Right Now | Safety-Net Dividend
Food Stamp Entrepreneurs
Economist Gareth Olds has some unexpected advice for policymakers who want people to start their own businesses: give them welfare, including access to food stamps and public health insurance. Contrary to the notion that welfare’s safety net undermines ambition and hard work—“a safety ‘hammock,’ I’ve heard it called,” Olds says—his research finds that public assistance gives would-be entrepreneurs the lift they need, in part by increasing their ability to save money for investment. “Most of the evidence we’ve seen so far says that the effects tend to be the largest for lower-income people,” he explains. “Which makes sense, because they tend to be the most constrained. They’re the least likely to have access to credit, because they don’t have collateral.”
But just as critically, public assistance reduces risk. Starting a business is inherently perilous. “If you can guarantee some kind of a floor”—if the venture fails, “their kids will still have health insurance, that they’ll still be able to eat—then they’re more willing to take on a risk. And…that’s very important to firm-creating and economic growth.”
Olds, an assistant professor in Harvard Business School’s entrepreneurial management unit, first published this conclusion in a pair of 2014 working papers during his doctoral research at Brown. One focused on the State Children’s Health Insurance Program (SCHIP), which provides health insurance to children in moderate-income families. Using U.S. Census Bureau data from 1992 to 2011 to compare households just above and below the cutoff for SCHIP, both before and after the program began in 1997, Olds found that the self-employment rate among SCHIP-eligible households rose by 23 percent versus those households that weren’t eligible. The rate of new business starts rose by 13 percent among households that qualified for the program, and the survival rate of new businesses rose by 8 percent. The largest growth was in newly incorporated businesses, many of which were substantial and successful enough to contribute to the family bank account: income from self-employment increased 16 percent relative to other wages.
Olds’s other 2014 paper, on “Food Stamp Entrepreneurs,” found a similar link between business starts and eligibility for the Supplemental Nutrition Assistance Program (SNAP), which expanded in the mid 2000s when its requirements were loosened. Newly qualified households were 20 percent more likely to start a business, and the number of incorporated businesses rose 16 percent among those who were newly qualified.
Those findings were familiar to Olds—as a child growing up in Anchorage, Alaska, he lived them. Money was tight: his stepfather worked a steady but low-paying job as a dental assistant, and his mother did a series of odd jobs, including as a secretary and a doula; she is now a nurse. They lived paycheck to paycheck. But when he was six, his parents launched a business, a training school for dental assistants, which they ran successfully before selling it a decade later. “It was one of those family businesses where everybody pitches in,” he says. On Saturday mornings, the family would go to Costco and get muffins for the students; in the afternoons, he and his two sisters would serve as mock patients so students could practice taking x-rays and fitting dental dams.
At the time, Olds didn’t think much about it. “I just knew this was what we did on Saturdays, and this was why I couldn’t play with my friends.” But as he got older, he thought about the risk his parents had taken (“None of this was guaranteed,” he says) and the money they’d had to save. They didn’t take out a loan. “I started thinking, how did they save that money?” He recalled the years early on when the family was on food stamps and he and his sisters got healthcare through Medicaid. All that put a floor under their feet. “That security, having that in the back of your mind, changes the risks you’re willing to take,” he says. “And they went out on a limb, and it worked.”
Olds is now investigating whether the effect holds for other public programs. One area that interests him: student-loan debt, which has become a crushing burden. “We’re looking at whether parents in areas where there’s been a rising cost of public education are less likely to start a business. And we’re finding that they are, and the effects are pretty large.”
In a Maryland-based experiment, he is also offering business-training programs to food-stamp recipients, to find out whether lack of knowledge is “one of the big constraints” for the poor. Behind this question is his larger one: “Can public programs have an impact on entrepreneurship?”
“If entrepreneurship is something we’re interested in supporting”—President Obama and many other politicians have talked about its importance, he notes—“we need to know if it’s something public policy can control. If the answer is no, then we should get out of that business and make sure the financial institutions work well. But if there’s something that isn’t being provided in the market right now—like cheap training or income security—then that’s something we should pay attention to.”