Laura Tyson: The Government as Venture Capitalist

The American public’s attitude toward government, writes Laura Tyson in a new column for Project Syndicate, recalls a classic scene in Monty Python’s “Life of Brian.”

“What have they ever given us in return?” fulminates John Cleese, playing a Judean revolutionary. “The aqueduct,” concedes a sheepish co-conspirator. “And sanitation,” says a second, as others pipe up with more examples.

“All right,” Cleese erupts in exasperation. “But apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, the fresh-water system, and public health, what have the Romans ever done for us?”

The scene captures America’s cantankerous and contradictory zeitgeist. On one hand, public trust in government is at an all-time low. On the other hand, Americans are deeply frustrated with gaping holes in health care, education, equality of opportunity, infrastructure, and environmental protection – goods and services traditionally provided by government.

How to unlock solutions?

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Tyson cautions that the blanket distrust of government is misplaced. Like it or not, she writes, the reality is that there really are “public goods’’ – health care, universal education, infrastructure, security – that neither the marketplace nor the nonprofit sector can provide on its own. The United States has seen a surge ambitious private activity, such as billion-dollar efforts by non-profits like the Bill and Melinda Gates Foundation and Bloomberg Philanthropies, to address social problems. These new efforts also include social-enterprise start-ups and impact-investing platforms that seek both social and financial returns.

But while these private and nonprofit initiatives generate crucial innovation, Tyson writes, only government has the resources to implement the best strategies on an national scale.

One answer, Tyson argues, is to put the government in the role of venture capitalist. Its task would be less to design and implement top-down programs than to solicit, support, evaluate and scale up successful strategies developed by state and local governments, businesses and non-profits. Tyson cites a growing number of examples of how this is already happening.

The US Department of Education’s Race to the Top Fund spurred local school innovation by offering $4 billion in grants to districts that developed the most successful reforms. The federal government also operates Challenge.gov, an Internet platform to facilitate new prize competitions aimed at solving complex problems. After the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, the Obama administration teamed up with the X-Prize Foundation to offer a $1.4 million prize to the group that produced the most efficient oil-recovery solution. The winning approach was three times as efficient as the industry’s previous best rate. Since 2011, some 50 public agencies have sponsored more than 260 challenges over Challenge.gov.

Federal, state and local government agencies are also turning to “pay for performance” contracts, sometimes known as social-impact bonds. In a social-impact bond, the government contracts with an outside provider to achieve a measurable social goal (like reducing recidivism among juvenile offenders), and private impact investors finance the program’s upfront costs. The government promises a return to investors if the program’s targets are achieved. The key idea is that the government acts as a catalyst for new ideas and then helps scale up the strategies that demonstrate real results.

With the government acting as a venture capitalist, the private sector can create effective new programs to address social problems. But scaling up good programs will require government resources. The Gates Foundation may devise breakthrough innovations for public schools; but, even with its billions of dollars, it lacks the resources to revitalize education at the national or even the state level. As former New York City Mayor Michael Bloomberg recently observed, philanthropists should test innovative policy ideas and then rely on government money to implement them widely.

Only governments can provide public goods and address social challenges on a national scale. But there are numerous ways in which governments can work with non-profits, investors, businesses, and citizens to find the best ways to achieve these goals – and thus restore public trust in government itself.

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