Chicago Booth Review

Robert H. Gertner: Governments are hard-pressed for resources. Agencies are supposed to be delivering services, they have trouble doing it on the budgets they have. Then thinking about carving out budgets, either within the agencies or through legislation, to focus on innovation where the payoffs are uncertain and they're in the future is really challenging.

Hal Weitzman: DOGE, Elon Musk's Department of Government Efficiency, has taken a sledgehammer to Washington, closing government agencies, and leaving many federal employees unsure if they still have jobs. Will that really make government more effective?

Welcome to the Chicago Booth Review Podcast, where we bring you ground-breaking academic research in a clear and straightforward way. I'm Hal Weitzman. Today, why DOGE may end up creating a less effective and less efficient federal government.

Chicago Booth's Rob Gertner says, "If you want innovation and greater effectiveness from government, rather than smashing things up, you should focus on incentives, funding, and management." How could we structure things to make government agencies worth their funding?

Rob Gertner, welcome to the Chicago Booth Review Podcast.

Robert H. Gertner: It's a pleasure to be here.

Hal Weitzman: Now, we're here to talk about social innovation. I'm going to declare a bias here. I have a sense, my hunch is that institutions like government, like nonprofits, are not very dynamic, they're not very innovative. Is that stereotype accurate?

Robert H. Gertner: I think it is accurate. It's a hard question. It's hard to point to the data. I think your intuitive sense, I don't know that I can add a ton more than I have the same intuitive sense. I think I understand, I'm sure we'll talk about, some of the reasons why. But it's a little hard to measure. I once tried to look at large nonprofits and try to figure out how innovative they are, and started going through filings, and annual reports, and those things. This was probably over five years ago, and decided it should wait until natural language processing tools got better. Now I think it's time to go back and look at it.

The casual start seemed to really indicate, if you look at large nonprofits' annual reports and try to think how much are new services, new things they're doing, how much do they talk about innovation? It's not a lot at all.

Hal Weitzman: Okay. I guess I'm actually struggling to think what innovation in government even means. How would we compare that social innovation to traditional innovation?

Robert H. Gertner: Well, I think if you think about a traditional company, they're thinking about they've got customers and services, things they do, the way they create value for their customers. They're always thinking, "How can we do that better? How can we use technology, develop technology, new technology that can do it better? How can we come up with new services, new ways to expand our customer base?" Government and nonprofits could and should be thinking the exact same thing. They are serving a set of beneficiaries, and they should be thinking about what are ways to do this in a new way, to create new value or additional value for our beneficiaries.

Hal Weitzman: Okay. But it's a puzzle because government and nonprofits are full of people who are very passionate about what they do. Many of them could be earning a lot more money elsewhere, but they're there because they really believe in the mission of the organization. You think they would want to do it in a more effective way, given the resources they have. Why aren't they more innovative? Also, anybody in an organization has ideas about how to do things better. Why aren't those ideas flowing into change?

Robert H. Gertner: Right. I think there are three problems, broadly. There's incentives. There's funding. And there's managing innovation.

I think incentives are really important. If you think about a traditional company, there worrying every day that somebody else is going to come up with an innovated way that's going to disrupt their business and they're going to start losing money. There's enormous amount of market pressure for innovation. Then if somebody comes up with an idea, there's an enormous financial opportunity through entrepreneurship to create value, to become wealthy, and institutions that support it.

If you think about government or nonprofits, let's take government first. In government, if you have an idea, if you're sitting in a government agency and you have an idea how to use technology to do the services better, first of all, the upside, how you personally benefit if its implemented and successful. Who knows? If it fails, you could lose your job, as opposed to the entrepreneur who fails, who just raises more money for the next venture.

Hal Weitzman: You're talking about just the structure doesn't say, "We will reward people for experimenting, or even just for coming up with great ideas and seeing them through."

Robert H. Gertner: That's exactly right. Then there are all of these institutional barriers to actually implement something innovative. So that if you have that idea and you're in government, and you say, "I don't care about the individual rewards, I'm just going to try to make it happen," then there will be all sorts of barriers, including funding and various other things, bureaucratic barriers that will make it not particularly likely. Which will then, again, say, "Well, it's not worth really trying to make it happen." That then of course affects who works in government. It just feeds itself into a culture that ends up not being particularly innovative.

Hal Weitzman: When you say who works in government, you mean the people that government tends to attract are themselves not social entrepreneurs?

Robert H. Gertner: I think that's to some extent true. I think if you had those ideas and you think, "I want to make this happen," you'd probably quit your job and become a social entrepreneur.

Hal Weitzman: Right, okay. You'd avoid government. I should say when you talk about private companies, or profit maximizing companies, you describe them as though they operate perfectly. Many of them, those companies, also struggle with incentives and innovation.

Robert H. Gertner: Yeah. I think one of the things the management literature on innovation shows is that actually innovation's really hard. That means it has to be managed in a very disciplined, intelligent way. Which again, without the right incentives in place, without the funding in place, it makes it really challenging for these other types of institutions to do well.

Hal Weitzman: Okay. You talk about incentives. Let's talk about the other reasons that you outline.

Robert H. Gertner: Funding I think is really critical. I think governments are ... We tend to think federal government, but you can also think about this to some extent to where innovation somewhat works within government tends to be on a more local level. Governments are hard-pressed for resources. Agencies are supposed to be delivering services, they have trouble doing it on the budgets they have. Then thinking about carving budgets, either within the agency or through legislation, to focus on innovation where the payoffs are uncertain and they're in the future is really challenging. They just want the money to be able to provide the services they're supposed to provide today.

Hal Weitzman: On the one hand, they always feel they're operating with limited resources. And on the other hand, that's going to make them not want to allocate a certain proportion of those resources towards innovation.

Robert H. Gertner: Which will ideally lower the cost in the future. Then of course, you think about horizons could be a real problem. Political horizons tend to be fairly short. If the payoff from the innovation is five, 10 years down the road, then again, the incentives to create the political capital to do that is going to be limited.

Hal Weitzman: Right. There's a whole load of people in Washington in the international development community who are probably having exactly that thought right now and we'll come to that.

You talked about budget. It also strikes me that, if you're in a government agency and you're cash-strapped, your main focus is trying to increase your budget, not on creating more strains on it like an innovation fund. What's the third? You talked about three.

Robert H. Gertner: The third thing is management, and managing innovation and the innovative process. I think the biggest lesson from other sectors that is really challenging for government is innovation tends to work well when you can experiment, learn, and adapt. You have this cycle of developing the innovative product with users by experimenting, and then adapting. Government structures really make that extraordinarily difficult.

Federal government rules and regulations make testing actually as burdensome often as a regulatory process to be able to get approvals to test some potential product, as it would be to implement it at scale. We find that rules and regulations and new ways of doing things tend to be done without experimentation, with just a process of people commenting on rules then trying the best you can, one hopes, to implement something. If it doesn't work as well as you hoped, there's not much you can do about it.

Hal Weitzman: Okay. You think that regulation is standing in the way of social innovation?

Robert H. Gertner: Yeah, I do.

Hal Weitzman: Okay. You and I talked about a thing called the Paperwork Reduction Act, which sounds like something that wouldn't reduce paperwork, and sure enough didn't.

Robert H. Gertner: I think actually, as opposed to some laws where they're explicitly titled in a way that's inconsistent with their real objectives, I actually think the objectives of the Paperwork Reduction Act was to reduce paperwork. But I think it has had, to some extent at least with respect to this, to have some of the opposite effect. Because it means any time, if I want to send a new form to try out to veterans in order for them to get services, a new form or some web-based, I have to go through a whole process to get approvals because of the Paperwork Reduction Act, because I can't reach out to the ultimate beneficiaries unless I get approval about the amount of paper or equivalent that it's going to take. I have to almost describe what's going to happen before I actually do it, so that takes an enormous amount of time before you can get approval to do things like a user-

Hal Weitzman: So it does actually reduce paperwork, but it increases the number of hoops you have to jump through.

Robert H. Gertner: That's exactly right. It has the opposite end effect, because the idea of the paperwork reduction is to make the ultimate beneficiaries' lives easier, and it's doing the exact opposite.

Hal Weitzman: Carry the Two is the show that pulls back the curtain to reveal the mathematical and statistical gears that turn the world. Co-hosts Katie Witkowski and Ian Martin bring unique perspectives from the field of mathematics and statistics to convey how mathematical research drives the world around us. With each episode tackling a different topic, subscribing to Carry the Two, part of the award-winning University of Chicago Podcast Network.

Okay, Rob, in the first half we talked about why it's so hard for government units to innovate. Why it's so hard for nonprofits as well, but we were talking more about government there. Let's try and be positive in the second-half, shall we? Give us some examples of innovation in social entrepreneurship, either in nonprofits or in government, that have struck you.

Robert H. Gertner: Yeah. I think one really important example is community development finance and microfinance, so just creating financial services for folks who have traditionally been left out of the financial system. Both within the US and internationally. A number of organizations, some not-profits, some for-profit arose in the '70s. Designed one right here in the South side of Chicago, South Shore Bank, which was the first community-development bank. It just said, "Hey, we can create a set of innovative financial services for members of this poor community on South Shore Chicago, and we can raise capital from folks who care about serving these communities. We can treat the borrowers in a way that really supports them." Created great businesses, great social value from doing that.

Hal Weitzman: Okay.

Robert H. Gertner: Another example is Khan Academy.

Hal Weitzman: Right.

Robert H. Gertner: Khan Academy which is very much typically for government, education. Came up with how do we use the technology of the internet in order to provide initially math lessons that can be really effective, and can reach anybody in the world for free. That's a really important social innovation. It's for a set of services that traditionally are mostly government services, but were done outside of the government sector.

Hal Weitzman: Okay. Although both the examples you gave are not government examples. Is there a government example of innovation?

Robert H. Gertner: Oh, yeah. Sure, there are government examples. Some good government examples that come out of research from economists, including economists here. There's been a fair number of what are sometimes called Nudge Units created within governments around the world, where they're taking the insights from behavioral science research and applying it to a variety of government services to make them take up or compliance much more likely.

Hal Weitzman: Right. A text message saying, "You haven't filed your taxes yet, get on with it," or whatever.

Robert H. Gertner: Exactly.

Hal Weitzman: Okay. That sounds a little more hopeful. We got some examples. What are they doing right? In the first half, you talked about what were things that stand in the way. How are these efforts, initiatives able to get around those constraints or eliminate them?

Robert H. Gertner: Yeah. I think there are a few things that have worked. They work imperfectly. I think one thing that we see governments doing a lot is really outsourcing innovation. It's not coming from within their ranks. There are two ways that that happens. One is organizations, social entrepreneurs, companies arise and create innovation software, let's say, and they sell them to government. And say, "Hey, here's an innovative product that can allow you to do what you're trying to do more effectively, more efficiently. Please buy it from us." There's a lot of that that goes on.

Sometimes governments say, "Hey, we know we need to be able to use AI to do X," whatever it might be. They say, "I know we don't have the capabilities to do it, so let's contract with an outside organization that's more traditional outsourcing and get somebody to build this for us."

Hal Weitzman: Is that a smart idea? Is that them knowing themselves and saying, "We are not going to do this, but you can?"

Robert H. Gertner: Right. You could see, given the constraints, knowing the limitations, it's program a good thing to do. But it's not necessarily great, especially very often with software where you need to be adapting it, or there are opportunities to adapt it over time. Having employees, having a staff that actually knows how to do that and knows we're there to build it can be really beneficial.

The second thing is that government contracting also makes, when we talked about earlier, which is the process of testing, and iterating, and learning, often is restricted through the way government contracting workers. Which is, "Here's what you have to do." There's an RFP, you have to do exactly this and deliver exactly this. If you come up with opportunities to do it differently or do it better, there can be no real way to make that happen.

Hal Weitzman: Right. Okay. Presumably, what you're pointing to there is that there is no capacity being built to be innovative in the future if I'm always buying in innovation.

Robert H. Gertner: That's exactly right.

Hal Weitzman: Okay.

Robert H. Gertner: We haven't talked that much about nonprofits. I think the institutional barriers aren't as great. I think there are lots of opportunities for large nonprofits to just decide they're going to be innovative. Then they'll have to fundraise if they're philanthropy-based, to be able to do that. But it seems more to me that it's missed opportunities.

Hal Weitzman: Okay. Well, let's talk about what they might do. How might nonprofits or governments do things differently?

Robert H. Gertner: One thing I'm intrigued about, an idea I've had for a while is I'm always thinking about trying to draw analogies between the traditional for-profit sector and government or nonprofits. There were these institutions, they didn't really work out that well, called corporate incubators. Where rather than having an incubator or an accelerator program that was Y-Combinator, would actually be sponsored by a corporation. They'd invest in the company, they'd support the startup, and then they'd have the ability to invest or have some business relationship or ownership of it down the road. The problem with that is that the best entrepreneurs didn't like those restrictions, so they just went their traditional route.

But if you think about somebody who has an idea, let's say for doing some aspect of disaster relief more effectively. How do you start that thing? It's impossible. But if you could be incubated at the Red Cross, where they have expertise, they have resources, they have a way for you to test and try it, and they have a way for you to scale it if it's successful, that would be enormously attractive.

I think in addition-

Hal Weitzman: This is just an idea. This is not something that's being done?

Robert H. Gertner: There are a couple of places where I think they're starting to try to do something like this. But I think there are ways in which large nonprofits could say, "We're going to try to be innovative, we're going to try to generate ideas internally." But we can also figure out ways, if again, we have a culture that makes it challenging, to support innovation around the mission of the nonprofit more broadly.

Hal Weitzman: Which sounds like a different way of doing what we talked about in the first half, which is setting aside a fund or a unit that's going to be the innovation unit or fund.

Robert H. Gertner: Exactly. I think, again, dedicated resources are a critical piece of this.

Hal Weitzman: Okay. You talked there about scaling, because often I would imagine that somebody has an idea, it works on a very, very small scale. It's great. What are the challenges involved in scaling a great idea?

Robert H. Gertner: The bottom line, our government, it's just a really big challenge to innovate. But scaling things that are working other places seems to be a greater opportunity for government. I think that also is somewhat broken.

If you think about some things like early childhood education, enormously valuable. Maybe even positive NPV for government. We've known it for 20 or more years. Still, it's now we're still debating it. I think the actual adoption of things that have worked other places that we know work by government is also one of the biggest challenges.

Innovation occurs, some city starts doing something better. Again, we talked in the corporate sector in California, they're coming for me in Illinois. If it's the Palo Alto local government, Chicago's not worried that the Palo Alto government's going to come take over. The incentives aren't so great. I think the knowledge flows are surprisingly not that good. The number of times where people in parallel positions don't know what's going on in other places and don't know what's working.

I think there's also a real opportunity, in addition to trying to be innovative, but to find innovations that have worked elsewhere, and to think about how we get wider-spread use of that.

Hal Weitzman: Do you think that people get proprietary about that? And say, "Well, that isn't a Chicago idea, or that's a California thing. It works there, it would never work here."

Robert H. Gertner: Well, it's really interesting. We taught a class for a while to think about trying to bring innovative nonprofits to Chicago as the next place. Chicago seems to have a reputation for people thinking, "Oh, if it wasn't built here, it's not going to work here." Lots of the organizations our student team starts to said, "Eh, not really so excited about Chicago being the next place."

Context obviously matters. If you're thinking about not just pride of place, but if you actually think about will it work in Chicago just because it's working somewhere else, maybe not. But I think it's probably a good place to try. It's also, it's only by scaling and trying to take things that will work other places to really understand what about the context is most important, and how can you adapt the innovation to work in other similar situations.

Hal Weitzman: At the same time, students of American government always hear that the States, they are laboratories for policy. Is that not accurate in the real world?

Robert H. Gertner: Yeah. I think that's a really interesting question. Certainly, you can point to examples of it working. I think it doesn't work nearly as well as it could. This notion of we have 50 experiments going around, and that's this really big value of a federalist system, makes sense in theory. I think it doesn't deliver in practice as much as one might hope.

Hal Weitzman: Okay. Now, Rob, there's been a specter in the background the whole time we've been talking, which is the specter of Elon Musk and DOGE, the Department of Government Efficiency. Which of course, is focused on some of the issues that you're talking about. Not necessarily innovation for growth, but innovation for the sake of efficiency. Some of the things that are part of that are trying to use ... It's interesting it's embedded, isn't it, within this unit of government, set up I believe by Barack Obama, to bring more tech into government departments? This idea of being more efficient by using software, by using technology. DOGE, as I say, it's not the first time that we've tried to address that problem.

Now I think what's probably different about DOGE is the shock-and-awe of it. They're taking a sledgehammer to smash up ... It kinds of reminds me when you have a contractor into your house, and the first thing they do is smash everything up. That's the approach. Is there any chance that will work? Will anything good come out of that?

Robert H. Gertner: Well, I think the sledgehammer to your house, I hope was done after there were plans as to what to do to rebuild.

Hal Weitzman: Correct.

Robert H. Gertner: I think that's the problem here, which is having a focus on government efficiency, or I would even prefer government effectiveness, is something that I think is an enormously important thing to be focused on. We've talked mostly about innovation, but even just trying to become more effective and more efficient, especially if it involves introducing new technology. For many of the reasons we talked about, it's a hard, complex management challenge.

Thinking about going about it just by firing people, and eliminating all processes, and then trying to think that you can hope that it'll just somehow create itself seems to me makes it seem really unlikely. I've seen nothing so far which I would call a good idea about the rebuilding part. I'm a skeptic.

Hal Weitzman: Okay. Do you think it will work then? It sounds like you don't think it will work.

Robert H. Gertner: I don't think it'll work.

Hal Weitzman: Okay.

Robert H. Gertner: But I think the one thing it ... I believe that trying to create greater government effectiveness, expand state capacity is one of the most important challenges for our society. I think in part because of political horizons, it gets ignored. You're not going to see the payoff in four years or in two years.

My one modicum of hope is that what comes out of this, which I think will be a lot of cost, a lot of disruption, and not a lot of benefits is perhaps, in a future administration, it'll get more attention.

Hal Weitzman: That seems like a good place to wrap this conversation up. Thank you very much, Rob Gertner, for coming on the Chicago Booth Review Podcast.

Robert H. Gertner: You're very welcome. It was fun having this chat.

Hal Weitzman: That's it for this episode of the Chicago Booth Review Podcast, part of the University of Chicago Podcast Network. For more research, analysis, and insights, visit our website at chicagobooth.edu/review. When you're there, sign up for our weekly newsletter so you never miss the latest in business-focused academic research.

This episode was produced by Josh Stunkel. If you enjoyed it, please subscribe, and please do leave us a five-star review. Until next time, I'm Hal Weitzman. Thanks for listening.