In the United States, though, many social welfare benefits still function like the old French system, disincentivizing entrepreneurship, and some popular reform proposals would actually worsen the situation. With food stamps, for instance, there has been a push to tie benefits to finding and holding a job, which actually does raise a barrier to starting a business.
Of course benefits are only one side of the ledger. Taxes are just as often held up as a threat to entrepreneurship and a dynamic economy. A lower capital gains tax rate does seem to be associated with a greater supply of entrepreneurs. But keeping the capital gains rate low to help startups is incredibly inefficient, since only a small portion of realized capital gains are from entrepreneurial activity. As Harvard Business School professors Paul Gompers and Josh Lerner write, “policies that increase the relative attractiveness of becoming an entrepreneur and promote technology innovation probably would have more of an effect on venture capital investments than an across the board cut in the capital gains tax rate.”
Instead of preserving low tax rates, entrepreneur-friendly tax reform would encourage startup investment by shifting the tax code away from its current bias for debt over equity, and could preserve or expand key tax credits like the exemption for long-term investment in small businesses.
Even the assumption that bureaucratic “red tape” holds back startups is less obvious than it sounds. Professors at George Mason created a novel measure of federal regulation in the U.S. and compared the amount of federal regulation to the number of new business establishments in each industry. They found a slightly positive correlation: more regulation was actually associated with more new establishments. (Though the number of “new establishments” correlates with entrepreneurship, they’re not quite the same thing since the former counts expansion by existing firms.)
That’s not to say regulations don’t hamper entrepreneurs; of course, they often do. It may even be the case that a better measure of entrepreneurship would correlate negatively with the amount of regulation. But what evidence we do have squarely challenges the intuition that it’s government that holds back startups.
It would be silly to argue that bigger government is always and everywhere good for startups. But the standard critique of big government throttling economic growth appears increasingly at odds with the available evidence. So why do pundits and politicians, on both sides of the aisle, so often assume the opposite?
In truth, the what matters more than the how much. Some government programs likely boost entrepreneurship, while others hold it back. The same is true of taxation, and of regulation.
This argument is particularly important today for two reasons. First, despite the headlines coming out of Silicon Valley, American has actually become less entrepreneurial over the past few decades. The research described above suggests that reversing that decline need not include cuts to the welfare state. Second, entrepreneurship is central to the ongoing debate over stagnating economic growth. Just as mainstream institutions like the IMF and OECD have publicly questioned the assumption that growth requires tolerating income inequality, we must revisit the idea that an expanded welfare state comes at the expense of entrepreneurs and innovation.
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.