Reading · External Processing

One of my favorite truisms is that there are two kinds of people in the world. There are the kind of people in the world who tell you they are in sales. Then there are the kind of people who do not tell you they are in sales, who are also in sales.

We are in the Age of the Salesmen. You probably have to go back to the time of PT Barnum to find another epoch in American history where we were so collectively enamored of being sold. Truthiness, and post-truth, and alternate truths, that’s just sales, baby. America is reclining in our Barco Lounger with the social media washing over us, just listening to pitch after pitch.

Here comes Sam Altman. He puts his arm over your shoulders, waves expansively to the horizon, and tells you of a dream he has, where machines do all the grungy work of life, and you, you just sit in your Barco Lounger and watch it all happen without lifting a finger, slurping on your universal basic income. There’s Elon Musk, with his arm around your other shoulder, waving to another horizon and another future, one where you sit in your Barco Lounger-like seat in your driverless vehicle, using your brain implants to control the boring machine that makes tunnels to Mars. Can’t you see it?

Can you tell I’ve been reading too much Matt Levine?

Anyway, I’ve been working on an idea for almost a decade now about how we can fund more evidence-based prevention. And I would like to sell it to you.

It is abundantly clear that prevention is far more cost-effective than post hoc treatment for almost any social ill you can name. Yet we fund very little of it. Some of that is political. But mostly it is structural. Governments work in short-term budgets, and prevention benefits only show up in the long term. Essentially, we are asking today’s government to pay for something that will benefit next decade’s government. You can guess how that sales pitch is received. The unfunny part is that this spatial mismatch means we get too little prevention and suffer needlessly as a result.

The way to solve this problem is to identify early benefits of prevention that generate actual cash flows. We know that a better education today leads to a more productive life, which means higher incomes and more tax payments. And those tax payments could be used to pay for prevention. But all of that happens way down the road, and the bill is due today. And that’s a product no one can sell. But there is something that is eminently saleable, and perhaps we can think about it together.

Here’s what happens if we do (this is me throwing my arm around your shoulder and waving expansively). If we execute the simple plan below, we can identify smaller short-run benefits of prevention long before the big benefits occur, we can package up those savings—those cash flows—and sell them in the capital market. In return for those future dollars, the capital markets will give us capital. Today. This process of wrangling cash flows into something you can sell is known as securitization.

What is securitization? I’ve struggled to make this concept accessible. Fortunately, Matt Levine wrote about this very thing today.

The basic business of finance is slicing up cash flows. You have some stuff, the stuff generates cash flows, you put the stuff in a box, the box issues securities to investors, the securities have claims on the cash flows…
This works for many, many things that you might put in the box. If you own a widget business, you can put that business in a box called a “corporation,” issue bonds with senior claims on the business’s cash flows, and issue stock to investors who want the risky upside of the business. If you’ve got a rockets-and-satellites-and-enterprise-AI-and-social-media business, you can put that in a big corporate box called SpaceX and issue bonds and stock. If you own some office buildings, you can put them in a box called a “real estate investment trust” or “REIT,” issue some bonds with a senior claim on the rental income and issue stock to investors who want the upside from your rent. But you can also put purely financial stuff in a box. If you own some mortgage loans, or some credit card receivables, you can put those in a box and sell junior and senior claims on them. Etc.
People often use the word “securitization” to describe this process: You put stuff in a box, you issue securities, it’s securitization. It would not, I think, do huge violence to the English language to describe every public company as a “securitization”: SpaceX put its rockets-etc. business in a public company and issued securities to finance it so, why not, securitization. In practice, though, people do not use the term this way. A “securitization,” in normal usage, mostly means putting financial stuff — mortgages, credit-card receivables, car-part invoices, what have you — into a box and selling claims on them.

So that’s the idea. Put the cash flows from effective prevention into a box and sell claims on it.

Now, you may be skeptical that evidence-based prevention produces cash flows large enough and consistent enough to be securitized. You might be right. Or not. The thing is, as far as I can tell, no one has ever looked for these cash flows.

Let me give you two examples to show how this might work.

Suppose you start an evidence-based program like the Good Behavior Game in all of the elementary schools in your school district. Now, the Good Behavior Game is associated with better student outcomes that, down the road, lead to better educational and workforce outcomes, and ultimately more tax revenue to pay for the program in the future. Where might the money come from today? Intermediate outcomes.

One by-product of the Good Behavior Game is that it makes the classroom calmer, more peaceful. In evaluation-speak, this is usually referred to as an intermediate outcome. You might survey teachers before and after the program to see if they liked it, and they might say it made my classroom so easy to manage. This is good, but not necessarily the kind of outcome that attracts policymakers’ attention.

But it certainly attracts my attention on the securitization front. Could calmer classrooms lead to higher rates of teacher retention? Could it therefore reduce the need for teacher recruitment? Quite possibly. Do school systems pay big bucks for teacher retention and recruitment? Absolutely. Would they share some of the savings to be used as relatively low-risk cash flows to securitize a Good Behavior Game bond?

Here’s another. There are many evidence-based workforce training programs that have demonstrated success in placing people in jobs. What if the state agrees to use some of the employer part of payments into the unemployment insurance pool to finance a Workforce Bond? It’s a win-win for the state. The Bond funds people to get evidence-based workforce training. People who wouldn’t have gotten jobs get one. They, and their employers, then pay into the unemployment pool that they would not have paid without the training, for unemployment support they no longer need because they are employed. Would the state share those as cash flows to support a bond?

Anyway, I raise this with you, dear reader, because I bet there are loads of examples like these just waiting to be discovered. For researchers, I am willing to bet you have encountered all manner of intermediate outcomes that didn’t make it into your reports that might be candidates for securitization. For government and non-profit people, I am willing to bet your deep knowledge of your systems means that you know of similar candidates. For others, just thinking about the government processes you encounter all the time might spark a candidate. Feel free to comment or drop me a line.

Look out there, beyond the soaring eagles and the scurrying clouds, beyond the bounds of our daily limits. Look what we can create together.

Financing Evidence-Based Prevention

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