According to The Atlantic, entrepreneurs are more likely than other Americans to receive public benefits, after accounting for income. The argument in this article is that expanding these benefit programs helps increase new business creation.
In 2014, Harvard Business School’s Gareth Olds studied the link between entrepreneurship and food stamps. He found that the expansion of the program in some states in the early 2000s increased the chance that newly eligible households would own a startup business by 16 percent. The Atlantic explains that expanding this program provided a threshold for entrepreneurs, by reassuring them that if their venture failed, they could fall back on food stamps.
In another study, Olds looked at the creation of the Children’s Health Insurance Program, which provides publicly funded health insurance for children whose families do not qualify for Medicaid. In order to estimate the program’s impact on new business creation, Olds compared the rate of entrepreneurship of those who barely qualified for CHIP to those whose incomes barely made the cutoff. He found that the rate of startup ownership for the eligible households just below the cutoff was 31 percent higher than for families that barely made the cutoff. Similarly, CHIP eligibility increased immigrant household’s chances of owning an incorporated business (startup) by 28 percent.
The article explains that taxes are also often a threat to entrepreneurship. A lower capital gains tax rate is associated with a greater supply of entrepreneurship, however the article explains that this system can often be inefficient. A better change would be to implement an entrepreneur-friendly tax reform, by shifting the tax code away from its current bias for debt over equity, while also preserving or expanding key tax credits such as the exemption for long-term investment in small businesses.
Do you all agree with the argument that when the government provides citizens with economic security, they use it to take business risks?
http://www.theatlantic.com/politics/archive/2015/03/welfare-makes-america-more-entrepreneurial/388598/
12 Comments
I don’t necessarily agree with that statement but I think economic security allows people the opportunity to take business risks, and that entrepreneurs are more likely to capitalize on those opportunities.
I think the safety net certainly allows, like Andrew said, the luxury of taking a risk with a startup or new idea, but for every entrepreneur taking a business risk because of the food stamp safety net you may have multiple people being lazy about finding or maintaining a job. There are certainly benefits to the safety net but the potential drawbacks can’t be ignored either.
Really? Foods stamps provide a life of luxury??? The real cheats are the ones working surreptitiously and drawing benefits. They’re not lazy, they’re entrepreneurial.
I think that the levels of assistance are a bit too low to do a lot for entrepreneurship, I think, rather that people who struggle take advantage of what they can. I assume Harvard Business School’s Gareth Olds knows what he’s doing, but I would explore for correlation, rather than causation.
I wonder if there a difference in the type of new business between those spurred by the safety net and those harmed by capital gains taxes.
Many times entrepreneurs starting new businesses do not take a salary for years in order to help their business grow. I am not sure where people in this type of situation would fit into the income brackets and food stamp distribution. This is assuming they have a certain amount of savings but I agree that a safety net does allow for more risks to be taken for those who do not have an abundance of savings.
^ That’s a really interesting point. My best guess is that there would be.
This is a really interesting article — I don’t see this as an entirely implausible theory. In my macrotheory class, we discussed how more generous unemployment insurance could lead to greater productivity since people will take more time to find a job that best suits their skills and preferences (therefore making them value their job more and discourage slacking off) and maximize their potential output. I think this fits into this theory pretty well: instead of taking more time to find the perfect job, an unemployed person may just take the time to become self employed and make their perfect job.
I agree that this type of policy will decrease frictional unemployment or may not change this but will allow for better investments in the future. When a new business is created there is a multiplier effect for additional new jobs as well, as opposed to just one job by someone unemployed taking an existing job.
Why view entrepreneurship as a good thing? Isn’t it instead an act of desperation? If you can’t find a proper job, then to avoid starvation you scrape together a bunch of odd jobs, you clean houses, you haul stuff on construction sites, you peddle a few things … well, that latter sort of entrepreneurship isn’t typically lauded. But overall this is not the sort of activity that is the stuff of long-run economic growth.
Indeed, you do see curious statistics about entrepreneurship in the nordic countries. The typical expectation is that no one would want to start a business when the taxes are so high. However, lower risk of failing might triumph, as your post suggests.
Except my Nordic friends run their own businesses…I’m not sure this claim holds water.
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