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Is America’s Welfare State Suffocating US Entrepreneurs?
What’s the link between entrepreneurship and the welfare state? Dynamic societies certainly require strong, pro-work, fiscally sustainable safety nets. But is there a trade-off where expanding the welfare states reduces entrepreneurship? Or might it actually encourage entrepreneurship?
Over at The Atlantic, Walter Frick offers economic literature roundup that suggests the latter. A strong safety net encourages startups by making the effort seem less risky, he argues. For instance, a 2014 paper found the expansion of food stamps “in some states in the early 2000s increased the chance that newly eligible households would own an incorporated business by 16 percent.” Another paper by the same author found that “the rate of incorporated business ownership for those 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.”
Likewise, Frick argues, “Obamacare doubles as entrepreneurship policy by making it easier for individuals to gain health insurance without relying on an employer.” Yup, we’re talking about the “job lock” phenomenon. Then there is a 2010 RAND study that found “American men were more likely to start a business just after turning 65 and qualifying for Medicare than just before.” Finally, it appears that when “France lowered the barriers to receiving unemployment insurance, it actually increased the rate of entrepreneurship.”
[As a general point, not all entrepreneurship is alike or equally beneficial. The rise of Wal-Mart may have reduced the number of mom-and-pop retailers, but it has also been a boon for US productivity. Indeed, as researchers Magnus Henrekson and Tino Sanandaji have pointed out, high rates of self employment can be a sign of economic weakness since taxes and regulation are impeding the ability of startups to become large, successful companies. At the same time, small-time entrepreneurship can get people on the first rung of that opportunity ladder, and it’s a shame government licensing regulations make it harder for so many to do so.]
Now it is one thing to argue that a more robust safety net would be good for US entrepreneurship broadly understood — I think that would be the case in some areas, though I would be careful about eliminating welfare work requirements — and quite another to make the same claim about mimicking the Scandinavian social democracies. In “Can’t We All Be More Like Nordics?”, Daron Acemoglu, James Robinson, and Thierry Verdier argue that “technological progress requires incentives for workers and entrepreneurs [and] results in greater inequality and greater poverty (and a weaker safety net) for a society encouraging more intense innovation.” If cut-throat, inegalitarian US capitalism became more like cuddly Scandinavian capitalism, the US might no longer be as capable of pushing the technological frontier. Check out this exchange between Acemoglu and Thomas Edsall in the New York Times:
Acemoglu said he believes that safety net programs in the United States are inadequate. But, if the thesis that he has put forth is correct, there is room for only modest expansion: “The fact that the United States is the world technology leader puts constraints and limits on redistribution at the top. The global asymmetric equilibrium is at the root of the United States being the world technology leader, but the mechanism through which this matters for innovation and redistribution is the very fact that the United States is such a leader.”
Indeed, the researchers have found a large per-capita gap between Scandinavia and the US when it comes to highly cited patents. The US also has a high-impact entrepreneurship rate three times as high as Sweden. (Of course, open economies benefit from innovation first produced elsewhere.) In short, the US has a pretty special thing going, and we should be careful not to screw that up. But that being said, I don’t think universal healthcare access or a more expansive and generous federal wage subsidy or unemployment insurance that helped workers relocate or better public transit would screw that up. (Even a universal basic income or negative income tax would not have stopped Bill Gates or Steve Jobs or the Google guys). As I wrote in Room to Grow, “American workers deserve a safety net that protects them from the worst effects of the economy’s inevitable ups and downs.”
Published in Economics
“Obamacare doubles as entrepreneurship policy by making it easier for individuals to gain health insurance without relying on an employer.”
Ummm . . . no.
Obamacare is a major reason why two friends and I passed on starting a company back in 2011. We ran the numbers, and discovered health insurance costs would wipe us out. It was smarter to continue as employees of major international corporations, getting our insurance through our employers, and entailed less risk to the capital we would have had to invest to start our business. Plus, we expected any gains we got to be taxed out of our hands.
The dirty little secret of Obamacare is it offers significant benefits to very large corporations, especially multinational corporations. If they self-insure they avoid many of the pitfalls of O-care. (My health insurance rates where I work have not gone up significantly since 2011.) The mid-sized and small businesses are getting hammered, but not the majors. Indeed, I think you could characterize it as “Crony-care” rather than Obamacare.
That is great for the minority of individuals (such as me) who are salaried employees at the majors, but it stinks for everyone else, and for economic growth as well. I guess the thinking is you have to make the economy into a crisis so as not to have a crisis to not waste.
Seawriter
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If the welfare state actually helps entrepreneurship, we might as well hang up conservatism. Somehow I am not sold on Frick’s analysis. 16% of what? 16% of a smidgen of people (“newly eligible households”) is still a smidgen. I can’t imagine that many people went from food stamps to business owners.
Businesses need certainty. Obamacare removes that for small businesses, making it very difficult to plan for the future. Those with OCare coverage have to shop around every single year, since so many insurance entities exit and enter the market, and rates rise and fall depending on outside factors not under their control. So many niggling regulations like minimum-wage laws, environmental laws, etc., make starting a business prohibitively expensive and nerve-wracking. I wouldn’t do it.
Some of the papers Frick is referring to are done by a PhD student at Brown. I don’t want to disparage research done by PhD students (I was one once upon a time too). But, as a rule, economists have trouble writing plain English and students more than most. They are writing for a very small audience that all share the same reference points. All this goes to say that after browsing through the papers I’m still not certain I understand what he’s getting at.
I THINK he is arguing that as ELIGIBILITY for food stamps and other similar programs broadened, there is a ramp up in the number of businesses started by those NEWLY ELIGIBLE for those programs.
This makes intuitive sense. Consider…I have a job. It doesn’t pay very well. I earn somewhere between 130% -200% of the poverty figure. I’d like to start my own thing, but I can’t really leave my job because I need it to pay the bills. Now the policy changes and I become eligible for food stamps. I might easily conclude ….”I still don’t know if I can make a go of it, but at least I won’t starve!” This might give me the courage to strike out on my own. Instead of thinking of it as eligible for food stamps, think of it as eligible for a micro-line of credit. If the author posited “micro-lines of credit boost new business formation” would you bat an eye?
I’m not sure American workers “deserve” anything – the safety net, as argued above, is truly a safety net for those people whose lives are torn asunder through unemployment, single parenthood, medical issues, etc. The net shouldn’t be there to catch those people who are akin to trapeze artists, risking their livelihoods for a chance to create a business.
If you’re looking for failure insurance, go buy some. There’s a reason why big corporations form captive insurance companies – so they can protect against catastrophic failure in the form of massive lawsuits or other liabilities. Smaller firms don’t have the resources worth suing for – so that’s why they don’t self-insure, and because they can’t afford the capital to do so.
But the larger question – does the welfare state suffocate entrepreneurs – is undoubtedly true. Why? Because the dollars that might have been invested into new enterprises is either taxed away to pay for the welfare state, or borrowed by the federal gov’t, reducing dollars available in the marketplace for investment.
Take it a little further. Would someone on welfare, of some kind, be willing to take a job at a start-up? Why or why not? This is really easy math. A bird in the hand, in the form of welfare (of one kind or another) versus getting paid probably not very well, with much higher risk, and only a very long shot of eventual reward.
Assistance programs generally create more people willing to sign up for assistance, not a fresh crop of entrepreneurs. There’s a side effect to the “safety net” that goes remarkably unremarked upon.
Nope, can’t think of any other things that might change in a man’s life at 65.