Odd man out
How government supports private-sector innovation, except in education

Odd Man Out

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Executive Summary

Federal policy has traditionally supported efforts to engage the private sector in solving some of the most challenging and intractable social challenges. Policymakers use a number of tools, including grants, loans, loan guarantees, and tax credits, to not only incentivize private-sector engagement but also stimulate consumer demand for new solutions and innovations. In areas such as health care, green energy, and space exploration, the federal government has actively sought ways to engage the private sector by eliminating regulatory barriers that impedhttp://cms1.aei.org/cms/e new entrepreneurs from launching ventures or providing a mix of funding and financing programs to support innovators in areas policymakers have deemed important to the country's future.

The federal government's posture, however, has been entirely different with respect to engaging the private sector in addressing one of the country's most serious challenges—improving education. Instead of involving the private sector, education policymakers have actually created policy and funding barriers that skew support to nonprofits and prevent for-profits from participating in programs aimed at improving teaching or learning. These barriers exist at nearly every level of government—local, state, and federal—further isolating education from potential innovations and discouraging entrepreneurship.

Federal Examples of Private-Sector Engagement. Most federal agencies in some way seek to engage the private sector in addressing their policy priorities, through legislation or through policy levers such as tax credits to stimulate consumer demand and accelerate new-technology adoption. NASA, for example, is pursuing a multiyear initiative that would allow private firms to compete to build and operate spacecrafts to carry astronauts into space and resupply the International Space Station. Doctors and hospitals will begin to receive incentive payments for using electronic health records (EHRs) to improve care and reduce costs, another example of how the federal government is providing direct subsidies to private entities to accomplish a public good, in this case ensuring every person in the United States has an EHR by 2014. The result has been a vibrant, competitive marketplace with well over 100 EHR providers of all sizes and types.

The Reluctant Embrace of Private Companies in Education. Private-sector companies are involved in nearly every area of K–12 education, from managing schools to developing textbooks and online-learning courses. However, federal policy toward private-sector education companies lags compared to other sectors. The most prominent concern voiced by opponents of for-profits in education is that these businesses will divert resources and tax dollars from services for students to profits for those firms. The skepticism surrounding for-profit entities in education manifests itself in laws, funding programs, and regulations. For example, the American Recovery and Reinvestment Act's Investing in Innovation competitive grant program, which was designed to accelerate the development and adoption of effective education solutions, shut out for-profits from competing for direct grants.

This treatment of for-profits in education increases investors' risk, which in turn decreases the amount of private capital available to education entrepreneurs. Private investment in cleantech, for example, surged from $1 billion in 2001 to nearly $4.5 billion in 2008 due largely to what investors saw as a more policy-friendly environment; during that same period, the education industry attracted only $560 million, most of which was in postsecondary education.

A Way Forward: Creating a Healthy, Competitive Education Ecosystem. Given the scope and urgency of improving the country's system for educating its citizens, it makes little sense to limit solutions and entrepreneurial spirit to only some groups based on their tax status. Federal policy can replicate successful models from other sectors to support innovation in education with safeguards to protect teachers, students, and parents. An entrepreneurial education landscape is not one in which the government or foundations simply pick winners and losers but, rather, one in which these entities help remove barriers to entry for quality providers and think deeply about the impact their policy or philanthropic decisions will have on the broader educational marketplace and potential investors or entrepreneurs in the field.

In a time of declining state and federal revenues, policymakers should be stimulating, not stifling, the influx of private capital to our education system. Our country can no longer afford to raise academic expectations for children while shutting out an entire group of providers who can help tackle our challenges. When it comes to other crucial challenges our country faces—creating a more reliable health care system, finding efficient sources of clean energy, or improving space exploration—policymakers do not ask whether they should engage for-profit companies, but how they should. It is time for education policymakers to follow suit.

John Bailey (john@whiteboardadvisors.com) is the director of Whiteboard Advisors.

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