The Agenda

Easier Business Creation Isn’t Going to Eliminate Entrenched Poverty

Among libertarian populists, there is a conviction – a morally and intellectually attractive one – that the best way to deal with entrenched poverty is to repeal regulations, like occupational licensing schemes, that serve as barriers to entry to enterprising low-income individuals. The idea is that if government gets out of the way, and if the public sector doesn’t collude with rich and powerful incumbents, people outside of privileged circles will have a fighting chance to climb the economic ladder. Efforts to better the lives of the poor through transfers, in contrast, are enervating, and ought to be avoided. There is much to be said for this way of thinking, and most of us on the right (and indeed, most people on the left) will agree that easier business creation has much to recommend it. But of course not all poor people will take advantage of easier business creation, because not all poor people are inclined towards entrepreneurship, or even self-employment. The same is true of more affluent people. Most people see work as an important but not necessarily central part of their lives, which is why the conservative celebration of entrepreneurship feels so irrelevant to people anxious about the prospect of finding stable work, or earning enough to achieve even relatively modest life goals. 

Robert VerBruggen adds another dimension to this discussion. He observes that children who grew up in low-income households are far more likely to score in the lowest third on tests of cognitive ability than in the top third, and he suggests, not unreasonably, that it is people who score relatively well on tests of cognitive ability who are most likely to take advantage of the opportunities created by easier business creation. To be sure, people who don’t score well on such tests could benefit from relaxed occupational licensing, as self-employment doesn’t necessarily require strong cognitive skills. But building a growing business — the kind that can help a family build substantial wealth, and thus facilitate significant upward mobility for the entrepreneur herself while providing a meaningful asset base for the next generation — is a different story. This is certainly not to suggest that the most successful entrepreneurs are the people who score highest on such tests. It could be that very high levels of cognitive ability are, like very low levels, actually detrimental to entrepreneurial success. Nevertheless, it’s not unreasonable to suggest that entrepreneurial success stories are going to cluster in the top half of the cognitive distribution. 

So we return to an important, vexing question: assuming we allow for easier business creation, as we can and should. How do we better the lives of the people who aren’t going to start new businesses, whether because they can’t or won’t? Education is obviously important, but as VerBruggen observes, improving the quality of education (which is much easier said than done) is hardly a silver bullet, as improving average performance will still leave us with a not insignificant number of people who struggle to master basic skills. VerBruggen ends on the following note:

It’s terrific that it will become easier to start businesses. It might even help some talented poor kids improve themselves. But if Tyler Cowen is right that average will soon be over, we should be worrying about the people who are not talented — and we can’t forget that starting a business comes with as much risk as it does reward.

Recently, Dylan Matthews interviewed the University of Arizona sociologist Lane Kenworthy, an exceptionally smart and thoughtful guy, and they briefly touched on less-skilled immigration:

Some on the left would say that, to get median wages rising again and improve things for the working class, we need to affect distribution before taxes, transfers and services through things like cutting the trade deficit, reducing low-skilled immigration or increasing union density. Why don’t you take that approach?

It’s a combination of two reasons. One has to do with my normative inclinations. So, for example, I would be against reducing immigration because people who come here tend to be poorer than even the poorest Americans, and their lives tend to be better off because they came. Even though I agree that the evidence suggests immigration reduces the wages of low-skilled native workers, I still think we shouldn’t cut back on immigration.

To me, this is a paradigmatic example of what separates reform conservatives from left-of-center neoliberals. While I appreciate Kenworthy’s normative inclinations, when you confront the fact that poverty is a complex, multi-causal, multi-dimensional phenomenon, and that much of the poverty we see in the U.S. is the product of intergenerational transmission, you first have to confront the fact that it is actually very hard to redress. Yes, you can mathematically eliminate statistical poverty through transfers, but it is much harder to cultivate the habits of economic self-reliance that help keep people out of substance abuse and other forms of self-harm, and that make it easier to impart valuable social and emotional skills to children. I am of the view that government can help address the intergenerational transmission of poverty, but that the interventions we’d need to undertake are labor-intensive, and thus expensive, and not guaranteed to succeed. Given this set of beliefs, I have a hard time believing that it makes a great deal of sense to invite large numbers of adults who lack basic skills to live and work in the U.S., particularly when there is strong evidence that U.S. K-12 schools aren’t up to the task of helping the children of these new arrivals to catch up with the children of adults who have basic skills and more. Because the native-born skill level has increased, immigrants who might have flourished in late 19th century America, or even mid-20th century America, face a very different economic environment. Let’s recognize that entrenched poverty in the U.S. is a big problem that requires labor-intensive solutions, and let’s not deliberately make the problem worse.