What Obamanomics is missing: Disruptive innovation
The Washington Post, September 22, 2010
With Larry Summers following Christina Romer and Peter Orszag out the door, President Obama has a chance for an economic policy reboot. Clearly he needs to try something
There he was, at that town hall meeting the other day, and even his supporters were lashing out. "Is the American dream dead?" they asked. "I'm tired of defending you." They're squeezed on jobs, health care, college costs, you name it.
But wait a minute, said the president. I've done x, y and z. It takes a while to get out of this hole.
On the recovery, he's right. A country can't have this kind of meltdown, with this kind of debt hangover, and not have to work it off over a period of years. His initial economic team deserves credit for throwing enough spaghetti against the wall to prevent something worse.
But on college, or health care, or schools, the problems are actually deeper. Here the president has talking points on things he's "done." But he doesn't really have answers.
To see why, think of America as a set of "industrial complexes."
The Medical Industrial Complex has pushed health costs to 17 percent of the gross domestic product when every other advanced nation is at 10 or 11 percent, with similar health outcomes. But every dollar of health care "waste" is somebody's dollar of income. It's impossible to cut costs when doctors, nurses, hospitals and drug companies conspire to make sure reform won't pinch their wallets.
Or take the Higher Education Industrial Complex. For years tuition has soared much faster than inflation and family incomeincreases that are enabled by federal loans and subsidies. Yet college presidents and professors act offended and resist fiercely if asked how much student learning we're actually buying for these excess billions.
Then there's the K-12 Industrial Complex, which leaves us spending more than other wealthy nations, even as we're stuck in the middle (or worse) on international tests.
The late economist Mancur Olson, in his classic study "The Rise and Decline of Nations," warned that advanced democracies eventually grow encrusted with powerful interest groups that hijack government to serve their narrow economic ends. Inefficiency reigns. Growth languishes.
Seen in this light, Obama has been shooting the wrong ammunition.
Sprinkle a few more Pell grants, and colleges transform them into higher tuition.
Toss in new health-care subsidies, and hospital bills and insurance premiums rise.
More money for K-12 gets swallowed up by the "blob." And when rare leaders like Adrian Fenty and Michelle Rhee take on the status quo, voters turn them outfretting more about ineffective teachers who lose their jobs than poor children who lose their shot at an education.
Is there a way to break this fatal interest-group stranglehold? Olson said war or depression could wipe society's slate clean, but that's a bit grim as a strategy. The better path is to promote entrepreneurial innovation and harness capitalism's bottomless capacity for finding new ways to deliver more for less.
Two examples are suggestive. Straighterline, based in Baltimore, offers students their freshman year of college via online courses for $999; if models like this are given full scope to compete with brick-and-mortar campuses now protected by "accreditation" rules, the cost of a degree could plummet. Or consider Qliance, a Seattle firm that offers a "fitness club" subscription model for primary care for $44 to $84 a month. It cuts insurers, and the estimated 40 cents they take out of every dollar spent on primary care, out of the equation.
Clayton Christensen of the Harvard Business School coined the phrase "disruptive innovation" for breakthroughs like these that revolutionize the value of a product, service or industry. A central theme of Obamanomics 2.0 should be "disruptive government"making the world safe for such innovations to challenge wasteful establishments in sectors critical to middle class well-being.
The president could bring in thinkers like Christensen to help shape this agenda, paired with disruptive innovators like Reed Hastings, the founder and CEO of Netflix (who led California's state board of education in his spare time).
Fresh blood can help the president see we're in a race between innovation and calcificationbetween the power of new ideas to lower costs and boost quality, and the power of entrenched interests to protect their habits and incomes. This is the battle that matters if Obama is to give those town hall skeptics real answers. Since it has nothing to do with increasingly irrelevant "left" vs. "right" debates, it may offer room for progress in the period of divided government ahead. It's the most constructive way to channel the anti-establishment anger now roiling the country.