The American Prospect, November, 2009

Copyright 2009 The American Prospect, Inc.

The American Prospect

November, 2009

HEADLINE: The Innovation Administration

BYLINE: DANA GOLDSTEIN

HIGHLIGHT:

When it comes to social policy, is newer always better?

BODY:

Every single one of you has something you're good at," President Barack Obama told children in his Sept. 8 back-to-school address. He went on to list future occupations toward which students could strive--doctor, teacher, police officer, architect, lawyer. Also included in that list was a career option no previous president had ever named: innovator.

Indeed, the Obama administration has been promoting "innovation" to anyone who will listen. The stimulus package includes more than $100 billion for innovation efforts across fields as diverse as school reform, energy research, health care, and poverty alleviation. In July, first lady Michelle Obama spoke at two "innovation events" honoring architects and product designers. On Sept. 21, the president delivered a speech at Hudson Valley Community College in upstate New York on how innovation can create jobs. A search of WhiteHouse.gov turned up 531 documents mentioning the term.

The most concrete definition of innovation is offered by economists, who point out that with manufacturing and service-sector jobs migrating overseas, the United States cannot compete in the global economy without developing new products, services, and processes. In 1942, Austrian economist Joseph Schumpeter coined the term "creative destruction" to describe how innovation drives economies. When Wal-Mart came up with new, cheaper ways to move products around the globe, it allowed consumers to buy essential goods at lower prices but destroyed local mom-and-pop shops. Similarly, the iPod was an innovation that destroyed the Discman, and the Internet may, someday, completely destroy the daily print newspaper. All these innovations created jobs, even as they made others obsolete. And they all grew the economy.

It makes sense, then, during a recession, for the federal government to invest in technological innovation. It's difficult to argue with the Obama administration's decision to provide $400 million for a new energy-research agency called ARPA-E, which will look for technological solutions to global warming. Or the administration's proposed $19 billion investment in electronic health records, which would result in better, more consistent care for patients.

Social policy is where the innovation agenda gets tricky. The incentives are less clear, the outcomes are more difficult to measure, and the entire endeavor is more open to ideological debate. In the White House, though, the importance of "social innovation" as a poverty-fighting tool is regarded as received wisdom. There is the new White House Office of Social Innovation, led by former Google.org chief Sonal Shah, and the Social Innovation Fund, both with the goal of working alongside the nonprofit sector in order to address joblessness, bad schools, and urban blight. And the Department of Education is using billions of dollars of stimulus money to help local school districts, nonprofits, and colleges enact "innovative reforms."

At its core, social innovation refers to the belief that for-profit institutions should be the model for nonprofit ones, and that nonprofits, in turn, can be more effective protectors of social welfare than government. There's nothing particularly new about these ideas. After the fall of the Soviet Union, American philanthropists spoke of helping former Eastern Bloc countries build "civil society" sectors, which would better care for human needs than bloated communist states had. In the 1990s, business schools promoted the idea of "corporate social responsibility," which held that government regulation wasn't needed in order for companies to do the right thing for the environment or public health. They could police themselves! During the Reagan and Bush years, conservatives suggested the nonprofit sector could serve as an effective replacement for the welfare state. (Some still do. At a health-care town hall meeting on Sept. 21, House Minority Whip Eric Cantor told a woman that her uninsured, cancer-stricken relative should seek care from "charitable organizations.")

Today, advocates for "social enterprise" argue that divisions between the public, private, and nonprofit sectors need to be broken down in order to better address social problems. The Obama administration has taken this message to heart. But it's entirely possible that social innovation is little more than a federal foray into a B-school fad that may be, during an economic crisis, insufficient to addressing the scale of the social problems facing the American public.

THE OBAMA ADMINISTRATION effort that best embodies this ideology is the Social Innovation Fund, a competitive grant program passed by Congress in March as part of the Edward M. Kennedy Serve America Act. Ironically, considering the fund is an anti-poverty program, it was rolled out by Michelle Obama at Time magazine's 100 Most Influential People Gala, a star-studded, black-tie event at Lincoln Center.

"The idea is simple," Obama said from the podium. "Find the most effective programs out there and then provide the capital needed to replicate their successes in communities around the country. By focusing on high-impact, results-oriented nonprofits, we will ensure that government dollars are spent in a way that is effective, accountable, and worthy of the public trust."

What could be less controversial among liberals than public investment in social-justice nonprofits?

A lot, it turns out. The Social Innovation Fund "is like how baby boomers think they invented sex," says Jeff Trexler, a professor of social entrepreneurship at Pace University. The idea adopts, uncritically, "the rhetoric of business schools and business magazines in the late 1990s," Trexler adds. "You can't conflate investment and innovation with guaranteed success"--a lesson the finance industry learned when it created an innovation called the sub-prime mortgage.

Even Eric Nee, managing editor of the Stanford Social Innovation Review, is somewhat skeptical of the Social Innovation Fund, in part because no one can agree on what innovation is, or when, exactly, it is a goal worth pursuing. "It's true that not everything should be innovative," Nee says. "If all you did was go around innovating and didn't spend any time building, or following up, or doing incremental improvement, it would sort of be just chasing your tail. Why is it popular? I don't even really know--just to be honest."

The idea for the Social Innovation Fund came out of America Forward, a campaign-season coalition of nonprofits and philanthropies. The driving force behind the group was the queen bee of the social-entrepreneurship movement, Vanessa Kirsch, founder and president of New Profit, one of the country's first "venture philanthropy" firms. Venture philanthropists direct charity dollars toward nonprofits that have embraced corporate efficiency and accountability standards, often with the explicit goal of fostering "social innovation." America Forward pushed its agenda--a government investment in grant-making institutions like New Profit--to all 14 presidential candidates in both parties. "Our incentive was to get the decision of what nonprofits to fund outside of government. The idea is that there is an intermediary--the foundation--that can make those decisions and isn't politically driven," Kirsch says. "The things that really last for the long haul are the things that have bipartisan support, that will be here through administrations."

The Obama campaign was one of the most receptive to America Forward, which was no surprise--both Barack and Michelle Obama go way back with Kirsch. Barack served on the founding advisory board of Public Allies, a nonprofit Kirsch co-founded in Washington, D.C., in 1992, with the goal of directing low-income teens toward public-service careers. In 1993, Michelle left her corporate law firm job to found a Public Allies branch in Chicago and later joined the organization's board of directors. Public Allies won plaudits from both Bush presidents and Bill Clinton, but Kirsch was frustrated by her attempts to grow the group nationally. Many donors were less interested in "scaling up" a successful nonprofit than in launching sexier, newer programs.

In 1997, Kirsch married Alan Khazei, the co-founder of CityYear, an AmeriCorps volunteer program for young adults. (Khazei is now a Democratic candidate for Ted Kennedy's Senate seat, and he's running on a social-innovation platform--"a message of Big Citizenship instead of Big Government," according to a fundraising e-mail.) In 1999, Fast Company profiled Khazei and Kirsch. "There's lots of money for nonprofit work," Khazei said. "There's lots of money for the really big, established groups. But there's almost no money for those organizations in between--those who need bridge money to sustain and to grow."

The Social Innovation Fund, as drafted by Kirsch and America Forward, is intended to fill that need for "second stage" funding. "The term 'innovation' is maybe a little misleading," Kirsch now admits.

After going through the legislative meat grinder, the fund emerged as a relatively small competitive grant program of $50 million. (For comparison's sake, a single grant from the Bill and Melinda Gates Foundation can top $1 billion.) It is administered by the Corporation for National and Community Service and will award grants between $1 million and $10 million, with a focus on education, health, and economic empowerment. Per Kirsch's vision, the vast majority of the funds it allocates--85 percent--will go not to "innovative" nonprofits themselves but to private philanthropies and other grant-making institutions, which will then match the funds and reallocate them to community organizations. In turn, the recipient groups must match, dollar for dollar, the grants they receive. A federal white paper on the program trumpets, "The result? Three dollars in funding for every $1 in government spending."

Obama's June 30 speech announcing the program adopted America Forward's disdain for big government; it almost sounded like Reaganomics. "Let's face it, there's only so much Washington can do," Obama said to nonprofit and philanthropic leaders assembled at the White House. "Government can't do everything and be everywhere--nor should it be."

The president continued, "Folks who are struggling don't simply need more government bureaucracy; that top-down, one-size-fits-all program usually doesn't end up fitting anybody. People don't need somebody out in Washington to tell them how to solve their problems, especially when the best solutions are often right there in their own neighborhoods, just waiting to be discovered."

The truth, though, is that big, top-down government programs like Social Security, Medicaid, and Medicare have done more than almost any nonprofit effort to lift Americans out of destitute poverty. Imagine what something like a national universal day-care system could do, in terms of encouraging work among poor parents and providing early childhood academic enrichment.

That's not to say charity isn't crucial, just that setting it up in competition with government is hardly relevant--and certainly not politically helpful for an administration attempting to overhaul the health-care system and potentially create a new, national public-insurance program. As Jeff Trexler writes in an article for the journal Emergence: Complexity and Organization, traditional nonprofit leaders critique concepts like social innovation and venture philanthropy as "an appropriation of business jargon that is inconsistent with the core values of the charitable sector."

The Social Innovation Fund rushes headlong into this debate and picks sides. Its requirement that each government dollar be matched by the recipient organization ensures that only nonprofits that are already financially sustainable will win grants. Many small organizations, no matter how essential their work, operate hand to mouth. Groups that haven't already attracted significant corporate, foundation, or individual donor support are unlikely to be able to match a multimillion-dollar government grant.

So it turns out the Social Innovation Fund is actually searching for safe bets. "The title was selected because it sounds really good," says Sean Stannard-Stockton, founder of the consulting firm Tactical Philanthropy Advisors and a well-known blogger in the nonprofit world. "We all want innovation. But the Social Innovation Fund is not going to draw up a lot of great nonprofits that nobody has heard of before. It's going to call attention to what works."

Pablo Eisenberg, a philanthropy expert at Georgetown University, is much harsher. "The administration's vision excludes the overwhelming majority of nonprofits that are really in need of assistance," he says. "Nonprofits that are activist, that are organizing, that are watchdog, that deliver important social services at the local level, like food banks and domestic-violence shelters."

IRONICALLY, IT IS EXACTLY such a small, scrappy nonprofit that Barack Obama worked for in Chicago in the mid-1980s, helping residents of a public-housing project demand better schools and public services from city government. That kind of community group, which engages directly with the political system, is out of vogue with the new generation of social entrepreneurs, who are more interested in self-sufficiency than activist government. "Foundations are some of the most elite organizations, whose boards are invariably made up of the wealthiest people in the country," Eisenberg says. "They have no sense of what community needs are."

At least so far, there's no indication the White House will push philanthropies in a more activist direction. The nonprofit groups singled out for praise by the Obama administration, in press conference after press conference, are studiedly apolitical, already enjoy significant corporate support, and often lack a systemic approach to addressing inequality.

One example is Rising Tide Capital in Jersey City, which runs a Community Business Academy for high-poverty adults looking to become small business owners. The group was founded in 2004 by Harvard graduates Alfa Demmellash and Alex Forrester. With a name that could belong to a hedge fund and a focus on self-sufficiency, Rising Tide Capital enjoys financial and in-kind support from companies including Goldman Sachs, Bank of America, Capital One, Chase, Wachovia, and Fidelity Investments.

Demmellash, the group's CEO, immigrated to the United States from Ethiopia at the age of 12. Her mother worked as a seamstress and waitress, and the family was poor. She is a young, inspiring, photogenic do-gooder, so it's no surprise that last June, right before the launch of the Social Innovation Fund, Demmellash was named a 2009 "CNN Hero." She and Rising Tide Capital were suddenly everywhere. Soon, they got a call from the Obama administration. Demmellash was whisked off to the White House, where she sat in the audience during Obama's speech announcing the Social Innovation Fund. "So far, Rising Tide Capital has helped 250 business owners in the state of New Jersey," Obama said.

The problem is Rising Tide Capital hasn't helped 250 new business owners. In reality, 216 people have gone through its business academy, 79 of whom have launched businesses and 71 of whom are in the planning phases. That's an impressive achievement but certainly no cure-all for low-income neighborhoods.

Rising Tide Capital knows these numbers because it already received a large donation that allowed it to purchase outcome-tracking software and conduct surveys of program graduates. In the future, it hopes to follow its graduates over a number of years, to see whether the Community Business Academy contributes to long-term financial well-being. "As a person who is investing tremendous energy and resources, making sure our mission is actually met is incredibly important to me," Demmellash says.

The use of trumped-up numbers downplays the difficulty of the work Demmellash and other nonprofit leaders do--and it downplays the stubbornness of problems like poverty, racial isolation, and lack of education. The 250 number was likely lifted by Obama's speechwriter from the CNN Heroes report, which used the same inflated statistic--ironic, considering the Social Innovation Fund is supposed to emphasize the responsible use of metrics in evaluating how well nonprofits are working.

The Social Innovation Fund is not the only corner of the Obama administration to fall under the sway of venture-philanthropy vogue, sometimes to the detriment of good social science. Through the Department of Education's innovation funds, Secretary of Education Arne Duncan is promoting a very specific image of school reform, one that borrows liberally from the venture philanthropists' goal of bringing free-market values to the public sector. The federal guidelines encourage states and schools to embrace specific "innovations," such as enacting merit pay for teachers and lifting laws that cap the number of charter schools. Though such policies may have tertiary benefits, there is no research consensus on whether either one contributes to the "bottom line" of education reform--increased academic achievement for high-poverty kids.

A recent Stanford University study of charter schools in 16 states found that in math, only about 17 percent of charter schools increase student achievement over traditional public schools. The researchers described the results as "sobering." A competing study out of Stanford, by Hoover Institute Fellow Caroline Hoxby, found that students who win a lottery to attend a New York City charter school do much better on standardized tests than socioeconomically similar students who lose the lottery and return to traditional public schools. But New York's charters may be superior in quality exactly because state law allows only a few carefully selected organizations to manage charters. It is exactly such laws that the Department of Education claims stifle innovation.

Regardless of whether you believe the charter detractors or defenders, it's undeniable that the obsession with innovative charter schools is out of proportion to the reality that less than 5 percent of American kids attend such a school. "[Charters] should not distract us from the challenging, important, and unheralded task of making process improvements in the operation of traditional schools," writes Grover Whitehurst of the Brookings Institution, in a gently mocking essay titled "Innovation, Motherhood, and Apple Pie."

In Denver, the site of one of the largest experiments in merit pay for teachers, a 2008 study from the University of Colorado found no evidence that the new compensation system helped students; rather, teachers who were already high-performing chose to opt in to merit pay, while those who were less successful opted out. Even among teachers who participated in merit pay, only 38 percent believed the program directly improved student test scores.

Critics contend the administration has ignored more difficult, yet proven school reforms, such as efforts to integrate schools, thus guaranteeing that fewer classrooms are overwhelmed by the challenges of poverty and racial isolation. Research by Cornell labor economist C. Kirabo Jackson found that when the Charlotte-Mecklenburg school district in North Carolina ended a 30-year busing program and resegregated, the highest-performing teachers fled schools that became predominantly black and poor. Yet integration is seen as a pie-in-the-sky, old-school lefty goal by the venture-philanthropy crowd and has registered not at all on the Obama/Duncan agenda. It's not "innovative."

Another criticism is that even when innovative social programs are proven to work well, the Obama administration underestimates the costs involved with scaling them up. The White House's single favorite nonprofit is probably the Harlem Children's Zone, Geoffrey Canada's effort to flood 97 blocks of New York City with educational, health, and economic resources--including several charter schools. The president has asked Congress to set aside $10 million in the 2010 budget to replicate 20 such "promise neighborhoods" across the country. But that figure is considered laughable by most nonprofit experts. The Harlem Children's Zone has an annual budget of $70 million.

While the Social Innovation Fund and Department of Education grants are unlikely to result in systemic policy improvements, it would be a mistake to view the administration's social-innovation efforts in a vacuum. The same White House is pushing for a major overhaul of our health-care system. The $700 billion stimulus package is the greatest increase in federal spending since the Great Society.

In the end, the administration's social-innovation push may be most useful for its signaling effect. Both Obamas have appeared in front of the moneyed and influential to tell them they should invest in community nonprofits and care about inner-city schools and unemployment. Nevertheless, it's true that the Obamas' infatuation with social entrepreneurship and venture philanthropy serves as a reminder of their aversion to a more robust, liberal, government-focused rhetoric. In this regard, they are, perhaps, more Clintonian than they'd like to admit.

The administration's concept of social innovation injects government into the philanthropic sector as a sort of taste-maker, hopefully influencing charities to advance progressive public policy ideas without the federal government having to spend too much more money. With the Republican congressional delegation in a full-on tax revolt, the strategy is arguably politically savvy, at least in the short term. But is it innovative? Not so much. There's nothing new about vilifying big government and asking a stretched-thin philanthropic sector to address a truly staggering landscape of human needs--10 percent unemployed, 47 million uninsured, only half of all black and Latino boys completing high school.

"Many of these social problems are of the scale that require the government to be involved," says Nee of the Stanford Social Innovation Review. "A lot of the nonprofit stuff is sort of ... nickel and dime."

GRAPHIC: Illustration, no caption, MICHAEL SLOAN

LOAD-DATE: November 5, 2009