Friday, March 27, 2015

The Atlantic: Welfare Makes America More Entrepreneurial

http://www.krusekronicle.com/kruse_kronicle/2015/03/welfare-is-key-to-entrepreneurship-and-economic-growth.html?utm_source=feedblitz&utm_medium=FeedBlitzEmail&utm_content=44864&utm_campaign=0#.VRVrb7vn_IU

A common perspective among political conservatives, especially of the libertarian and Tea Party varieties, is that welfare is a drag on economic growth and it is a disincentive to initiative. Paul Ryan wants a safety net and not safety hammock. Some libertarians don’t even want the net. It would be better to let people assume their own risks. Money taxed away by the government is money that people could have used to buy goods and services and boost the economy.

I do not dispute that government programs could be a drag on the economy but this conservative narrative is grossly incomplete! Entrepreneurship and economic innovation are, at the heart, calculations about risk. By taking a bold step, what are the chances I will be better off (however I measure that) and what are the chances I could lose everything? Do the chances of “better off” outweigh the status quo, especially if I could lose even what I have now? So here is the key point: By reducing the risk of losing everything we tip the risk calculation toward taking making more risk, and therefore economic growth.
 
... Take food stamps. Conservatives have long argued that they breed dependence on government. In a 2014 paper, Olds examined the link between entrepreneurship and food stamps, and found that the expansion of the program in some states in the early 2000s increased the chance that newly eligible households would own an incorporated business by 16 percent. (Incorporated firms are a better proxy for job-creating startups than unincorporated ones.)
 
Interestingly, most of these new entrepreneurs didn’t actually enroll in the food stamp program. It seems that expanding the availability of food stamps increased business formation by making it less risky for entrepreneurs to strike out on their own. Simply knowing that they could fall back on food stamps if their venture failed was enough to make them more likely to take risks. ...
... The rate of incorporated business ownership for those [CHIP] eligible households just below the cutoff was 31 percent greater than for similarly situated families that could not rely on CHIP to care for their children if they needed it.
 
The same is true of recent immigrants to the United States. Contrary to claims by the right that welfare keeps immigrants from living up to their historic role as entrepreneurs, CHIP eligibility increased those households’ chances of owning an incorporated business by 28 percent.
 
The mechanism in each case is the same: publicly funded insurance lowers the risk of starting a business, since entrepreneurs needn’t fear financial ruin. (This same logic explains why more forgiving bankruptcy laws are associated with more entrepreneurship.) ...
... American men were more likely to start a business just after turning 65 and qualifying for Medicare than just before. Here again, government can make entrepreneurship more appealing by making it less risky. ...
 
... Sometimes, though, a robust safety net may serve to discourage entrepreneurship. The best path in such cases, however, may not be to cut the program, but rather, to reform it. When France lowered the barriers to receiving unemployment insurance, it actually increased the rate of entrepreneurship.. Until 2001, citizens on unemployment insurance had little incentive to start businesses, since doing so would terminate their benefits. Instead of gutting the program, the state simply decided to let anyone who founded a business keep drawing benefits for a limited period, and guaranteed that they would be eligible again if that business failed. The result: a 25 percent increase in the rate of new-firm creation. ...

Other examples are reported. You get the picture. Here is the conclusion.
 
... The evidence simply does not support the idea of a consistent tradeoff between bigger government and a more entrepreneurial economy. At least in some cases, the reverse is actually true. When governments provide citizens with economic security, they embolden them to take more risks. Properly deployed, a robust social safety net encourages more Americans to attempt the high-wire act of entrepreneurship.

The challenge is not the particular size of government. The issue is the precise programmatic design of any given program. Markets generate a real-time feedback loop that allows independent individuals to prioritize their choices. Government has less effective ways of being adaptive and responsive. I lean toward market solutions where practical. Yet, there are some deliverables that markets alone are not capable of generating. How this mix should all come together is a topic on which reasonable people can disagree. But the idea that government cuts necessarily lead to more economic vitality is no more valid than the idea that wildly throwing money at welfare programs helps people. The real world is far messier than ideologues are willing to grant.

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