Talking Points

America's pandemic-era social safety net boosted entrepreneurship. What's next?

You know what's good for capitalism? A strong social safety net.

Axios points out today that U.S. business startups boomed in 2021 — there were 5.4 million applications for new companies last year, a stunning 53 percent jump over 2019. Census data shows that business formation had been on a steady rise for most of the last decade, but really took off after briefly plunging during the first lockdown stage of the pandemic.

What caused this sudden burst of entrepreneurship? There are several factors, but a surge of government checks was a big help. One study last year from the National Bureau of Economic Research found that emergency stimulus checks and increased unemployment payments gave a number of would-be entrepreneurs — particularly African-Americans — the necessary financial cushion to strike out on their own. 

That's understandable: Many businesses fail within the first year or two. Most people wouldn't take on the challenge if it meant risking their family's livelihood. A pandemic made the risk even scarier. "Founding a new enterprise, particularly amid an economic downturn and a high level of uncertainty, reflects both a choice and a capability on the part of an individual: a choice to seek an economic return and the ability to navigate an uncertain environment," the study's authors wrote. The emergency safety net packages passed first under President Donald Trump and then President Biden spread that capability far and wide. 

A spike in business ownership is usually the kind of thing conservatives celebrate. Three of the last four Republican presidential nominees have been rich guys who built their fortunes (and reputations) on top of a foundation of inherited wealth and privilege. But the party has generally opposed giving a smaller-but-similar leg up to less-fortunate Americans, and have usually lobbed angry cries of "socialism" at proposed social programs, and warned against creating a "culture of dependency." Indeed, Republican-led states couldn't move fast enough to cut unemployment benefits last year.

But there's long been a capitalist argument for making America's safety net more robust. Supporters of "Medicare for all," for example, make the case that the program would reduce healthcare costs for new businesses. A 2014 paper indicated an expansion of the federal food stamp program helped increase entrepreneurship — even when new business owners weren't actually enrolled. "Simply knowing that they could fall back on food stamps if their venture failed was enough to make them more likely to take risks," The Atlantic reported.

Now we have more proof that a strong welfare state can be good for business. But the stimulus checks, unemployment benefits, and child tax credit payments of the pandemic era have mostly ended and their effects are fading away. Don't be surprised if American entrepreneurship fades with them.