom? What was the drive there?

John Arnold (06:08):
I think it was trying to prove something, mostly to myself, but a little bit to the world, that I was a good student. I wasn’t a great student. I was naturally very talented in math, but I never put in the effort to get the best grades. And so in high school, again, I had good grades, but I wasn’t valedictorian or salutatorian. I applied to go to Ivy League schools. I got rejected from them all. I ended up at Vanderbilt. Coming out of Vanderbilt, I applied for the marque Wall Street banking jobs, the Goldman Sachs and Merrill Lynches, and got rejected from them.

John Arnold (06:44):
And so at that point, it was I had high confidence in myself, but I needed to prove it to myself. I needed to prove my success. And again, at that time in my life, this scorecard was money for better or worse. But it drove me into this career which ended up being perfect, both for my skill set as well as what I ended up being really passionate about, especially at that time of my life. And then, in my 20s and into the 30s, was really enjoying the markets and that game and that fight every day. I loved and I was good at it. So, I happened into a job that was perfect for my skill set.

Trey Lockerbie (07:22):
Yeah, let’s talk about that job because it does seem like you really just found your sport or something at that stage, right?

John Arnold (07:29):
Yeah.

Trey Lockerbie (07:29):
You just kind of gravitated, from what I’ve read. So out of college, the first job you land is with a burgeoning company called Enron.

John Arnold (07:37):
Enron, yeah.

Trey Lockerbie (07:38):
And that’ll perk a lot of people up I think when they hear the word. Obviously, it’s kind of a tarnished name at this point. That name bears a lot of weight.

John Arnold (07:47):
There’s a lot, yeah.

Trey Lockerbie (07:48):
There’s a lot there.

John Arnold (07:48):
That’s a lot.

Trey Lockerbie (07:48):
Which we could get into a little bit. But what I’m mostly interested in is while you may not have set out initially to be a natural gas trader, you most certainly had a knack for it. So what was your experience like, and what do you kind led you to ultimately being at this trading desk at Enron?

John Arnold (08:04):
So coming out of college, the best job I got was at Enron. And at the time, it had a very active energy trading desk. It was kind of the largest energy trader and had a bit of an investment bank for the energy industry, had developed this merchant firm around the energy business. And that was close enough to be in finance for me. And so, I figured I’d take that job, work two or three years, go back to business school, and kind of figure out what I wanted to do with my life. And I happened to be put on the trading desk from day one, which was a bit unusual. But I found my home there immediately. And as a company, it was a great place to be in the 90s. It was creating and inventing these business lines.

John Arnold (08:48):
And it was taking lots of risks. It was doing things other companies were not. It was named the most innovative company by I think Forbes Magazine or Fortune for a number of years running. And it was a fantastic place to be as a young, ambitious employee because you got responsibility much earlier than I would’ve gotten had I gone to one of the marque investment banks. They were growing so quickly that they would often take somebody out of middle management, promote them to go start a new line of business, and everybody below them would take one step up. And so, I was able to escalate my career much quicker there than I would’ve any place else. And I think the firm obviously had its strengths, it had its weaknesses. It had hubris around it that I think led to the downfall.

John Arnold (09:36):
I got there in 1995. It declared bankruptcy in December 2001. And so, for about six and a half years. And I saw so much. I kind of joke that I earned my MBA there. I never went back to get my official MBA, but I saw so much on the way up with innovation. But then, I learned even more on the way down understanding what the company did poorly, what it did wrongly, and the ramifications that it had, not only to investors but more importantly, to the older employees. It was fairly easy for people like me and the people in their 20s to transition into a new career or new firm. But the pain that is created for older employees who lost a significant amount of their retirement funds and their next job wasn’t as clear, it was real.

John Arnold (10:26):
And so, having all those mixed emotions about being part of the creation of this or the build-up, the success that the company had but then seeing that downfall and all the pain that it caused was real. It was an emotional roller coaster. By 2000, at the age of 26, I was the head natural gas trader at Enron which was the biggest gas trading firm in the industry. So I was sitting in the biggest seat in the industry at a young age, and just completely focused on trading the markets. Had a small team around me and we were just heads down, pedal to the metal, just all day, every day. And it was exhilarating. At that age, you just have infinite energy and just this roller coaster of emotions around the whole thing.

Trey Lockerbie (11:12):
At that age, did you feel the pressure that you had being in that position? Were things moving so fast that you were just sort of moving with it and didn’t have time to think? Or were you feeling that pressure and stress along the way and that responsibility of being in that role?

John Arnold (11:27):
Both. I think it was you’re just trying to keep your head above water. We were trying to do so much. The industry was so busy. The volumes that were being traded in the industry were so high. And we were the center of it. We were trading multiples of what the next largest company was. And much of that was going through my desk. It was getting priced and managed through my desk and a lot through me. And so, each day was just a battle to stay alive. But then, you’d step back and see what was being created, and it led to a sense of pride about the success that certain divisions within the company were having.

Trey Lockerbie (12:06):
Now, you often hear that bankruptcy happens slowly, then suddenly, right? And I imagine 2001 could have been a very confusing time, as you kind of highlighted, seeing this peak and then this ultimate crash, and the pain that went along with it. But in a strange way, you also had just made this $8 million bonus. So you just brought in nearly three-quarters of a billion dollars for the company, and this is seemingly right before the collapse. So I’m just kind of curious, was there writing on the wall? Were you seeing the cracking around you? Or were you pretty blindsided by the whole thing on the day that things really turned around for it?

John Arnold (12:42):
It was mostly blindsided. I had had friends in other divisions of the company. And we would go get a beer, and some of them would talk about some of the issues that were in other divisions. But at the time, especially in 2001, the trading division was so profitable that there was a sense that those trading profits could mask other parts of the company that were doing poorly. And so, I didn’t give it a whole lot of thought. I kind of knew that things weren’t 100% kosher there, but again, it was just a day-to-day survival of trying to get through that day, get through all the trading volumes, and translate that into some profit for the company, which then, translates into success for me.

Trey Lockerbie (13:24):
And you mentioned innovation and how innovative the company was. As I understand it, you were using a system called EnronOnline, which allowed you to trade these derivatives. What did that software allow you guys to do? Just talk us through about that experience and what that innovation, having that in your arsenal, meant for you in that particular position.

John Arnold (13:45):
Sure. So at the time, the main trading venue was an open outcry system on the mercantile exchange, the NYMEX. And it was incredibly inefficient, just the number of phone calls and people you would have to go through in order to get a transaction completed. And this was about the time ’99, 2000, web 1.0, when things started moving online and auction markets started moving online, all types of markets started moving. And some of the executives at Enron had the idea of, “Let’s put our markets out online. Let’s make it easy for customers to transact. Let’s give full price transparency, so we’re not quoting one customer one thing and another customer another thing. We have to have very tight bid offers and they’re going to be fully transparent to the market. And if anybody wants to transact with Enron, they can do it. With one click, they get an instant confirmation, and their transaction is done.”

John Arnold (14:41):
And that was a far superior system than what existed at the time. And so when it was introduced, it very quickly became industry standard. And so, the volumes that we were getting, starting in 2000 and continuing on through 2001, through that system of all products, but especially, the ones that I was responsible for managing, were just incredible. And trying to manage the risk that was coming into the company, price, and manage warehouse that risk was a very substantial enterprise that we were doing. And it provided a lot of liquidity for Enron to take its speculative positions. It provided a lot of information as we saw what everybody in the market was doing. And we theoretically made some bid-offer income, but the downside was a market maker that’s constantly out there, you can end up with positions that you didn’t put on by design and that would go against you. So, there was that struggle of how do you manage these positions? How do you manage a bid-offer given that you may or may not want these positions that are coming through on your markets?

Trey Lockerbie (15:48):
Now, from learning on that system, I’m kind of curious as we kind of go from the Enron collapse into your next venture, which was Centaurus, your own firm, walk us through what led you down the path of starting your own firm, and what maybe learnings you took from either that software or any kind of other systematic trading you took along with you.

John Arnold (16:07):
So I was very happy to get away from EnronOnline, right? And getting to have that time back and that stress removed. But when Enron went bankrupt and I was contractually obligated to stay there to and through bankruptcy, so I didn’t leave until February 2002, and the question I had was, “Well, what next?” And I had a number of opportunities. I wanted to run my own thing. I wanted to either run my own company or run a division within a company. And at the time, I was running a trading desk. But I wanted to take that next step up and run a division. And so, I talked to some of the New York banks about that. I talked to some of the energy companies about going there, and I started talking to some of the hedge funds. And it was clear that the highest compensation for me was going to be through the hedge fund structure.

John Arnold (16:55):
Just the economics of that, especially at that time, it was far superior to be in the hedge fund structure. And then, the next question was, “Was I going to start on my own, or was I going to go work for a larger fund?” And the business that I was running at Enron, that I continued on at Centaurus, didn’t have much synergy with what other hedge funds were doing. It was a pretty unique strategy. We were trading this niche market of US natural gas. We were trading the commodity. We weren’t trading equities or bonds around the energy space. And so, there wasn’t synergy of me going to another hedge fund besides the fact that they had day one capital that they could allocate to me. And during this time, I had a number of people approach me and start offering me day one capital if I wanted to start my own company. And when I got confidence that I could get that, that became an easy decision of, “Let’s go down that route. I’ll start my own company.” And in August 2002, it was the first day of Centaurus Energy.

Trey Lockerbie (17:56):
Amazing. So, you achieved your goal. You were a millionaire well before age 30.

John Arnold (18:01):[crosstalk 00:18:01].

Trey Lockerbie (18:01):
What was that day like realizing that goal that you had kind of been after for so long? What did you feel, and what was kind of anything you learned from that?

John Arnold (18:08):
Well, there’s a psychology of money that I’ve been a part of. And I’ve been a part of it directly and I’ve seen this affect others, which is you have this goal, and as soon as you get to that level of success, your goal post-change. They move. And so it was, “Okay, it’s not 1 million. It’s 10 million.” And then when you get there, it’s something else. And I was definitely on that treadmill for a long time as I was having success. What I defined as, “Okay, I have enough. I’ve met my objectives, I’ve proven it to myself,” kept changing until it got to a point where at some point, I said, “I’m not enjoying this anymore. I’m not happy on this treadmill. And I need to step off.”

John Arnold (18:54):
And looking back, that was scary. It was risky for me. I didn’t know, whenever I stepped off if I would find happiness and satisfaction doing something else. My career at that point, when I finally closed Centaurus in 2012, it was 17 years in energy trading. Is the only thing I had done. And so the question was, again, could I find that satisfaction? Could I find success doing something else? And could I define my life with something other than money? And that was the question that I was going to face stepping out.

Trey Lockerbie (19:31):
That kind of reminds me of another hedge fund manager we brought on the show, Jason Karp. He told us that he had a mentor at one point who told him that he had been to the top of the mountain and there was nothing to see. So when you talk about being on this treadmill, I think that really kind of accurately describes how you were feeling. But I’m kind of curious, stepping off of that huge business… I mean, stepping away from that, was there a lack of identity that you were seeking shortly thereafter? What was the aftermath of that stepping away? How did that look for you?

John Arnold (20:05):
I was lucky I had met my wife in 2006. We got married in 2007. And she had a professional career. We both had this idea of wanting to do something significant philanthropically when the time was right. And about 2009, she was at a crossroads in her career and decided to step out and start thinking about our foundation full-time. And I started to do it very much part-time. Maybe an hour a day, go over to the foundation offices and spend some time there. And over the next several years, I started getting more and more interested in some of the issues and work that we were doing at the foundation. By the time 2012 came, again, my last year of running Centaurus, I was finding more happiness and more challenge thinking about our philanthropic activities rather than trading energy markets. So it was a very easy transition for me, at least from having something to do. The next day, I would just show up at a different office. The bigger question was, would I enjoy going from one hour a day doing that to doing it full-time?

Trey Lockerbie (21:17):
Now, we’re going to get to the philanthropy here in a second, but I have to just ask while we’re still vaguely on the topic of your trading career, the markets are a lot different maybe today than they were back then in a lot of different ways. I’m curious, do you still trade on the side? Do you miss it? Do you participate in any way? Have you stepped fully away from the game?

John Arnold (21:35):
So I don’t manage anybody’s money, which thanks to goodness, that takes away very significant stress from my life. I still mess around in the markets a little bit. I like having one foot in that for profit space. I like just thinking about markets and investing. And so I do, at times whenever I see something that’s really disjointed in the markets, will step in and put a little something on.

Trey Lockerbie (21:59):
Is there anything at the moment, I have to ask, where you’re focusing the most? I mean, I’m just going to frame it that way. Are there any opportunities that are calling to you?

John Arnold (22:09):
Yeah. The oil market, I think, is in a structural bull market. And the boom bus cycle associated with commodities continues. We had seven years of very low oil prices where the industry just got decimated, and the CapEx that was put into the industry fell precipitously. And there was a belief, I think, that the oil demand peak was near than what it was, and the equity markets were not valuing growth anymore. They were sending a signal to producers not to invest in new supplies because the energy transition was going to make the oil have a terminal value of zero at some point. And companies responded to their financial duress. They responded to equity valuations and what Wall Street was desiring from them, and they severely cut back their exploration budgets. And we’re at a point now where oil demand is still going up. And so, that spare supply and that supply-demand just kept getting tighter.

John Arnold (23:12):
And I think the COVID of 2020 when you had this, the demand shock hid the tightening of the market and caused even more financial duress, such that whenever things emerged, it became a more blatant supply-demand discrepancy, as well as, a lack of capital to figure out how to get yourself out of this. And I think even still, the markets aren’t valuing growth. They want the oil today, but they don’t want oil five or 10 years from now, and you can see that from the forward curve. And I think this is going to be a challenge for the markets and for the oil markets during the 2020s. It’s very unclear how they balance other than very high prices that cause demand destruction.

Trey Lockerbie (23:55):
Thank you for that. That’s amazing. I’d like to talk about the Arnold Foundation. And one of our other recent guests was Tony Robbins and he said something that really stood out to me, which was that “Money does nothing for you. It only enhances the person that you already are.” Meaning that if you’re a giving person, you will give more. If you’re a materialistic person, you’ll spend more, et cetera. It stood out to me that your philanthropic efforts began really early in your career and have only expanded from there. Did you always have the drive for philanthropy? You seem to have been involved from an early start.

John Arnold (24:29):
I think it’s natural for people, whenever you have enough resources to meet the demands of yourself and your family, to look broader and start thinking about their community. And people define their communities in different ways. It could be extended family, it could be a geographic community. It could be any number of things. But I felt that, and I felt that I wanted to be productive in society. And the professional occupation I chose of financial trading, you can tell a story about why it’s a needed function. But it’s pretty hard to draw the direct correlation or direct tie between trading and making society better.

John Arnold (25:11):
Even from my early days at Enron, when I started making some really good bonus checks, I started giving money back to the community, mostly in education. So I agree with you, I agree with Tony Robbins that the money allowed me to be much more philanthropic. It exaggerates all traits, both good and bad. It exaggerates the bad traits as well, and you have to be very careful about that. But it allows somebody, who naturally wants to give back, to have that opportunity and to do things that most people can’t. And so, I’ve had that great luck and blessing in my life of being able to do that in the manner that we are.

Trey Lockerbie (25:53):
How steep was the learning curve entering into philanthropy? I’m curious, given the skillset you were bringing to the table, were you able to leverage any of that and apply any of either strategies or lessons from the trading career and apply them to your philanthropic work?

John Arnold (26:09):
So, the work that we do at Arnold Ventures is domestic public policy. We work in areas like education, criminal justice reform, public pensions, healthcare policy, evidence-based policy. So, all of that was completely foreign to me when we hopped in. I had been in education reform circles for over a decade when Laura and I kind of really started to ramp up our foundation. So had theories of that, had learnings from that space that then to some extent, were applicable to these other spaces. Just about how these large public systems work, what the incentives and rules or how actors respond to incentives and rules, how change happens, the rule of legislation in driving change, the rule of public opinion in driving change. And so, wasn’t starting from scratch, but it was very much new work.

John Arnold (27:04):
And there was a very steep learning curve associated with that, as we were trying to figure out as outsiders to these systems, how could we be productive? As a third-party foundation and these very complex systems with a lot of actors and special interests, with government intervention in these systems, how could we be productive? And so, we tried a lot. We did some things right. We did a lot of things wrong. And now, kind of 14 years into this, I think we’ve had a lot of learnings. We’ve been able to create a brand and a reputation that’s attracted some real, top experts in the field. So, it’s much easier now that we don’t have to go into these systems and these fields and try to figure it out ourselves. We can hire great people who have the knowledge. But we’re trying to do things a little bit differently than what others do. I think there are only a few foundations that are really focused on public policy as the lever for structural and sustainable change. And within that, we’re probably the largest that’s focused exclusively on policy.

Trey Lockerbie (28:15):
We’re going to talk about some of those organizations, especially GiveDirectly, here in a moment. But I’m kind of curious, and maybe this ties into how you found GiveDirectly, but what have been some of the biggest challenges you’ve experienced so far in your philanthropic career? What hurdles have been the most to surmount, so to speak?

John Arnold (28:34):
The hardest by far is special interest in all these fields. Anytime you’re trying to change a system, there are winners and losers. And people who are harmed by that change, the special interests who are harmed, who have an economic interest in the system, are very good at stopping that. And certainly, some fields more than others, but at the instance of healthcare, which is probably the most powerful special interest in DC. And every Congressman has a hospital in his or her district. Everybody uses the healthcare system. It’s very easy to tell stories about the harms that are going to develop if the healthcare system changes at all. Political careers have been ruined trying to make a change in healthcare. And so, we go in and point out these deep inefficiencies in the system. And it’s clear to experts about the flaws of the system, about ideas of how to improve it, but actually reaching change and reaching success in trying to improve the system is enormously challenging.

John Arnold (29:41):
And I think one of our advantages is we’re young, we’re patient, we don’t have economic interests in any of the things that we’re working on, and we can be a safe space for policymakers because of that. We can be objective, and we can be trusting, and we can provide that information, but trying to actually get policy change, trying to get legislative change is challenging and it’s been the biggest struggle. The upside is whenever you do create change, whenever you do get that law passed, it’s hard to get that changed again. So that’s the structural and sustainable aspect of the work that really drives our day-to-day, but it requires a level of patience that I think few have.

Trey Lockerbie (30:25):
Yeah, the special interests are particularly interesting. And there’s just sort of the misalignment of incentives, it just seems, all across the board. In researching you, I came across some, what seemed to me, these cheap shots. I mean, you’ve seen advertisements of people kind of dragging your name through the mud just because of the association with Enron and trying to discredit you when it’s just fascinating to see that knowing that the intentions and how genuine they are and the change is a significant one that you’re trying to make. What has the experience been like just dealing with all of that external kind of ramifications or collateral damage from your effort?

John Arnold (31:07):
It was hard in the beginning. We were trying to improve these systems and we were getting attacked. And especially, I was getting attacked. And to some extent, I had an easy target on my back, having Enron on my resume. But at some point, step back and say, “Why are we getting attacked?” And the answer was because we’re having an effect. If we were not doing anything, if we weren’t successful in trying to change the conversation in these systems, we would be ignored. But the fact that we were getting ad hominem attacks against us and that special interests were hiring attack firms to go after us was an indication that we were having success. We were making progress but they were scared of us. When we came to that realization, there were, I think, two ramifications.

John Arnold (31:51):
One was, it was a renewed energy. Don’t let this bother us. We don’t have a business on the side. We don’t have a day business that we have to protect. That we are able to put our reputations on the line and take that criticism like very few people in our situation are. So, let’s use that to our advantage and take on issues that have scared others off because they don’t want that backlash. The second thing was we realized we need to tell our story better. I came from energy trading. Laura came from M&A legal background. In both professions, it stayed out of the press. You don’t want to be in the news. And we took that philosophy into our work. In the beginning, was we were just going to put our heads down, do the work, not talk to the press. We don’t really have successes early on. So, let’s not tell the story of what we’re going to do. Let’s just do it.

John Arnold (32:49):
And the problem with that was if we weren’t telling the story of what our motivations were, why we were interested in the work, what the ideas that we were promoting were, and what the ramifications of those ideas were going to be, somebody also was going to be telling that story for us and it wasn’t going to be favorable to us. So, we realized that we needed to get out more. We needed to tell the story. Who are Laura and I as people? What are our interests in this work? What are the ideas that we’re promoting? And why are we doing it? And since we started doing that, it’s changed dramatically.

Trey Lockerbie (33:22):
All right. So I imagine along your journey, you’ve dealt with a number of different organizations, seen some work, some not work. You’ve obviously found something that intrigued you with GiveDirectly. And we have Michael Faye, co-founder of GiveDirectly, here on the show. Michael, welcome.

Michael Faye (33:39):
Thanks for having me, Trey.

Trey Lockerbie (33:40):
You’ve been patiently waiting in the wings here. I really appreciate it. You are a particularly impressive person yourself, so I have to highlight that. I mean, unbelievable resume, and you’ve had a significant impact on the philanthropic world through multiple organizations. I’d like to kind of explore this thesis that seems to underline all of them, which is that the best way to combat global poverty is to simply put money into the hands of those who need it most. So, where did you first originate this idea and how did you kind of prove this out?

Michael Faye (34:12):
Yeah. So I did a Ph.D. in economics a while ago, and it wound up being a pretty interesting time for the field because we started to A/B test what worked and what didn’t work. So, we applied some of the same rigorous techniques that you might use to test the drug to poverty programming. And what we learned, and to synthesize kind of the literature, was that a lot of what we had hoped worked, and that we had been doing in the field did not work as well as we would’ve liked, and simply giving someone money to make them less poor worked remarkably well. We ran around and said, “Well, this seems great. Why don’t we give out some of our money this way?”

Michael Faye (34:46):
And as it turned out at the time, nobody was really letting you do that. People were running small programs here and there. But if you wanted to give money and simply have it get to someone else in extreme poverty, that was impossible. And little by little, we built GiveDirectly to do exactly that. And we’re under no illusion that cash is the only thing that should be done, but we do believe that recipients themselves should have some say in how the capital and this sector gets allocated. Ultimately, it is to benefit them. Why not give them some choice in that decision?

Trey Lockerbie (35:15):
Fascinating. So, I’d love to kind of explore GiveDirectly as it stands today. It seems like the majority of the philanthropic work is benefiting Kenya, but you also have programs even here in the US and in Atlanta, Georgia. Walk us through the decision on starting in both Kenya and also Atlanta.

Michael Faye (35:33):
Yeah, it’s a great question. So Kenya, we’ve got to go back more than a decade. And there was a dramatic change in financial systems about 2007 and 2008 which started in Kenya, and that was the introduction of mobile money, specifically, M-Pesa. So we went from a world where most people in the emerging markets had no access to the digital financial system. So no bank accounts, really no way to get them money outside of physically handing someone money which is hard. And we literally saw tea companies would drop boxes of dollar bills, denominated in packs, to pay folks. So M-Pesa comes out and all of a sudden, any person that has a feature phone can get paid. I can literally sit in my living room in New York and pay someone in a refugee settlement in Uganda. And that very quickly changed what was possible philanthropically as well. So for the first time, I can get money to these folks. And that’s why we started in Kenya, these mobile money started in Kenya. Since then, it’s expanded. We’re working in places as diverse now as Yemen, Liberia, and Atlanta.

Trey Lockerbie (36:32):
And it definitely just piqued my interest in Atlanta. What was the thesis going into that region in particular?

Michael Faye (36:38):
Yeah. So, a lot of the cash programming we do is sort of a lump sum grant that lets people take investments they may not have made otherwise. There’s been this other idea out there for a long time, from Martin Luther King to many others, to give people a basic income. And the concept of a basic income is everybody deserves a minimum standard of living, which we can achieve by giving people a minimum standard of income. So in the US, that winds up being about $1000 a month. In most of Africa, that’ll be about a dollar a day. So, why not do that? And why not do that with some of the most vulnerable people? Which is how we got started with this guaranteed income program in Atlanta.

Trey Lockerbie (37:14):
And what are the limitations of that in your mind? For example, you had Andrew Yang recently campaigning about a universal, basic income. At what point is there a limitation to that idea? Meaning, we’re spending around trillion dollars in welfare programs in the US, which theoretically could work out to be 25 grand a year to the 40 million people in the US here who are considered poor. I’m just kind of curious, does that broaden out that just theory in your mind? And economically, given your Ph.D. and your work, are you a proponent of the UBI mentality?

Michael Faye (37:47):
Yeah. So cash will not solve everything, right? There are problems with coordination and public goods. So, cash is not going to discover a COVID vaccine. It’s not going to build roads. It’s not going to establish other public systems. And we should be clear about that. At the same time, there is a lot of waste in the system and a deep degree of paternalism, right? Even in the US, there was a discussion a few years back about, instead of giving people food stamps, actually sending them boxes of food. So you pick the powdered milk, you pick what goes in that box of food. Now, that is tremendously wasteful. Not only do you have to send shipments of food to people, but because I have no idea what kind of powdered milk you want, or even if you want powdered milk. So we should at least start by asking the question, why not cash? For so long, we haven’t trusted recipients and we forced organizations like GiveDirectly or donors to justify why would you give cash?

Michael Faye (38:38):
And I think that’s the wrong question. I think we should ask why would you not give cash? Let’s start from a place where the recipient chooses, where we empower them, and where it’s efficient. And then, let’s make the argument, why not do that? And there will certainly be cases. The other thing I would say on this, you asked, “What are the limitations?” I think we’re just scratching the surface. Cash has historically been a rounding error of what we do as a sector, and the potential for it is tremendous. You look at the global poverty gap today and Brookings will estimate it’s about 95 billions. That’s the amount that it would take to get every person in the world above the poverty line. That’s 0.1% of annual global GDP. That’s not a lot of money. That means that for 0.1% of our global income, we could potentially end poverty today. So, there’s a whole lot more 0.1% to solve other problems. But why not take a crack? Why not take a chance at ending poverty in the next decade or two?

Trey Lockerbie (39:28):
Now, speaking a little bit more about that waste, kind of on the flip side of that is the dormancy of money, right? And you have both been outspoken about this thing called a donor-advised fund and it needing more regulations. So, walk us through the misincentives around DAFs and what changes you’d like to see. What are the issues and what are the changes you’re out to kind of change?

John Arnold (39:50):
I’ve met a lot of very philanthropically inclined people over the past 10, 15 years. Many of those people are not actually giving money on an annual basis that’s aligned with what their intent is. So, there’s this big gap between philanthropic intent and philanthropic action. And the question is why? And I think it’s become easy to push off the decision about how to choose which organization you’re going to support until tomorrow. There’s no forcing mechanism with donor-advised funds that forces you to make a decision today. And because it’s hard, people don’t want to make a mistake with their giving, they put it off. Some people. And so, there’s a reason why we see most of the philanthropic giving that happens in a year, that comes out of your checkbook, happens in December. You have this forcing mechanism that you have to give it away by December 31st in order to get the tax credit for that given year.

John Arnold (40:47):
And if you give money to a private foundation, there are requirements that you have to distribute 5% a year, right? So again, there are these forcing mechanisms that get money moving. A donor-advised fund is this unique structure where there’s no requirement to actually distribute the money into the community. So, you can write the check now into a donor-advised fund. You get the tax credit for this year, but that money can sit dormant forever. And I think that’s wrong. So what we’re saying is that if the donor gets the tax credit today, that within a certain amount of time, that money needs to start flowing into the community, that these shouldn’t be wealth warehousing vehicles, that some of them are, especially some of the very big ones are, and that donors actually should be incentivized to give them money while they’re living, while they are thoughtful about it, rather than dying and having this money in a will be lump sum to a number of organizations.

John Arnold (41:45):
Or more likely what we see is that these decisions just get pushed off to a future generation that might not want that responsibility, might not have the same passions that the original donor had and set the tone and admission statement for the donor-advised fund. And so, there are this enormous amount of resources that, again, received a subsidy from the government, that’s meant for the community, but isn’t getting to the community. So what we’ve proposed, a coalition of a number of policymakers and donors, and academics, including Michael, have suggested is that there should be a requirement that the money gets to the community within a certain timeframe. And lawmakers in DC have heard this, and it’s really struck a chord with them. And there’s been bipartisan legislation introduced both in the house and the Senate along these lines.

Trey Lockerbie (42:39):
That makes sense. And there also appears to be an interest of those brokers, managers who are collecting fees on the assets under management, as part of these funds, that I imagine are kind of the coalition you’re up against, right? Who is trying to protect almost the fees that they’re obviously disincentivized to give that money away? So, that seems like a structural change that’s needed as well.

John Arnold (43:00):
Exactly. So, they get fees based upon assets under management. So it creates this misalignment that they are naturally inclined to want that money to stay in investment funds and not get distributed to the community, the exact opposite of what these funds were intended to do.

Trey Lockerbie (43:17):
And shifting gears a little bit, while we have you, John, what kind drove you to partner up with GiveDirectly? What did you see in them that you liked?

John Arnold (43:26):
So, I saw some of the same things that Michael had seen with the fault of programs that weren’t meeting the intended targets and goals. And as Michael was talking about the research that started happening in the evaluation of programs through randomized control trials and A/B testing, you could start seeing what effect do these programs have that have high intentions and are really well-meaning, what are they actually doing? And I think, especially in the international space, there was a lot of disappointment that the programs, as crafted by Americans and by NGOs, were not having the desired effect. And although we are a domestic public policy foundation, I was very interested in these debates that were happening among development economists about why aren’t they working, and what’s a better way for resources to go for good overseas. And that led me to find GiveDirectly as the gold standard of any program should have positive impacts that exceed what you can do just by giving cash to an individual. That should be the base, and you should have to prove that the idea of this program is better than just giving the individual cash.

Trey Lockerbie (44:44):
Yeah. So Michael obviously is not that passive, right? Where you’re just handing out cash and walking away. You guys are tracking the effectiveness of these dollars. Walk us through how GiveDirectly works exactly, how it tracks the effectiveness and the efficiency of the donations.

Michael Faye (44:59):
Yeah, for sure. One thing to pick up on what John said as well is I think cash does push structural change in a sector that has largely anchored the programs, and I think it does it two ways. One is that it forces us to think about what the recipient wants, right? The unique thing about nonprofits first before profit is the person that pays is not the person who benefits. And that’s unusual, right? If you don’t like the phone you bought, don’t buy the same phone next year. And the market has a mechanism to fix that. The mechanism doesn’t really work in the nonprofit sector that way, right? Because the person that pays is different. And the second thing is when you tell people you’re giving cash, and we’ll talk about the systems for doing it, everybody has a thousand questions.

Michael Faye (45:37):
How do you know it gets there? Who do you give it to? Do they waste it? How do you know it works? Is there fraud? What exactly does it cost? And our answer is these are exactly the right questions, but we need to be asking them for everything. So if cash is the mechanism by which we push the sector and other organizations to ask and prove those questions, that’s a gift in itself, beyond the direct impact of doing cash. Now, on the operational bit, it seems like the easiest thing in the world. You just hand someone cash and you’ll be, “What could be easier?” But it actually turns out to be relatively complicated, right? So if you think about the structure of any intervention, the first part is figuring out whom to give to. So in our case, we look for those in extreme poverty. How do you find people in extreme poverty, and how do you do it at scale?

Michael Faye (46:16):
What if I want to find a million people in a month to pay, that’d be if a generous donor gives, and that’s complicated, right? That’s step one. We’ve done everything from door-to-door surveys, how big is your house, what assets do you have, to literally using machine learning algorithms on people’s phone data to identify who the poorest people in a country are. And that sort of program is amazing because it scales rapidly and kind of instantly within a country. So, that’s finding who the people are. Then you need to plug them into a program. How do you actually persuade them to sign up? How do you teach them about the program? And so on. If I showed up at your house and said, “Trey, I’ve got $30,000 for you. You just need to sign here and give me your phone number,” you probably would ask me to leave, right?

Michael Faye (46:54):
And it’s not just you, but a lot of recipients have that skepticism. People say no all the time. How do you convince them and persuade them that this is real and different? The third bit is you have to pay them. How do you pay someone in remote Liberia, which is a country that does not even print its own currency, that literally imports physical bills of which there’s often a shortage? How do you make sure there’s enough money in rural Liberia where there’s no reception? So it’s everything from even bringing in kind of remote cell phone towers to provide the connectivity, to working with the telcos to do it. And then of course, how do you monitor and evaluate this, right? And the gold standard is these randomized trials, which we do in partnership with academics, but we also literally interview every recipient and publish this on the website without editing, live.givedirectly.org. And you can see the stories. So anyway, that’s the short answer to some of the complexity of simply giving people cash.

Trey Lockerbie (47:42):
Well, I’m glad you brought up the challenges to actually getting the dollars into hand and especially in rural, impoverished nations where the internet can be a challenge. Because one thought I’ve had, I’m sure it’s something that’s come to mind for you both, is this new world of cryptocurrency, for example, and having a blockchain and traceability to some extent of how to go bypass an intermediary and get someone money. I know Jack Dorsey, for example, is doing a lot of initiatives in Africa for this exact kind of reason, propagating Bitcoin in countries such as Kenya especially. So is that anywhere in the near future, do you see a benefit of blockchain technology entering the philanthropic world in a beneficial way?

Michael Faye (48:26):
I think it’s early days, but I think the crypto community has been quite generous. I think direct giving and the crypto community share a lot of common philosophies. One is decentralization. Empower the individual over the institution, which is kind of at the heart of what we do. And two is traceability. I want to know where my funds go. I think a lot of the skepticism around NGOs or taxes is about what happened to my money? So the fact I can tell you, “Your money went to this person in Malawi at 2:23 PM. Here’s the proof that your money went there, and 92 cents of dollars in this person’s hands now,” is pretty powerful. Now, of course, there are places, in Zimbabwe, other places with really volatile currency markets, hyperinflation, for which crypto is the most stable asset. And we are starting to experiment with some of those projects as well where you actually deliver crypto on the recipient end.

Trey Lockerbie (49:15):
Fascinating. Now, another kind of curveball question, but given your background, I’m just curious, especially with the printing of money so to speak, because one benefit you hear the Bitcoin community say is, by giving someone Bitcoin, it’s not going to inflate away, right? Much like the US dollar. But this UBI philosophy is a bit different. Obviously, we could reallocate some of the budgets towards things like extinguishing poverty. But I’m kind of curious what your thoughts are about just the creation of dollars and how much more runway we have to do that, to solve things like global poverty.

Michael Faye (49:48):
So, I think I’ll put my economist hat on for a second. When you drop money on a place, one of two things can happen, right? Prices can go up, or you could see a change in the real economy. And that is a purely empirical question. There are undoubtedly places where prices will go up, right? Places that are shut off from the global economy, and so forth. There are places that we’ve seen where the real economic changes. The largest experiment we’ve run to date on this, actually there’s about 15 to 20% of GDP on a region. So pretty meaningful chunk of cash if you think about that in the context of a large economy.

Michael Faye (50:22):
And prices moved, I think it was about 0.2%, and output moved significantly, so much so that you actually saw the benefits of cash to those that did not receive it to be about the same as those that did. And that was through a spillover mechanism, right? So, I give you cash. You need to spend it. You now go get a haircut that you might not have gotten. That barber now has more work and has more income as well. And you did see the expansion of the economy. So where we have worked and where we have tested this rigorously, the impact on price has been small. But of course, there are situations where that would not be the case and we will continue to test for them.

John Arnold (50:56):
It depends on how much spare capacity is in an economy. I just got back from Sri Lanka, and it was notable, you drive around there, a very poor country, and there’s just a lot of spare capacity for labor. You’d pass a roadside stand and there’s two or four or six people kind of sitting out in front of the stand waiting for a customer. And you could easily with some economic stimulus imagine that that labor is put to better use than having four people wait for one customer to show up. In the United States now, there’s a demand for millions of employees that the market can’t match. And so, if you dumped a lot of money into the United States economy, as we have in the past 24 months, you see a very different result than what you see if you dump it into Sri Lanka. And so, I do think there is this question of how does UBI intersect with the existing social programs.

John Arnold (51:49):
When UBI as a concept was originally proposed, I think most people viewed it as a replacement for the safety net as it currently exists. That is what would happen if instead of having social security and Medicare and food stamps, et cetera, you took all that and just gave a check. And I think people over time have realized that that’s probably not going to happen. It’s hard to see Medicare being replaced. We talked earlier just about what happens when you try to deal with the edges of the healthcare system. If you were to completely get rid of the healthcare safety net of Medicare and Medicaid, I just don’t think that’s realistic. So now, it’s being discussed as a supplement to the existing safety net. And the ramifications for inflation in the United States on that type of program I think would be real and have to be thought through, before it’s considered at the economy-wide scale.

Trey Lockerbie (52:49):
So one other question I had just around, let’s say, Kenya in particular. There’s well-known government corruption there and crime. Is giving individuals cash directly a better way to kind of circumvent corruption and crime? Or do you see challenges on that side as well just giving directly with cash?

Michael Faye (53:11):
Yeah. So, the Kenyan government is actually running some of the most effective national cash programs out there. So, I want to make sure to kind of recognize that they’ve been doing that for a while and doing it pretty well. I think the beauty of cash is that it does go directly and you have this traceability. So if there is any block in the system, and a block could be an additional cost, it could be a diversion of funds, whatever the case is, you don’t have to worry about it because you’ve proven that you can go directly. And people will often say, “But Michael, this doesn’t solve every problem. This doesn’t solve governance. This doesn’t solve public goods.” And of course, it doesn’t solve every problem, but you can certainly solve the individual’s problems while we figure out how to solve other problems. Some of those other problems are important, but we don’t have any great solutions right now.

Michael Faye (53:55):
And we don’t need to wait to help lift somebody over the poverty line, while we figure out how to solve some other big problem that we haven’t yet solved. We should be doing that today. And this goes back to the DAF point and the urgency of problems today, not just the urgency of the problem, but the existence of very good, impactful solutions today. There are great ways to spend your philanthropic dollars today. You don’t need to wait, and you also don’t need to decide on the perfect solution, right? If we all sit deciding on what is the absolute best thing to do, we will never give money. If we will study the problem for decades. Let’s find something that is above the bar, and there’s plenty of that, and start doing it today.

Trey Lockerbie (54:33):
Progress, not perfection. Yeah, I appreciate that. Two questions to kind of round us out here. What is next for GiveDirectly? And also, what does success look like, either in Kenya or Georgia, other metrics, some KPIs that you were targeting to say, “Okay, we did our work here?” Not that it’s ever done, but is there something short-term?

Michael Faye (54:54):
Yeah. So, we look at all the KPIs. The efficiency, how many dollars do we put in the hands of the poor? How quickly do we get it? How well did we target and find the poorest of the poor? And so forth. In terms of what’s next, it almost sounds naive to say, but I think we have now developed the tools to find the poorest of the poor and transfer them money. So let’s ask, “What does this look like at the next scale? Can we take an entire district out of poverty? Can we take an entire country out of poverty? And could we count back from the 711 million people left in extreme poverty to zero?” Because it wouldn’t take that much as a fraction of global wealth today. So at least, let’s take a shot at it.

Trey Lockerbie (55:32):
All right. So before I let you both go, I’m going to let you both handoff to our audience where they can learn more about you and your individual endeavors. John, let’s start with you, Arnold Foundation, and any other resources you want to share.

John Arnold (55:44):
I’d just direct people to arnoldventures.org. It shows who we are, it shows the work that we’re involved in, and what we’re trying to do. I tweet occasionally, @JohnArnoldFndtn, and that’s it. I think I found Twitter to be a useful outlet for my random thoughts on the world.

Trey Lockerbie (56:05):
I love it. Michael.

Michael Faye (56:07):
Yeah, we’re at givedirectly.org. And if you go to givedirectly.org/wsb, we’ll actually match the first $1000 donation. To try taking one person over the poverty line, it’s about a dollar a day. And it’s probably one of the most rewarding uses of a dollar a day I think you could spend.

Trey Lockerbie (56:24):
Well, gentlemen, I really appreciate you taking the time out of your day. You’re both incredibly impressive, well accomplished. And it’s just an honor to sit here with you both and learn from you and root and cheer and participate alongside. So, I really appreciate it. I’d love to catch up and see how we progress from here. So, thank you again for coming to the show.

John Arnold (56:42):
It’s been fun. Thanks.

Michael Faye (56:44):
Thanks, Trey.

Trey Lockerbie (56:45):
All right, everybody, that’s all we had for you this week. If you’re loving the show, don’t forget to follow us on your favorite podcast app. You can always reach out to me on Twitter. My handle is TreyLockerbie, and if you haven’t already done, so be sure to go to theinvestorspodcast.com and check out all of the resources we have for you there. And with that, we’ll see you again next time.

Outro (57:03):
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