John Arnold on Why It's So Hard To Build Things in America

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1:33Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, we're recording this on June 6th. And yesterday, we got the news of New York City Governor Kathy Hochul permanently putting a pause on a proposed congestion tax, people driving into the city of Manhattan from the outer boroughs or other states. And I have to say, like reading about the whole thing, like it kind of depresses me. It's crazy, that story. I'm sorry, but Joe saw me kind of going off on this in an internal chat room yesterday when the news kind of filtered out. But regardless of where you sit on the congestion pricing debate, I think we can all agree that a last minute U-turn after years and years and years of public consultation on this matter, after the installation of the machines that were supposed to take photos of everyone's license plate and actually get the fees, that this is not an ideal outcome to actually cancel the plans two weeks before they were supposed to go into effect.

2:41Yeah, look, I'm a neutral journalist at a mainstream publication, so I have no opinions on policy ever. It is not my job. But it does seem to me that there's something wrong. If you spend like probably$100 million in studies and you talk about something for 16 years and you have all these things and then it's like at the end, it's like, nah. And it's like, how do we like build anything in this country? It's just surreal. Sorry, the more I think about it, the more I just like start laughing and then kind of crying as well. It's just, it's crazy. But of course, this comes up all the time in so many episodes we do, whether it's around housing or whether it's about electrification or whether it's about installing offshore wind, whatever it is, it seems like there is a major problem in this country about like how long it takes to plan things, how long it takes to get permits for things, the cost of construction.

3:36The crazy thing with the congestion tax, it wasn't even a construction thing. You know, it's literally just tolls. It's not like they had to build some new bridges and demolish tens of thousands of houses. Well, they still spend a lot of money on it. But yes, I take the point. It's not like they were building a new highway that would go through some neighborhoods or something like that. Right, right. It's also crazy to me. Anyway, I do think this recurring question of why is it so hard to build stuff or just actually take any decisive policy towards anything seems like a real problem. Oh, absolutely.

4:07And even though this particular issue, I think we can all agree was very contentious. There are people who feel strongly on both sides. There are other things that I think have more collective public support and maybe certainly bipartisan support. So I think most of Americans, most politicians would agree, for instance, that housing supply is kind of a bipartisan issue now. But even on something like that, where everyone kind of agrees, like, yes, this is a problem. We need more supply. We need places for people to actually live. There are all these questions about how you actually decide where to put those houses.

4:47And then even more controversially, how do you fund that? What does support for real estate, residential real estate, actually look like? Where does the financing come from? How do you structure that? Is it the form of subsidies? Is it the form of incentives? Is it public-private partnerships? It just seems like there are so many points in the process at which you can kind of get stuck. So many, so many. Anyway, I'm really excited because we do have the perfect guest today. We're going to be speaking with someone who is extremely interested in this topic and sort of puts his money where his mouth is, spends a lot of money researching and trying to think up solutions to some of these things.

5:27We're going to be speaking with John Arnold. He's the co-chair of Arnold Ventures. Prior to that, he was a famed energy trader, made his fortune at Centaurus Energy. Prior to that, I learned he was the recipient of the single biggest cash bonus when he was a trader at Enron, where he was not accused of any wrongdoing. A bunch of people there obviously were. And now he is a philanthropy co-chair, Arnold Ventures, as I mentioned, that among many other things works on problems like this. In fact, they do a lot on health, criminal justice, higher ed, public finance, all of which could probably make for a great specific episode of the podcast.

6:05John, thank you so much for coming on OddLots. It's a great honor to be on my favorite financial podcast. Thank you. I'm skeptical. I favor, but thank you. Just accept the compliment, Joe, and move on. We'll take it. So we're going to get into all this permitting. And you had a great tweet yesterday. Actually, you did a little mini history of the congestion pricing in a tweet. Starting in 2007, Mayor proposes awarded Fed Grant. 2008 plans finalized, 2008 to 2017 stall, blah, blah, blah. Environmental assessment, another delay, another delay, and now the indefinite delay. I want to get into all that.

6:43But before we do, there are a lot of billionaires who want to give away their money and have philanthropies, et cetera. I get the impression that Arnold Ventures tries to solve these problems sort of differently or try to have a novel approach to giving your money away. What is the sort of driving philosophy behind what you do? Yeah, it might be good to start at the beginning of our philanthropic efforts. My wife, Laura, and I came out of professional careers from the private sector. I was in energy trading for 17 years, kind of got burnt out after those 17 years. My wife was an M &A lawyer. She kind of got burnt out.

7:18And we had this fledgling foundation at the time that was doing work in mostly in K-12 reform efforts. And I think a lot of people from the financial sector and got involved in those efforts in the 2000s. And then after 2008, we kind of got very interested in the public pension crisis that was happening, both the funding design and benefit design. We viewed as flawed and started working in that area. And then we got interested in criminal justice reform. And we stepped back and saw, wait a minute, the tie amongst these three very disparate areas is that they're all related to public policy. It's all about the rules and incentives of the systems that drive behavior.

7:56And so we started thinking more and more about public policy as the framework for our philanthropic efforts and really believe that there's a shortage of philanthropy focus on this very important issue of policy. We think policy is the three S's. It's sustainable, it's scalable, and it's structural change in a way that maybe funding programs is not. But for a variety of reasons, it tends to be underfunded from the philanthropic community. It's changing a little bit, but that really led us down this pathway of getting involved in a number of areas of public policy, including infrastructure and the energy and climate and housing debates.

8:36How do you decide what you want to look at? Because I was searching for some of your previous projects, and there's a lot of them. So criminal justice reform is probably one of the ones that you're better known for. Charter schools, which you just mentioned. But there are other things like high drug prices, expensive college textbooks, even geoengineering, which I don't think a lot of billionaire philanthropists have even begun to look into. The quality of academic research, I think that's something you've been working on as well. But it seems like a very varied collection of interests that you have.

9:14It is. We kind of get drawn to issues where there starts to be bipartisan support, at least at a suboptimal equilibrium. And so there starts to be some political consensus of desire for change. Now, finding what the overlap is across the two parties can be a much more challenging endeavor. So we're looking for those types of issues where at least one side is starting to move and there starts to be this political window that's opening for reform. We're looking for areas that have promising ideas. We're not necessarily going into areas saying, here's our idea. We're not the experts in it. But we survey the field and try to find out, oh, here's a promising idea.

9:57Maybe we can support this or test this or evaluate that in an idea. And I think, again, we're looking for areas that have this public policy focus to it, where it's about the rules and incentives of systems and how can we change it. And then we have to believe that we as an outside third party can have influence on a system, which in some areas we can. And some I think we've had to turn away thinking that it's not obvious how we can have a positive influence on those areas. This is going to be my next question, actually. But once you identify an area where there either is bipartisan support or the, I guess, first inklings that this could have bipartisan support, what's the value proposition that you bring to the table?

10:41Because just to play devil's advocate, but, you know, if both sides of the aisle are interested in this and are discussing solutions, then maybe they can figure it out on their own. I wish it were that easy. Yeah. I think most of our work centers around one of three roles. The first is providing tension in a system. So from an economist framework, it's often areas that have a concentrated benefits, diffuse costs area. So you can think about healthcare, where you have many companies that get 100 % of their revenue from the system. They're very dedicated and inclined and very motivated to be involved politically.

11:21And so some of the strongest, if not the strongest lobbies in D.C. are from the healthcare industry, whether it's pharmaceutical or hospitals or physicians or insurers, PBMs, etc. And the costs of the system fall to individuals. It falls to the taxpayers. It falls to individual firms. And none of those really have the incentive to put significant resources to counter the weight of industry. And so we see a role for trying to provide proper tension into a system. And so we're stepping in. When you have everybody in D.C., every lobbyist, trying to advocate for more money into the system, we're stepping in saying, how can you bend the cost curve in health care without having any compromise on quality of care?

12:08And it's a very lonely position because, again, there's not much incentive for others to do this. And a second aspect we get involved in is the development and piloting of new ideas. I was talking about, you know, we survey a field and try to see what are academics, what are practitioners, what are their ideas as to how the system could be performing better? And do they need resources in order to kind of more fully develop the idea or even start to test the idea? And then the third area we often get involved in is evaluation. And I think this is a very underfunded aspect of public policy, is trying to figure out what works, what doesn't.

12:47And this includes what programs work and what policies work. And I think that's led to kind of some surprising findings over the years that things that seem obvious, that they should be productive, should be efficient, turn out to have counterproductive aspects to them and might not be a good policy or a good program. What's an example of that, something that everyone thought, like, yeah, let's do this, and then when you actually looked at the results, no, it didn't? This is a small one, but I think it's very telling. There was a program that was started, I think it was in the 80s or 90s of a scared straight, where the idea was, let's take high school students who were kind of starting on the pathway of misbehavior that people thought they might be going into criminal justice involves individuals.

13:41and we'll take them into prisons and jails and show them how horrible it is in these places and try to, quote unquote, scare them straight. And this program went on for a number of years, got federal funding, state funding. And then someone came around and did an evaluation. And they did a RCT, put some people through the program, some people not. And it turned out after the fact that those that had gone through the program actually committed more crimes than those that didn't. And so, you know, kind of had this theoretical background, but when you actually apply it in practice, you often get very different results than what the theory said, or there are unintended consequences of those programs that are very hard to think about in advance.

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15:47HR, and more. No more app overload. No more juggling logins. Just one seamless system that makes work easier. And the best part? Odoo replaces multiple expensive platforms for a fraction of the cost. It's built to grow with your business, whether you are just starting out or already scaling up. Plus, it's easy to use, customizable, and designed to streamline every process so you can focus on what really matters, running your business. Thousands of businesses have made the switch. So why not you? Try Odoo for free at odoo.com. That's O-D-O-O dot com. One of the debates I see online a lot is whether it's productive from like a political standpoint to sort of always talking about worst case scenarios.

16:32And there's a lot of people it's like, oh yeah, when you're talking about say climate, always err on the worst situation. And then there's other people who's like, no, like let's actually talk about what the most likely situation is or whatever. And I find this sort of an interesting, I don't know, interesting sidetrack. No, absolutely. I've seen that argument before that if you're always focused on the worst case, then you're never going to do anything, much less get out of bed in the morning. But John, I wanted to ask you as well, in addition to the evidence-based approach, there's something else that you do that's a little bit different to a lot of other philanthropic organizations, and that is the actual structuring of the company.

17:11So Arnold Ventures, I think you have different aspects of the organization, but one big part of it is structured as a limited liability company versus, say, a charitable foundation or a donor-advised fund. And I'm really curious why you decided to take that approach, because to date, there aren't that many billionaires that have gone down that route. Zuckerberg is probably the big exception there. But how did you decide to take that line in terms of organizational structure? Part of this was a realization that research alone doesn't pass laws and that we had to have the political know-how and advocacy and comm strategies tied directly into our 501c3 work, kind of the more charitable work, the research focus.

17:59And so we created these two arms over the years. We had our C3 and we had our C4. They have different tax treatment. And so we had to have this Chinese wall between the two. And it became very annoying because we had some employees that were with the C3 and some that were with the C4. Now, we're very strongly advocate that we want to put more research and more evidence-based findings into government, into policy. And so trying to combine those organizations had a lot of synergy. And so what we did was we brought all employees up into this LLC and we could knock down the Chinese wall. There are a few negative tax consequences from that, but in the grand scheme, it wasn't that significant.

18:40And we thought the benefits from having one organization where employees could both be experts on the research as well as sit and talk with policymakers to advocate for better policy was the better approach. Let's get into some of the infrastructure and policy questions that we let off with. You know, we're talking about this congestion pricing. 17 years was about to go into effect, finally delayed at least indefinitely two weeks before it was about to go into effect. When you look at a story like this and you watch it and you see how long it unfolds and then never happens, is this being replicated across the country on smaller scales all the time that we don't see because they're not as big?

19:22And as you look at situation after situation, what do these have in common? I mean, this wasn't even an infrastructure project, which blows my mind. It was just basically increasing the tolls. But what's really going on here that it's so hard to get a policy like this passed? Yeah, you're right that it's not an infrastructure project, but it was very illustrative and similar to the timeframe and journey that many infrastructure projects in the U.S. are now facing. And maybe we start back with the environmental framework for this country really got started in this three-year period between 1970 and 1973 under Republican Richard Nixon with bipartisan support.

20:02And this was the creation of the EPA. It was the creation of NEPA, the Clean Air Act, Clean Water Act, and Endangered Species Act. And even today, that's really the framework that most of the environmental law is based upon. And those were enacted for good reasons and have been very effective policies as a whole. If you think back before 1970, there were a lot of environmental disasters in this country, from the Cuyahoga River catching on fire to the smog that you saw in L.A. and Houston and Pittsburgh to the oil spill in Santa Barbara. And so there was a reason why there was broad voter support and bipartisan support for this.

20:44and it's had good impact over the years, but it's changed. And I'd say starting at the turn of the century, although that's not a hard turn, but two things happened. One was that the courts started becoming more aggressive about interpretation of Lee's laws and made it harder and harder for developers to build things. And the second was that opponents to projects became smarter about how to utilize the laws to stall and ultimately cancel many projects. And one example of that is instead of filing all your objections to a project at the same time and let them be heard simultaneously, what opponents started doing was file one opposition, wait a couple of years as that chug through the court system.

21:33When that got reconciled, then file your next claim and then do your next claim. And so a process that should have taken two years to hear the opposition and the complaints about it ends up taking 10 years to do it. And that does several things, right? And it greatly increases the cost to the developer to do it. It increases the time to bring these important infrastructure projects to the market. And it just provides this kind of general sense of malaise that's developed across both the end users of these infrastructure projects as well as the developers. So I know you spend a lot of time in D.C.

22:13as part of your philanthropic push. But when you're talking to politicians or other policymakers or maybe even court officials or people from the judiciary, is there a recognition that this is an issue now, that it is harder to build things or that it just takes longer? Absolutely. And I think the passage of the IRA really changed the discussion around permitting. And I think there was a growing sense around the difficulties that the environmental framework were creating for projects. But then the IRA passed. This kind of deregulation or this desire to look at the kind of environmental process was historically a Republican one or a conservative one.

23:01And then the IRA passes. And the CBO scores the environmental provisions at, I think,$391 billion. And then as the private sector and as environmental orgs spent time with that law and started thinking about what does this actually mean, you started hearing numbers that were actually in excess of a trillion dollars. And this was kind of a secret that was going around the environmental community was, don't tell anybody, but this is a trillion dollars of new spending on environmental projects because they were modeling this on spreadsheets. And then the reality sets in. And the reality is that modeling things on spreadsheets versus actually building physical infrastructure is two radically different things.

23:47And so then the next 12 months was about, holy cow, we need to change and make it easier to build. Because instead of trying to stall and cancel projects, in order to have an energy transition in this country, we need to build a lot of things. And so there's a lot of energy infrastructure that needs to get built. Now, the same rules that were making it difficult to build clean energy infrastructure were also making it difficult to build traditional oil and gas infrastructure. And so today, the Mountain Valley Pipeline, which has gotten very famous because of the discussions over the past couple of years, is very near completion.

24:25But there's no other interstate pipeline that's in development after that. And the developers have pretty much given up because you've now had three major pipelines that ended up getting canceled or very significant delays that has greatly affected the economic outcomes of those projects. And so developers are saying, we don't know what the rules are anymore to build these projects. And so we're not even going to start because we've seen three instances where they became financial albatrosses. And all this was happening on the energy side at the same time that the housing side really started to pick up.

25:00And this was coming from a lot of this originated in California, which a lot of well-known stories about the difficulty of building housing, especially workforce housing in California. and there started to be the creation of a YIMBY movement and real questions about what are all these hurdles that are in the way of development. And that helped to spur this whole movement around the abundance agenda. And so all these things are coming together and we see that there is now great political will from both sides politically, but also includes a lot of the environmental groups who had traditionally worked to kill projects and delay projects are now realizing they need to find projects to support.

25:46So let's drill deeper into this because we actually recently did a interview with the CEO of Orsted Americas and slow permitting for offshore wind was one of the bottlenecks that he cited. I saw you've done something with a sort of like more advanced power lines so that clean energy in one part of the country can be distributed to other parts of the country, et cetera. But what are the sort of specific issues that arise in permitting? Or maybe what are the specific types of reforms that would be necessary so that this trillion dollars can actually get spent in some sort of relatively efficient manner that produces good?

26:26Like, what are the actual issues at play here? Yeah, this applies, again, not only to clean energy, but to all energy infrastructure and kind of all linear infrastructure. You think about linear infrastructure, which includes rail and highways and transportation, transmission, pipelines. All these things have gotten very, very difficult to build in the 21st century. So the question is kind of what to do. And that's where things often kind of start to bog down. There's been kind of extensive negotiations between Senator Manchin and Senator Brasso in the Senate, and they've been reported days away from potentially releasing a bill that it starts to address this.

27:07And the framework that they've mentioned would do a lot of things. And I think the question is that oil and gas has traditionally had exceptions on some of the environmental framework. And so everybody talks about NEPA and the categorical exemptions that certain industries have from the NEPA process. And so oil and gas has a lot of exemptions from that. Clean energy generally doesn't. So things like geothermal, the transmission that's necessary to unlock the wind and solar resource, and then even things like siting of wind turbines all end up tied up in a lot of environmental process that either stall or make them uneconomic.

27:50And so the question is, do you bring clean energy down and make it at an equal basis to oil and gas and make everything easier to build? Or if we do nothing and oil and gas is becoming harder and harder to build and everything across the energy spectrum becomes very difficult to build. So going back to one of the specifics, one is what is the role between federal and state on trying to permit things? And so there's this inherent tension between needs of society and the preferences of a community. Like we need energy, we need transportation, mining, workforce, housing, et cetera, right? But individual neighborhoods usually prefer that that be built somewhere else.