What’s Wrong With the Administration’s Innovation Agenda?

Does anyone remember Al Gore’s National Partnership for Reinventing  Government?

The Information Technology & Innovation Foundation had yet another great event on March 9th, 2011.  This one was devoted to the Administration’s innovation agenda.  There were two panels of distinguished speakers, including at least three top Administration officials.  Yet despite the excitement and confidence, the central message seemed hollow.  The reason I think is that, despite their best intentions, the Administration officials do not realize what true innovation would do to existing business models and, to the extent that they do realize it, they are unwilling to let such changes happen.  Yet without these changes, there is little reason to think that we will ever see the significant improvements in quality and cost that innovation can bring.

There were several references to the fact that productivity has lagged in education, health care and government services.  The logical conclusion might for government to withdraw from these activities so that consumers had choices, suppliers faced competition, and disruptive innovators could challenge incumbents.  Yet no one made this leap and there are few signs that the Administration wants to go in this direction.  Despite some positive steps in education, the President has still not challenged the basic power structure for education.  And in health care we have actually taken steps backward.  The hope instead seems to be that we can force change from the top.  Good luck.

Let’s take education.  One of the speakers mentioned a challenge by the President to develop technology that was the equivalent of learning from the nation’s best teacher and as captivating as the best-selling video game.  A great product, but it wouldn’t make a difference to public education.  Instead it would join the long list of technologies including 8 millimeter film, video, and computers which failed to have a significant impact on the cost or quality of education.  The reason is that technology almost always requires significant organizational change in order to have a large impact.   Companies used to have pools of typing secretaries to handle paper work.  Imagine giving each of them a computer but asking them to do the same work.  You get a little productivity improvement but not a lot.  Much of the productivity increase comes in being able to do away with the typing pool and asking executives to learn to type themselves.

The technology that the President is talking about could both dramatically lower the cost of education and improve its quality.  But in order to do that it would have to fundamentally upend the existing model of K-12 education.  There is no way that school boards, administrators and teachers are going to make that change themselves.  There is also no indication that the Administration would support giving parents the power to go around them to new entrants.  Doing so would have an enormous effect.  The District of Columbia spends well over $10,000 educating each student.  If you give 5,000 parents the right to use that money for education in whatever way they want, that’s a $50 million market right there.  Spread that across the country and a lot of businesses get interested.

The need for a different power structure was also illustrated by the personal history of one of the panelists.  Congressman Jared Polis described starting Proflowers.com before entering Congress, .  The company’s website states that: “once hand-picked, our flowers are delivered directly to you. Others take a longer route through brokers, middlemen and, finally, a florist’s shop. By the time they reach the recipient, their best days are long gone.”  The value proposition is that it facilitates transactions directly between the customer and the grower.  Its growth could only have happened because Mr. Polis was allowed to start a business that went around the established industry directly to the consumer.  Its success came at the direct expense of many of the middlemen listed on the website.  If the flower industry had been regulated on the K-12 model, change would have had to come from within the industry itself.  Mr. Polis would have been prohibited from approaching customers directly and instead would have had to convince brokers and florists to adopt a business model that was directly contrary to their immediate interests.  He would have been told of the difficulty consumers would have judging flower quality for themselves and the need to have an experienced middleman to provide advice and assure quality.  No doubt florists would have used some information technology, but Mr. Polis would have made very little money and consumers would have experienced little difference in the way they purchased flowers.

Of all people, Congressman Polis should perhaps see the value of new business models like vouchers in education and tax credits in health care.  I suspect he strongly opposes both.

An open business model in health care and education would ensure that patients and parents get to make the choices.  It would put the resources currently spent by government and employers directly in the hands of consumers.  It would eliminate the tax incentive currently given to employer-based health care.  It would allow new entrants to enter the market with a minimum of prequalification.  And it would not insist on a rigid way of delivering services.  Over the past decades the existing model within each industry has been characterized by increasing costs and stagnant, if not declining, quality.  Under an open model within ten years I believe both would show declining costs and improving quality.  Society and the average worker would be far better off.  Yet the transition would be rough.  Large numbers of teachers, schools, hospitals, and health care providers would close and the government would have far less power to dictate outcomes or policy.

Because the Administration is not ready to support such changes we will see incremental progress at best.  Costs will continue to climb, pricing more Americans out of the market.  No doubt ten years from now we will be going to similar conferences to hear a new Administration gush about how the latest technologies hold the promise of transforming health care, education and government services.

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