Episode 540: Great Expectations : Planet Money Today on the show we have three radio stories for you about the strange ways people think about the future.

Episode 540: Great Expectations

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Hello, and welcome to PLANET MONEY. I'm Robert Smith.


And I'm Zoe Chace. Today's show - great expectations. We have three radio stories for you today about the strange ways people plan for their future.

SMITH: Consider it an economic commencement speech. We'll meet a couple of recent graduates with a crazy scheme to get people to invest not in their business, but in their potential.

CHACE: We will show you how one state, Massachusetts, plays mind games with its young people in order to teach them that they will not live forever.

SMITH: I want to tell today's graduates that it is a pretty optimistic time in the economy. Everything is looking up except for prices.

CHACE: What happened to inflation?

SMITH: Three stories about your future coming up.


SMITH: Now, when I graduated from college, I gave zero thought to what I would do for a living, of even getting a job, until literally the day after graduation. And even then I had no idea what I wanted to do. I actually opened up the newspaper to the back and started to circle job openings like, I could do that. Maybe I could wait tables.

CHACE: I was actually the same way, but it was Craigslist. These days, though, some graduates have figured out a way around this whole process, around working for the man. Their idea is to become the man right out of school. Instead of working their way up at some company, what they want to do is buy the company and actually get someone else who actually has money to foot the bill. It's a real strategy, and it's working for some people. Our colleague, Ashley Milne-Tyte, looked into it.

ASHLEY MILNE-TYTE, BYLINE: Alex Livingston graduated from Harvard Business School last year. He was offered a pretty sweet job at a startup, but he turned that down.

ALEX LIVINGSTON: Ultimately, it would never be mine. You know, it wasn't my idea. I would never become the CEO. There was a ceiling there.

MILNE-TYTE: He's 27 and he wants to be a CEO. Not in 15 years - now. He and his business school classmate, Eddie Santillan, knew they wanted to run a company together. They just didn't know which company. They had no idea. But they did have moxie, so they went to investors and basically said, invest in us. Be our partners. Give us a chunk of money, and we'll look for a company to buy. If we run it successfully, you'll all be winners.

LIVINGSTON: The key is convincing someone that you have the gritty, resourceful, tenacious attitude to get, you know, not only the search process done, but then be an effective general manager.

MILNE-TYTE: Believe it or not, investors took them at their word. The guys raised a few hundred thousand dollars, money they're using to live on while they hunt down a company to buy. Now, who exactly - other than mom and dad - would give money to a recent graduate who's never run their own business before? Lots of people, it turns out. This is a real corner of the investing world, and it's growing. These investments are called search funds. And there are investors out there looking for young people to invest in, investors like Rich Kelley.

RICH KELLEY: I'm a principal at a small private equity firm called Search Fund Partners.

MILNE-TYTE: This seems crazy. Why would an investor invest in a person who doesn't even have an idea yet? They don't even know what kind of company they're going to buy.

KELLEY: In essence, you're buying an option to look at great deals.

MILNE-TYTE: He says these guys - and they are nearly all guys - they're called searchers. They toil away to find solid companies with good earnings potential. Kelley says eight or 10 investors like him each hand over about $30,000. Added up, that covers a salary and travel expenses for up to two years while the person hunts. Kelley says it's less than he'd pay a full-time employee to scout for juicy deals.

KELLEY: And they're looking for diamonds in the rough out there all over the U.S. And they're looking for deals in places where a typical private equity deal guy doesn't look.

MILNE-TYTE: He says think smaller companies doing unglamorous things like renting restaurant linens or making machine parts. He says investors always want the searcher to buy a company that does something pretty boring. That way, it's not too tough for an inexperienced person to run. Jim Sharp also invests in search funds. He teaches at Harvard Business School. He admits this route to entrepreneurship can sound incredible to the uninitiated.

JIM SHARP: I've had one searcher tell me that when he told his parents about this, his father said, son, this is a scam. This can't be true. People are giving you money to go not work for two years? There's got to be a catch here.

MILNE-TYTE: The catch is that young searcher is going to do all the work. And if they're successful, the investor gets a cut and an opportunity to invest even more. The risk for the investor is that the kid never finds a company, blows the money. When you sit down with that person, what human qualities are you looking at that help you decide whether this person is a good bet?

SHARP: So I'm looking primarily to humility. The person has to be willing to learn from others in the process.

MILNE-TYTE: Those Harvard business school grads, Alex and Eddie, they are more than willing. They ask their investors for advice all the time, and investors get that warm fuzzy feeling.

LIVINGSTON: They like the idea of being able to kind of live vicariously through two young guys who are trying to make it work.

MILNE-TYTE: He and Eddie trying to make their money last by renting a 10-by-20-foot office above a bar in San Francisco. They're now ten months into their search. They came really close to buying a firm that makes stuff for hotels. They got emotionally invested, started thinking about their first day at the company. Then the buyer pulled back. Eddie says they've had to get used to the stomach-wrenching nature of the search and to business owners who don't take them seriously.

LIVINGSTON: a small portion of them, they kind of sit back and say, huh, OK, so you guys have raised a little bit of money, but you don't have all the money to buy the deal. You have a little bit of operations experience and background, but you don't have that much. Do I actually believe that you're a credible buyer?

MILNE-TYTE: Convincing them, he says, that's the toughest part of all. Until they can pull that off, their search continues.


CHACE: OK, here's another post-graduation Zoe Chace memory. I remember one of the first things I did, like, right in June after graduation, my dad took me to buy my very first cellphone. It was a flip phone, and it came with a car charger. And I was like, great, I am done. I am now set. I have a B.A. I have a cellphone. I am unstoppable. Something that did not occur to me - health care.

SMITH: Yeah, times have changed. President Obama specifically wants to pitch the Affordable Care Act to young people. And one of the ways he sold it was to say that in some cases, you can get health care coverage for what you spend on your cellphone bill. The problem, of course, is that young people do not look at their cellphone like they do health care. They use their cellphone every day. There's a reason for paying for it. Health insurance - especially if you are young - you might not use it all year, but you've still got to pay.

CHACE: When Massachusetts ruled out a similar law, you know, a few years ago before Obama's law, Massachusetts figured out a way to get the young people in. David Kestenbaum explains how.

DAVID KESTENBAUM, BYLINE: In 2007, Massachusetts was rolling out what, in many ways, was the inspiration for the Affordable Care Act. It was called the Health Connector, and it was a chance for all those uninsured people to finally get coverage. People earning below the poverty line could get coverage for free. But if you earned a bit more - say you were just out of college - if you earned a bit more, you had to pay part of the bill. And these people, well, they weren't exactly lining up. Jonathan Gruber is an economist at MIT who helped design the program.

JONATHAN GRUBER: So that very first month, altogether there was 123 people enrolled.

KESTENBAUM: Which is a small number.

GRUBER: Which is a very small number. Almost nobody came in the first month.

KESTENBAUM: This group was going to take some persuading. And what better way to convince someone than with an ad? There was one ad in particular that ran all the time. It was almost impossible to miss, especially if you watched a Red Sox game that summer. It appeared on the big screen in the stadium.


GABRIEL FIELD: You think it's not going to happen to you? Well, take it from me, it can.

JOAN FALLON: So it's a TV ad.

KESTENBAUM: This is Joan Fallon. She was in charge of PR.

FALLON: And it's a young man who's sitting in his kitchen, and he has a broken arm.

KESTENBAUM: The guy's got his arm in a cast.

FALLON: And he's saying that he's grateful that he signed up for health insurance before he broke his arm because if he hadn't, he would be out a lot of money.

KESTENBAUM: And is that a true story?

FALLON: No, he was an actor.


FIELD: Hey, don't wait till it's too late.

KESTENBAUM: This is you with the broken arm in a kitchen?

FIELD: Yeah, that's it.

KESTENBAUM: I called up the actor. His name is Gabriel Field.

Did you really have a broken arm?

FIELD: No. No. But for the audition, I went in with a - you know, a sling, which I think totally helped because you - you automatically have sympathy for someone who's got a broken arm.

KESTENBAUM: Gabriel, it turns out though, was exactly the person the ad was targeting - young, healthy and, at the moment they shot the ad, uninsured. You could call him a young invincible, but really it wasn't that he felt invincible. He was just doing the math.

FIELD: Technically, I could afford it. You know, it wasn't fully beyond my means. But strategically, you know, economically, it didn't seem like it was necessarily the best choice because it was constantly paying out a lot of money for something that I may or may not use.

KESTENBAUM: A more statistically true ad would show a young guy in a kitchen writing out a check for health insurance and then not needing a doctor. The health insurance sign-up folks though had one other economic tool in their arsenal that, together with that ad, made a powerful package. And that tool was the mandate. If people did not sign up, they were going to have to pay a penalty. As a reminder, people got a warning in the mail. Again, Joan Fallon.

FALLON: The postcard said urgent message to Massachusetts income tax filers.

KESTENBAUM: It laid out that there would be a penalty of $218 that year and that the penalty was going to go up the next. If you think about it, a fine of $218 is pretty small. But by the end of that first year, 2007, the young and the healthy, they were signing up. And they continued to sign the next year and the next.

FALLON: I can't say that we got every single young person enrolled in health insurance, but we came pretty close.

KESTENBAUM: It's unclear what exactly pushed these people to sign up. But Jonathan Gruber, the economist, has a theory. The math hadn't really changed. If you weren't worried about getting sick, it would be cheaper to pay the fine than fork over what could be thousands of dollars for insurance. But somehow, the calculation felt different.

GRUBER: My conjecture about a lot of why this worked is that you saw people saying, you know, I really hate paying this penalty and getting nothing when in fact there's an option where, yes, I'll have to pay some more, but then I can have health insurance, which I want.

KESTENBAUM: Paying a penalty just so you can not have health insurance, that felt lousy.

GRUBER: Basically, people really hate, hate, hate paying something for nothing. They just don't like doing that.

KESTENBAUM: Gabriel Field, the actor pretending to have a broken arm, he eventually got health insurance for exactly this reason. He didn't want to have to pay to get nothing. As it turns out, that year he did have to go to a doctor. He had a broken toe and a bad case of walking pneumonia. The Affordable Care Act had a lot more hiccups and a lot more opposition than the Health Connector did. But Jonathan Gruber says the sign-up rates of young people for the Affordable Care Act so far look pretty similar to what Massachusetts saw in its first year.


CHACE: Now, one thing that lots of college graduates notice when they graduate is how much everything costs because in some cases, they're seeing it for the very first time. Like, when I was in college, my college supplied the bed and the chairs and the microwave. And when they graduate sometimes, they see the price tag of these things for the very first time. And one thing that they might start thinking about is, is the price of these things going to go up? Is there going to be any inflation?

SMITH: Now, luckily, we have been watching the inflation numbers. And for the last few years, inflation has not gone up. Things cost pretty much what they have the year before and the year before that. And this is actually weird because as listeners to PLANET MONEY know well, over the last few years, the U.S. Federal Reserve has created trillions of dollars out of thin air.

CHACE: Trillions of dollars.

SMITH: Trillions of dollars. And the theory goes that that should lead to more inflation, all that new money in the economy.

CHACE: Jacob Goldstein wanted to know why we don't have more inflation.

JACOB GOLDSTEIN, BYLINE: The classic Econ 101 explanation for inflation boils down to this - too much money chasing too few things. For example, say the Fed creates all this money out of thin air and people go out and buy new cars. You probably don't need an economist to tell you what happens next, but I got one anyway.

WILLIAM SILBER: More people buying cars leads companies like General Motors and Toyota to raising prices.

GOLDSTEIN: That's Bill Silber. He wrote a book about former Fed Chairman Paul Volcker. And he says when companies start selling lots of stuff and raising their prices, it's easier for their workers to get raises. And when the workers get raises, they go out and buy more stuff so companies raise their prices some more. But this has not happened over the past few years, despite the fact that there's all this new money out there. Why not? Part of the reason, Silber says, is all that newly-created money is not in the pockets of ordinary people who could go out and spend it.

SILBER: It's just sitting there in the banks. As long as it sits there, it's not dangerous.

GOLDSTEIN: The banks aren't lending that much. Today, nearly six years after the financial crisis, the economy still hasn't fully recovered. Millions of people are still unemployed. And Joe Gagnon, an economist at the Peterson Institute, points out, even people who do have jobs can't just walk into the boss's office and demand a raise.

JOSEPH GAGNON: For most people in most industries, the boss would say, well, I'm sorry. I can't really afford to give you one right now. Our sales aren't that great. And to be honest, we've got a lot of qualified applicants, you know, who want to take your job.

GOLDSTEIN: So wages are stagnant. Goods aren't flying off the shelves. Companies can't jack up prices, and inflation is just creeping along at a low level. That's most of the story anyway. But there is this one other weird, interesting piece. Inflation today is low partly because people aren't that worried about inflation. Quick trip to Times Square in New York.

BEVERLEY HUSTOS: I don't think we think about it that much. I'm sure it's happening. We're just not seeing - it happens so incrementally that we don't see it.

JOHN ADAMS: I don't think inflation at the moment is a concern.

ANNE ZIEGLER: I don't know how much is happening now or if that's having a huge impact on our prices.

GOLDSTEIN: Beverley Hustos (ph), John Adams (ph) and Anne Ziegler (ph) are three random people I found on the street. And the way they and all the other random people on the street think about inflation actually has an effect on what happens with inflation. Sure, people always complain that things are getting too expensive.

But when people are really worried about inflation, they start acting differently. Back in the late '70s and early '80s, when inflation in this country was around 10 percent, people expected prices to keep rising quickly. So, Bill Silber says, they rushed out to buy stuff before prices went up even more.

SILBER: I'm going to buy a car for $5,000 back in - that's what it cost. Believe it or not, I'm going to buy a car for $5,000 because if inflation is 10 percent a year, next year it's going to cost 5,500, so I'm going to buy today.

GOLDSTEIN: Cars are flying out of the showroom, car companies raise prices, boom, high inflation. Today, on the other hand, people are not rushing out to buy stuff. Here's Cynthia Buda (ph), one last person I talked to in Times Square.

CYNTHIA BUDA: If I can afford it and pay cash for it, I'm going to do it. If I can't, then I'm a little bit more hesitant than I would have been 20 years ago. I would have just slapped it on a credit card.

GOLDSTEIN: That is what low inflation sounds like.


CHACE: That's our show. And as a quick follow-up to last week's episode about the penny, go to our Twitter feed - @planetmoney and you'll see all these people from around the country tweeting pictures of things that you can buy for a penny.

SMITH: Next time on PLANET MONEY, who owns the skies? We'll have a show on drones. You can hear the story of Michael Kirschner, who one day looks out his window and finds a drone peering inside at his wife.

MICHAEL KIRSCHNER: Something's looking in at you, right? And you're very self-conscious about that all of a sudden. And then she started, like, hiding behind furniture. And I found myself doing the same thing. You're hiding behind your own furniture in your own house where you just had privacy prior.

CHACE: That airs Friday. Our show today was produced by Phia Bennin. I'm Zoe Chace.

SMITH: And I'm Robert Smith. Thanks for listening.


LA ROUX: (Singing) Oh, I've made mistakes and you just say it's growing pains. When I feel ashamed, you tell me it's just growing pains. When I'm crying out for change, you tell me it's just growing pains. Oh, I've made mistakes. And, yes, I know it's growing pains.

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