NY Fed’s David Erickson on making missing markets for healthy communities

I'm David bank and from Impact Alpha.

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This is an Agents of Impact podcast.

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I was just in Hartford talking to a bunch of insurers, and they're saying, look, we're trying to manage the risk in the places where we have policyholders. We would like to make investments into those places to reduce our risk. How do we do that? Who are our partners? Right. And we're just trying to make it easier to do that. And we're trying to create this kind of framework where people see themselves in it, no matter what you call it. And that's sort of the effort of making missing markets.

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That's David Erickson of the Federal Reserve bank of New York. I had the privilege of joining David on stage at the Fed for the Making Missing Markets gathering late last year. The initiative has brought together children's hospitals, community foundations and nonprofits with corporations, banks, and local governments in Cincinnati and Columbus, Syracuse, the Adirondacks and Fairfield county in Connecticut. The projects are designing financing mechanisms that connect the builders and the buyers of health, wealth, and vibrant communities. As David emphasizes in our conversation, the views he shares here represent his own and are not made on behalf of the New York Fed or the Federal Reserve System. With that, let's jump right in.

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Thanks, David Bank.

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Thanks, David Erickson. Here, here.

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Yeah, I guess so. Thanks, Otho. And I didn't know that they were going to do that about that little back and forth about the title. So that was new, that was sprung on us. But I like it because it kind of illustrates this idea that this sort of is an issue with many names.

1:16

Right?

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It's sort of. We were talking to the folks in Fairfield county and they're working with FSG Consulting, and they said. I said, this is a lot like collective impact. And he's like, oh, yeah, it's collective impact with a capital stack. And I know, like the work that David's doing at Impact Alpha, talking about investing in shared prosperity is kind of a similar idea. So we can call different names. It's a little gimmicky. It is true that our president came up with it, so it's kind of. We're sticking with it. So sorry about that. But, you know, it's just. It's definitely an evolving idea, but it's been around for a long time. I mean, this is really. Robert Kennedy Sr. Talked about in the 1960s that if you really want to try to tackle poverty, you have to grab the web hole. And this is something that he really tried to do with model cities and community development Corporations is another so I'm sorry, I'm kind of. I'm stealing your thunder here.

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Just keep going.

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Yeah, I don't even know I'm rambling. I usually get up here and I just black out. I just start spewing out a bunch of stuff. So that's happening again. Sorry about that.

2:31

Well, I just wanted to thank you and thank Otho and thank the Federal Reserve for having us all here today. And greetings agents of Impact. And if you get the reference, you may be a reader of Impact Alpha. And if you don't get the reference, you should subscribe. And thank you for having me. It's always good to be with another David. We were going to have a show of hands. You did all the geographies. How many Davids in the audience? I saw David Sands too, somewhere. You jumped in and that was going to be my first question, which is you've talked about War on Poverty and model cities in Fifth Freedom. You sort of recount the whole history of anti poverty and community development programs and billions and trillions spent, not just over time, but each year. And you have this interesting idea of like, make the problem bigger. So what does that mean to make the problem bigger?

2:40

Yeah, so I think one of the things that. So I have training in history and I studied that period very closely. And when you read about what they were talking about in the War on Poverty and Model Cities, they really had this expansive view of like the community development corporations were intended to sort of remake the whole local economy. They were really ambitious. And you had the federally qualified health centers were not just there to provide medical care. They were really inspired by what was known as the community oriented primary care, which was something that came out of South Africa in the 1940s, but this idea that you adopt the whole neighborhood as the patient. And so they were very expansive about those issues in those days. The problem was that it's very hard to execute on those things. And over time the community development corporations just start building affordable housing because that's something you could kind of do. It's harder to remake a whole local economy. That's pretty hard. And then the health centers sort of got away from that community oriented primary care philosophy and they started just doing, focusing on medical care that's very downstream. And so there was a great sort of siloing that happened over the 70s, 80s and 90s. And what we've been trying to do in many efforts, efforts have tried to weld those shards back together again and with mixed success. So we've got, we've had things enterprise zones, enterprise communities, promise neighborhoods, choice neighborhoods hope six. There are lots of efforts to try to sort of bring this whole back together to that original vision and they haven't been that successful. And we spent a fair amount of money on it and trillions is not an underestimate for that. But the question is now I think even though we have failed in most of those efforts, we've learned a little bit each time. And so we have these kind of, we're stronger now in terms of we're better at getting community voice involved early in the process. We're better at purpose built communities that's kind of pioneering this quarterback, community quarterback model is really innovation I think with blockchain protecting privacy and AI giving us more kind of ability to spot trends and sort of bring cross across silos. I think our capabilities ability to go back to that 1960s vision to grab the web hole is really coming back into focus.

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Well and it's interesting because if you one place where it comes into focus is in a actual place like in a community, in a geography. And people don't need just one thing. They don't need just education or just healthcare or just housing. They need all of that. Right. So it has to kind of come together in a place. And so you've got all these terrific places that you're working with. What are you seeing kind of as the keys of these kind of local collaborations.

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Yeah.

6:23

So I think, you know, one of the things that's, I mean if you're going to be, if you're going to come to the Federal Reserve bank of New York and have this conversation with us and, or you're online or in one of the overflow rooms. Sorry about that. You. A thousand things went right in your life. Right. I mean, and you know that you can point to the teacher, the coach, the scout leader, the, the library you went to after school, the play you were in that got you excited to go to school. I mean you can point to all of those things. And so the question is like how do we make sure everybody has those thousand things so that they can enter into adulthood with the skills they need to thrive? And so part of that is really, I think that you try to do kind of like a zone defense on this and do it in a place. Right. And there's kind of a, there is an underlying logic to making missing markets. And it's this, there are overlapping vulnerabilities in places. So if we look at, if we looked, if we did a heat map of anywhere you're from and we've shown these maps to you before. But you know, this is. If we focus just on economics, you would see certain neighborhoods light up with. And it would be. We could pick anything. Income, wealth, overcrowding and housing. Percent of percent of people living in poverty. Certain neighborhoods would light up. And we also know in whatever community we're dealing with, we could look through a different lens, through a health lens, and we could look at longevity, lifespan, the best summary statistic for health. Or we could look at prevalence of chronic disease or prevalence of smoking or other issues, and certain neighborhoods would light up. Those are the same neighborhoods. We know that. What was interesting in the book that you may have seen out on the desk out there, what's possible, it was a book we put together with LISC and Enterprise on the ideas about climate vulnerabilities being in places. If you looked at those same communities through a climate or a weather lens or a risk lens, you'd see the places that are most likely to flood hotter on hot days. Heat islands, they call them, or poor air quality. Those would be the same neighborhoods too. So our very conservative estimate is that in those three realms around economic opportunity, health, and preparing for climate disaster or extreme weather events, you find that there are probably at minimum $2.4 trillion every year spent in those places. So that is depressing on some level. But the silver lining is there's a lot of money there. And if we could think about ways in which we could sort of braid those systems more effectively, not spend as much on the downstream, on things like chronic disease, but spend on the upstream to make sure that kids are reading at grade level, for example, then we could start creating a new business model that used those resources more effectively to create more opportunity and better outcomes.

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So just sort of pause on that on upstream, because I think you talk about making missing markets and at some level, market failures. One of the market failures is the inability to pay for the preventive upstream. Things that would actually be much more cost effective but are not somebody's problem or mandate. And so that doesn't get funded. So how do you get folks thinking that it's in their interest of their own enterprise, so to speak, to actually do all that?

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No, it's a good question. And it's sort of. And this is sometimes like, I sort of dream of being rich someday, you know, I love to be rich.

9:54

The gold is in the base.

10:02

Yeah, it's true. There's a lot of gold down there. You can't steal it. It's very, very heavy. I don't. People are talking about like, it's like some die hard, that's not going to work. You can't get through the wall. But anyway, so if I were to be. My idea to get rich would be to start a reinsurance company. And I would buy the downstream poor, negative outcomes in health, climate risk and economic opportunity. And so I would sort of, I would. And then I would just manage the hell out of the upstream, right? Because I think I could make money doing that. Now, there are some instances, there are some places that have kind of a natural sort of reinsurance type arrangement where the incentives are aligned properly. So like in my book you mentioned fifth freedom, the first line of that book is that the status quo is stupid, expensive and unfair. See, you gotta love points. This is like, this is a great audience. I love you guys. The status quo is stupid, expensive and unfair. And by the way, did I mention that the comments that I'm sharing with you now are my own and do not reflect the Federal Reserve bank of New York or the Federal Reserve System? I want to be very clear about that. But the reality is that we do have some places where some entities do own the downstream medical care cost risk. For example, Kaiser Permanente is an integrated health system and they run all the hospitals on the island of Maui. And in that instance, if you run a hospital, that means you have the readmission risk. So that means if it comes back in after 30 days for the same procedure, you won't get paid for it from the government. And so they are very focused on they're not gonna just discharge someone and have them come back in for another $50,000 medical treatment. They're gonna make sure that person's stably housed and they have connections to their community and whatnot. So that's an instance where the Kaiser Permanente owns the medical care cost risk that's downstream. And so once they realized that, they started doing things like investing in preschools. Right? And so. And I think there are lots of mini Mauis around the country where we could sort of find somebody who kind of owned that downstream. Maybe it's a large employer, maybe it's an insurance company. I was just in Hartford talking to a bunch of insurers and they're saying, look, we're trying to manage the risk in the places where we have policyholders. We would like to make investments into those places to reduce our risk. How do we do that? Who are our partners? Right? And we're just trying to make it easier to do that. And we're Trying to create this kind of framework where people see themselves in it, no matter what you call it. And that's sort of the effort of making missing markets well.

10:03

So on the slide it talked about buyers and sellers. And I think you schooled me to say maybe not sellers, but producers or builders of these kind of better social outcomes. And that's all the nonprofits and the agencies and schools and all the folks who are doing the upstream work.

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Yeah.

12:59

Generally underfunded, I would say. Would folks agree? And yet you're saying if you could, that there's all this money there. So if you could organize the buyers of these things, then maybe also you could rationalize in a sense the procurement function to be able to fund and finance the production 100%.

13:01

And so there's this perception. So this is my PhD is in economic history. And one of the things that people, I think people often think like the steam engine was the basis of the industrial revolution, like that was what started it. That's not true. The Greeks and Romans knew how to build steam engines.

13:22

Right.

13:40

It's not until you had enough. It's what my advisor, Berkeley Yandel Vries used to call the industrious revolution. People's head is like, they were just, they wanted more stuff. They wanted two or three or four or five shirts and there weren't enough people to sew them. So it really pushed the envelope on what producers could do in the textile industry with the old methods. And they said we need to break through and do something different. We're going to use steam power to make these demand driven. Demand driven. All markets are demand driven. And so if you could find a way to harmonize and you think about. So we spend about a half a trillion dollars on anti poverty programs a year. People think that we spend more money on social welfare like Sweden does. We would solve the problems we have. The reality is we spend more money per capita on social welfare than Sweden does and every other country in the world. And no one believes me when I say that you could definitely, you can Google this. OECD tracks this work. What throws people off is a lot of our social welfare programs like the earned Income Tax Credit or things like that are through the tax code. So it's net social spending on social welfare. France spends a little bit more than we do per capita, but that's it. So we spend a fair amount on social welfare, but we do not get the outcomes we should. So let me make this point really clear. We've got a lot of money in the buyer category, but we're not buying or we're not buying the right things, right. And so we end up buying some things that are really sort of downstream. Like, you know, there's this old phrase that's like it's as expensive to send a kid to prison as it is to send them to Harvard. That is not true. It's three times more expensive to send a kid to prison. Right. One chronic disease avoided saves the system millions of dollars. Like there's lots of ways. So let's just, let me just take this off on the buyer category. Half a trillion in social welfare spending, almost a trillion dollars in community development. Half a trillion from CRA motivated banks into low income communities. There's the investment tax credits, low income housing tax credits, new markets, historic credits, community development block grants. There's local sources like tax increment financing bonds and others. That gets you up to about a billion. We spend about a trillion dollars on social welfare, on Medicaid, for example, in low income communities for low income people. And we spent $5 trillion. And by the way, a trillion dollars is 1,000 billion dollars just to remind everybody. And so we spent a trillion dollars on Medicaid. And, and that was, and 90% of all spending on medical care in this country is for chronic disease and mental health. Many things that are avoidable. Right. And so we think there's a lot of money in that category for the buyers. And then we also have lots of instances where, and I'm really drawn to this one example in Alabama where they are fortifying roofs as a way of reducing risk from high wind. And it's partly paid for by the government, but partly paid for by insurers. And it's building better housing in Alabama that keeps people safe, but also it's higher quality. And this is a program that's saving money. There's lots of instances where there are payers or people who own the risk for extreme weather who might be willing to invest in a neighborhood as well. And they're in part of the buyer category. And then you've got the producers as you just mentioned, schools, libraries, sports. The bottom line of the fifth freedom is every kid should have a middle class existence. They should have cleats for soccer and singing lessons for glee club, and they should practice their French in Paris over the summer. And it would be cheaper to do that than to not do it.

13:40

Just one thing that jumps out, and it's been my hobby horse for years, is you actually have supply and demand in the right places. And I always think philanthropy and at Some level impact investing kind of thinks that everybody, all the enterprises, all the entrepreneurs, all the founders are like the demand side, like they actually want. Demanding the money. No, they're the supply side. They're producing the outcomes. The demand comes from the folks with the money, who are the buyers. And so I think it's important to make sure that everybody understands that this marketplace works differently than sometimes we think about it that folks want these better outcomes if they can save some money and deliver for their stakeholders.

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Absolutely, absolutely. And I think that kind of gets us to the connectors. And you'll see that we're talking about buyers and producers and connectors, and that is reflected in the agenda today. So you're going to see that people sort of talking about that throughout the course of the day. But these connectors are really important because there's a lot of in order for the buyers to connect to the producers, you need some structure for that. Right. And so you have things like the Healthy Neighborhood Equity Fund in Boston. So Maggie Superchurch, one of the people who started this program, this funding vehicle, was motivated by this very simple question. Why can't I invest in a company that lowers blood pressure, that makes a pill that lowers blood pressure, but I can't invest in a neighborhood that does measurably exactly the same thing? It's the same outcome. You should be able to do that. And you can in Boston because you can invest in the Healthy Neighborhood Equity Fund. There's lots of things funds like that allow to connect buyers. And in that case, it's hospitals and cre motivated banks and foundations and government are investing in neighborhoods to improve health. And there are lots of examples of that.

18:06

Yeah, and there are lots of examples that will come up in the next couple days, right?

19:14

Absolutely. So we've got the investing and flourishing folks that are working in Cincinnati and Columbus talking about, about using a stadium model to use a series of saved things like pay for success contracts that allow them to sort of invest over the life course for a child to make sure they get into adulthood with the skills they need to thrive. That stadium model, or what they call the flourishing model, authority is that flourishing authority is a connector. Right. And so there's lots of connectors. But just keep in mind banks and communities, development financial institutions are also connectors and they are your friends and they are very good at making, making this market work.

19:17

Right.

19:56

And there are lots of you from the finance industry in the room today and online. I really, you know, I just want you to know, like, you get a lot of you get a lot of heat sometimes, but you are. Because sometimes people, not everything is financeable and sometimes you're the bad guy and you have to say no. But the reality is they are the connectors that bring this whole market to together.

19:56

So I think we're, I think Otho is trying to signal us that we're running out of time here.

20:15

No, he does not mess around, that guy.

20:19

But I want to close out on hope or if that's too small, too soft, like maybe narrative or aspiration. And I came in from California and there was an election here in the city, I guess, a little bit ago. And everybody's kind of ginned up about it. And I was interested to see is there some hope? And not just about the particulars in the city, but just like this notion that there actually could be these virtuous circles up instead of vicious cycles downward. And so we talk a lot about infrastructure, but you also tell us about imagination. Are the two things we can offer?

20:22

Well, one thing, and people know I do this all the time and I may go one minute over oto, but so there's this idea of fractals, right? I think fractals are really important idea. So you have a fractal is like something that occurs in nature that is identical at different scales, right? So if you have like a whirlpool in a stream, you know, it will behave identically to a hurricane in the Gulf and that will behave identically to a galaxy, the Milky Way galaxy, swirling around, you know, the center of the galaxy. And so you have these different fractals. And we see when we talk to people about making missing markers with different sort of players, that they're people are in different positions along that spectrum. And so you have places like purpose built communities or others that are working at the stream level that really do need to sort of. And then you have people like the head of the CalSTRS pension fund who she has $400 billion under management. She said, I have two goals. One is to make sure I can pay the teachers when they retire. And two is that I've invested in neighborhoods around California. So those are places they'd want to live. So the galaxy needs to find the stream and they need to find some hurricanes to make it happen. That's where the stadium model comes in or the CDFIs or the CRA motivated banks who are able to sort of bridge these scales from these big investors because CalSTRS can't send their minimum check is $200 billion, right? It's very hard for a purpose built neighborhood to absorb something of that scale. But if they go through one of these intermediaries that allows them, that really makes it possible. And the last thing I'll just say is, so my mother was born in rural Alabama and my grandparents on the mantel, they had two images on there. One was a painting of Jesus and the other was a photograph of Franklin Roosevelt, because Roosevelt literally turned the lights on in her town, right? They brought electricity there. And I knew growing up in California that when, you know, money was tight, I had a single mom, you know, but I knew if I did my homework, I could go to UC Berkeley, the best school in the world where you can only find a parking space if you win a Nobel Prize. That's how impressive that place is. And that was leaders in California built that school. And it's not like my life was a little bit better, because that existed. It transformed my life. So why can't we build a system that allows, make sure every kid arrives at kindergarten ready to learn that they go through life with the skills, with the things that allow them to pursue their capabilities to the fullest extent possible so that they eventually contribute to and benefit from a thriving economy. And we're all better off if we do that.

20:56

Terrific.

23:40

Well, David, you are downstream of a

23:41

lot of good stuff. Thank you, David. Thanks very much.

23:43

That's going to do it for this Agents of Impact podcast. Big thanks to David Erickson, Otho Kehrer and their team at the New York Fed, to our producer, Isaac Silk, to the whole team at Impact Alpha, and to all of you agents of Impact, with gratitude for all that you do.

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