A growing number of programs are trying to turn the unemployed into entrepreneurs. It's a nice idea, but it's no cure for poverty
No doubt about it, America loves entrepreneurs. In some other cultures, people who risk everything to start their own businesses are viewed as, well, slightly unstable. Here they're lionized for pursuing the American dream and creating jobs.
Mostly, that is a great thing. But the American love affair with entrepreneurship does have a few curious consequences. Not the least of them is the current public-policy interest in small-business ownership for the poor.
It's become trendy lately to argue that assisting low-income and unemployed people in starting "microbusinesses" is a good route to helping them escape poverty. By one estimate, more than 100 programs that try to do just that have sprung up throughout the United States. (Most are small nonprofits, but a few are state initiatives.) Now the federal government has authorized five state pilot programs experimenting with self-employment training as a way to get people off welfare. Two states have projects allowing people receiving unemployment to use the money to start businesses. In May the Senate Small Business Committee even held hearings to consider whether the Small Business Administration should get involved in financing microloans to low-income entrepreneurs.
Here's the theory: the poor often live in depressed areas where there are few jobs, or they may be unqualified for the jobs available. By learning to capitalize on whatever skills they do have, low-income people can become self-employed and earn enough to make a living. If, as is the case with many of the U.S. poor, these new entrepreneurs are single mothers, they can work at home and avoid the high costs of child care and transportation.
This argument is bolstered by the fact that over the last 20 years, microenterprise lending has become an accepted means of helping poor people in developing nations. So why not here? Admittedly, since we don't have the Third World's dire shortages of jobs and capital, programs here are not filling such an acute need.
Still, advocates of self-employment training point to success stories, which are invariably inspiring. Consider JeannÃ© Anthony, star of a Chicago program known as the Women's Self-Employment Project (WSEP). Just four years ago Anthony, like so many single mothers, was searching for a good way to provide for her family. Today it looks as if she's found it. She's supporting herself and her child with a small, home-based business making hand-painted clothing. Thanks to business training and a series of small loans from WSEP, Anthony now hopes to expand her business and hire her first employee.
It's tempting to leap to the next conclusion: if people like Anthony can make it, why can't everybody? But wait. There's more to this story. On closer examination, it is not so Cinderella-esque after all. Anthony, like most people who earn their living as small-business owners, has a lot going for her. At thirtysomething, she has supported herself through a wide variety of jobs and self-employment. In addition to a college degree, she has a bachelor of fine arts from the prestigious Art Institute of Chicago. Her major? Fashion and textile design. With that level of training and talent, it should surprise no one that she can design and sell clothing successfully.
Certainly, WSEP works with many women who do not have Anthony's skills. But early results from Washington State -- site of one of the pilot programs involving unemployment insurance -- also suggest that entrepreneurship training suits a select audience. Washington has had considerable success getting program participants to start businesses, but those participants are not at all typical of people on unemployment.
While most unemployment-insurance recipients had no more than a high school education and previous household income of less than $25,000, more than half the 451 starting companies had had incomes above $30,000, and two-thirds had more than a high school education. Their most common start-ups, after construction (36 businesses started), were related to computers (27) and accounting and bookkeeping (26); 14 started management-consulting businesses. In other words, this program does not exactly cater to unskilled laborers, although there are individual exceptions. Instead, the unemployed do what one might expect: when given an option to start businesses, the people who choose to do so most often are the ones with experience, education, and money.
It comes as little surprise, then, that the preliminary evaluation of the welfare pilot programs suggests the welfare population doesn't yield many good candidates for self-employment training. The programs have had a terrible time getting enough new businesses to meet their start-up goals -- goals that had been set with an eye to making the programs cost-effective for the federal government. Those who do take the training and start businesses, despite being long-term welfare recipients, are older than average and have more education and full-time work experience. One-third report they have been self-employed in the past. Even here it's only a small, more skilled, and more experienced set of people who can best use the training.
All that suggests what entrepreneurs have known all along: it isn't easy to start a business. Only a small percentage of any population -- no matter how advantaged -- has the resources, the talent, and the drive to do it.
Still, programs that deal with likely populations -- such as the Washington State unemployment project -- may get some impressive start-up results. And when it comes to dealing with long-term poverty, there's a lot to be said for programs like WSEP, which provide their clients with valuable training and their communities with role models. But a few role models is about all we can expect self-employment training programs to provide. After all, most of America's poor have more pressing problems than lack of access to small-business loans.
Nowhere is that clearer than in Mississippi, where one of the pilot programs for welfare recipients ran into a serious obstacle. The problem? Many of the participants couldn't read or write well enough to create any sort of business plan. Staff members "solved" the problem by transcribing the plans participants dictated. But the question remains: why is our society teaching people to start businesses when we haven't taught them to read?