Does the Grant System Discourage Innovation?

Many of those interviewed for this New York Times article think so. I believe the same applies in many or most scientific fields. The majority of the comments also support that view. Even the supporters of the current U.S. process seem to be agreeing with Winston Churchill's comments on democracy. An alternative often mentioned in the comments is to support strong individuals rather than strong proposals. My impression is that the ARC (Australian Research Council) leans much more in this direction than the U.S. funding institutions do through Future Fellowships, Federation Fellowships, and other fellowships in the Discovery Program. Another interesting proposal was to give applications an initial screening for completely bad proposals and then award the money among the acceptable proposals by lottery. Nobody cited any academic research on the grants process but I am sure there must be plenty?