[BRIEF NOTE] On how social safety nets can encourage entrepreneurialism

[rfmcdonald]

Bloomberg View's Noah Smith had an interesting article, "Does the Social Safety Net Make Us Lazy?", which links to research suggesting that a social safety net does not necessarily discourage entrepreneurialism. Debates of this kind connect interestingly to discussions of a guaranteed minimum income, which, as the Mincome experiment in the Manitoba town of Dauphin conducted during the 1970s strongly suggests, can actually substantially increase the productivity and overall health of human beings by relieving them of existential concerns related to poverty. I'm personally inclined to think that social safety nets can be tuned much more finely, the better to maximize human potential. Institutions and policies like these may become increasingly necessary as globalization and technological advance limit the potential for employment across the board. What do you think?

[E]conomists Johan Hombert, an economist at HEC Paris, Antoinette Schoar of MIT, and David Sraer at the University of Califorina, Berkeley, recently found evidence that broadly fits the alternative story. The authors take advantage of a 2002 French government reform that gave extended jobless benefits to unemployed people who started their own companies. Not only would this let unemployed people keep their benefits while launching companies, but if the companies failed, the benefits would extend even further in time. Basically, the French government decided to treat entrepreneurship like any other job, with respect to benefits. In doing so, the government offered a backstop to unemployed entrepreneurs, offering them a safety net should they fail.

Hombert et al. find that the rate of entrepreneurship increased by about 10 percent, across all industries. More importantly, they found that the businesses created by people who were helped by the new law were just as high-quality as other new businesses, in terms of job creation, growth and survival rates. Actually, the entrepreneurs helped by the new policy reported higher levels of ambitiousness than other entrepreneurs -- a measure that sounds hokey, but is typically correlated with future business growth.

So in this case, a more “cuddly” form of capitalism didn’t reduce the incentive for entrepreneurship -- it increased it. That hints that, in France at least, the main constraint on entrepreneurial activity isn't lack of effort, but too much risk. The theory of Acemoglu et al., in other words, might just not describe what’s going on in France.

What about the U.S.? Harvard Business School professor Gareth Olds has found evidence that is strikingly similar to Hombert et al. In a 2014 study, he found that food-stamp assistance makes people significantly more likely to start businesses. Again, the data supports the hypothesis that “cuddly capitalism” boosts risk-taking, rather than discouraging it.

This suggests a way for us to attack the entrepreneurship deficit. In his 2008 book, "The Great Risk Shift," Jacob Hacker documents how Americans have been forced to take on more and more personal risk -- medical bankruptcies, unemployment and retirement finances all loom larger than they used to. Maybe this is scaring Americans away from entrepreneurship -- forcing them to forgo big dreams because the financial danger of failure is too great. Perhaps if the government did more to limit these risks, we would see the entrepreneurship decline reverse itself.