Does a Welfare State Encourage Entrepreneurship?

It might, according to some economic research.1 As AEI’s James Pethokoukis explains,

Image result for welfareOver 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.”

However, he notes,

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 frontierIndeed, 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 screw that up.

Worth checking out.

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