America has always been, above all else, the land of opportunity, a country where those at the bottom can work their way up the ladder to succeed. But now that ideal is endangered -- the bottom rung is broken. For some surprising reasons, the American dream is being destroyed where it's needed most

In recent years we have seen the breakdown and breakup of large corporations. We have witnessed the rapid ascent -- and often equally speedy flameout -- of small companies. The abundance of the 1980s has given way to the hardscrabble mind-set of the 1990s, accentuating both the promise and the peril of capitalism.

The ascent of Microsoft is inextricably linked with the decline of IBM and the wiping out of thousands of good jobs and billions of dollars in shareholder wealth. Within the pages of this magazine and the experience of this writer, lesser-known but equally stunning examples arise. Companies such as Spartan Motors, Wabash National, and Southwest Airlines have leveraged so little to take so much from larger, more hidebound rivals.

A recent study by Cognetics, a research and consulting firm based in Cambridge, Mass., that specializes in business formation, concluded that of companies in business between 1988 and 1992, just 4% were responsible for 70% of all the new jobs created in that time frame. Those are companies that have mastered the mix of technology, talent, capital, and markets. They have crossed the growing divide between the Old Economy with its dated rules and the New Economy, in which the rules change daily. Yet hidden within their success lies the truth that change is often threatening -- and always painful.

Dynamism at the economy's most competitive levels distracts us from seeing the fallout in its lower reaches -- where businesses and people are going nowhere. Never before has it seemed more possible for a person to become richer, faster -- or to be out on the street in need of a job. While opportunity today is evident for the educated, creative, and risk-tolerant entrepreneur, those with less savvy and fewer connections often confront nothing less than a conspiracy of mutually reinforcing elements. Those with the least access to the New Economy must endure the most violent neighborhoods, the worst schools, and a welfare system that locks them into -- not liberates them from -- poverty. Often they lack access to capital, expertise, and the role models necessary to make it in the mainstream economy.

To many readers of this magazine such barriers are incidental -- if not invisible. They hire a lawyer, consult their accountant, tap their banker, or simply talk to a knowledgeable friend. But to those with fewer advantages, who lack such critical touchstones, the barriers to entry loom as large as ever.

What's more, many of our institutions, mired in the ways of the Old Economy, are unresponsive to individuals seeking to better themselves. Banks can't or won't make small loans. The law serves special interests, not economic justice. Regulators write more rules, often favoring those with pockets deep enough to fight back. Charles Rial, chairman of Chicago's South Shore Bank, which does much of its lending in the inner city, says we have created a system in which we implicitly assume "that below a certain level in society, you've just got to depend on your own wits and resources." We have created, he adds, "the economic segregation of America."

As the economy grows increasingly complex, increasingly competitive, and increasingly global, segregation could evolve into apartheid. We run the risk of institutionalizing the economic disenfranchisement of a whole class of Americans.

In the Belly of the Beast
While the U.S. tax code and various governmental regulations are written to foster an orderly and civilized society, Steve Mariotti believes they do virtually the reverse in America's inner cities. Mariotti, who has an M.B.A. from the University of Michigan and once worked for Ford Motor Co. as a financial analyst, didn't used to spend time entertaining such conundrums. But that was before the evening 13 years ago when he went out for a run and was jumped by a pack of teenagers who robbed him of $10. Embittered by the experience, Mariotti sought to explore his anger, not deny it. The more he ruminated, the more he saw the stark divide between his world and that of his attackers. Business, he believed, was predicated on "voluntary exchange." The violent side of life in the streets was based on "coercive exchange."

To bridge the gulf, in 1987 Mariotti started the New York City-based National Foundation for Teaching Entrepreneurship (NFTE), which teaches entrepreneurial skills to "at risk" inner-city children. Since then, NFTE has expanded to 10 cities. This year 2,500 junior high and high school students will go through its program, with the expectation that when they finish they will be ready to run a small business while maintaining a full academic schedule. To date, NFTE has had a 14% business-formation rate, with the definition of a business being an enterprise that is grossing $60 or more a week after six months.

Those numbers are small, but Mariotti, age 40, says his primary mission is to demystify business in the eyes of his students and cast it as something as instinctive as riding a bicycle. "Business is in people's rational self-interest," he says. "It does not require tremendous mathematical or scientific knowledge." Moreover, claims Mariotti, life in the inner city, full of "ambiguity, stress, and conflict," resembles situations that entrepreneurs face daily. "This makes these kids ideally suited to function in the marketplace."

But in a place like New York City, reality can crowd in fast on the visions of people like Steve Mariotti. He contends that what to the typical entrepreneur -- white, middle class, and educated -- are customary hurdles to starting a business, to a minority teenager are bewildering and dispiriting barriers to entry. The vital advice proffered by professionals -- lawyers, accountants, consultants -- that mainstream entrepreneurs take as a given and simply chalk up as part of standard business expenses is simply beyond the means of those with few advantages. "The minority entrepreneur usually ends up being his own lawyer and accountant. He can't go down the hall for that advice," says Mariotti. "It's very lonely. If you have capital, you may not see the stream of paperwork that is generated by a regulation or a clause in the tax code."

Mariotti notes that the U.S. tax code now runs to 38,000 pages. (Alone, the tax rules relating to owning a car for your business run to 68 pages.) He points to a 1993 issue of Fortune, featuring a photo of Chrysler's chief financial officer dwarfed by his company's nine-foot-high tax return, which, in turn, prompted a letter to the editor from Citibank's CFO, with mention of his 26-volume tax return.

But Chrysler and Citibank can get their IRS horror stories publicized in national magazines. They can also muster armies of accountants and fold tax-preparation costs into the price of products and services. An inner-city youth with marginal reading skills trying to make $180 a week by running his or her own business can do nothing of the sort. "There's no simple way to cut through the red tape," asserts Mariotti. "You've got to pay someone, and that means you've just added $4,000 to your start-up cost, which is nothing to someone with $1 million. To someone with $300, which is what we're talking about with at-risk people, it's an enormous amount."

Mariotti notes that beyond the tax code's sheer length and density, there is something equally insidious. "The tax code changes all the time, so there's no established body of knowledge. It's like studying a science and finding there are no basic principles." He says that a standard part of the NFTE curriculum is a field trip to New York's labyrinthine permitting and licensing offices -- which he admits is depressing but necessary. He believes that a radical overhaul of the tax code and a streamlining of the business-licensing process are vital. Would-be entrepreneurs, he thinks, should be allowed to walk into city hall, register their business at one location for a nominal sum, and walk out with the necessary license and a tax identification number.

The paperwork, cost, and confusion resulting from not being able to do that drive would-be entrepreneurs away from certainty and down a slippery slope. They develop contempt for the government because they no longer see it as their ally. That drives people into the underground economy, where, says Mariotti, "there are no contracts. Matters of dispute are often settled with a gun or a beating." In the mainstream economy, he adds, there is an implicit understanding that government becomes a de facto partner to entrepreneurs by agreeing to protect their property rights. Underground, "each person becomes his own government. He has to. He can't go to the police or a court, because he's illegal."

Once an entrepreneur moves into the balkanized -- and chaotic -- underground economy, growing the business is not a viable option. "Psychologically, you always want to be broke, because the accumulation of assets becomes evidence of your illegitimacy to your peers," says Mariotti. "You can't have a checking account, an office, a lawyer, or an accountant. Maybe you can gross $50,000 or $60,000 a year and clear $18,000, but to do better than that is difficult."

Mariotti contends that a simple lack of legitimate trade lies at the core of much inner-city decay and despair, playing into every pathology from a booming drug industry to the soaring cost of health care resulting from violence and a high rate of teenage pregnancy. He says a big piece of the American urban experience involves people's being able to trade their way freely to a better life -- beginning as street peddlers and one day possibly building retail or service empires of storied proportions. He says that is all but impossible today in New York City, which resembles a cramped and graying socialist state, where the government is a principal property holder and dispenses access to the economy to a favored few. He notes that New York City gives out only 1,100 peddler licenses each year, while it has at least 100,000 homeless people roaming the streets. "These people can ask you for money whenever and wherever they want, but they can't legally sell you a thing."

Welfare for the Haves
While government regulation is a large and obvious barrier to many would-be entrepreneurs, it also has its nasty private-sector underside: protectionism. Another barrier to many aspiring entrepreneurs is the ability of those on the inside to exclude new entrants. About 10% of all jobs in this country require some sort of a license, and many of those are low-skill entry-level occupations such as taxicab driving, working as a street vendor, cosmetology, trash hauling, and recycling. Nonetheless, the licensing process in those fields is often onerous and reinforced by antiquated laws written decades ago, when the economy looked far different. "Traditionally, in our country these kinds of entry-level opportunities started people on the way up and out of poverty and into the middle class," says Jerry Hill, president of the Kansas City-based Landmark Legal Foundation, a public-interest law firm. "You would have a family that would start with one pushcart; then maybe in a few years that number grows to three or four, and eventually the family has a trucking company." But, says Hill, what happens too often today is that you have "the haves regulating the have-nots. You have licensing boards dominated by people already in the business. They sit back and decide who their competition should be. The effect is to preserve existing monopolies at the expense of those least able to defend themselves."

It is implicitly accepted -- especially among readers of this magazine -- that among the most guaranteed of rights in America is the individual's right to attempt to earn a living in his or her chosen field of endeavor. In fact, claims Clint Bolick, director of litigation for the Institute for Justice, a public-interest law firm based in Washington, D.C., that litigates cases relating to economic liberty, "of all the rights Americans think we have, there's no question that economic liberty is the least protected." There is no constitutional right assuring individuals that they may pursue their chosen calling.

A landmark 19th-century Supreme Court ruling -- made 122 years ago -- specifically allows states the leeway to grant monopolies, thereby restricting market entry. That ruling effectively gutted the "privileges or immunities" clause of the Fourteenth Amendment, which Congress had specifically ratified during Reconstruction to ensure that emancipated slaves could fully realize their newly won freedom. That was in response to a patchwork of post-Civil War laws passed by many southern states to bar blacks from a range of trades and thereby turn them back to indentured servitude on the plantations from which they had presumably been liberated. The result is a modern-day economic landscape far more strewed with barriers to entry -- especially for minorities and immigrants struggling to enter the mainstream economy through manual trades -- than most people realize.

One of Bolick's clients was Ego Brown, a former federal employee who got sick of working for the government and wanted to go into business for himself. He walked out on the street and observed that people were generally well dressed but that their shoes look scuffed. He set up a shoeshine stand on the streets of Washington, D.C., only to be picked up by the police for violating an 82-year-old city ordinance excluding blacks from a number of occupations. After two years of fighting the law in court, Brown was allowed to retain his business.

Another client, Taalib-Din Abdul Uqdah, and his wife, Pamela Ferrell, started a hair-braiding business in a Washington, D.C., storefront in 1980 with $500, only to be shut down by the city government for violating laws written in 1938 and enforced by the city's Board of Cosmetology. Those laws, upheld by established practitioners, mandated that Uqdah's employees have extensive schooling in hair treatments using chemicals and techniques that had not been used for at least 30 years. Thus Uqdah began a 10-year struggle with the city government to pursue his business.

Uqdah, who first went into business with $200 in 1974, selling cider, flowers, and firewood, says there's no way he could replicate that start today, because the D.C. government requires that street vendors pay it $1,500 before they go into business. In recent years he has spent time counseling young people in his inner-city neighborhood, something he wishes he could have done more. "One thing that angers me is that during those 10 years fighting this case I could have been working with young people, teaching them how to get started and how to turn their lives around. Think of all the positive energy I could have been using instead of this negative energy."

Regulated Monopolies
Or Why Four Denver Cabbies Can't Go into Business for Themselves
A classic protected monopoly in many U.S. cities is the taxicab business. It typifies the exclusionary practices one sees within otherwise easy-to-enter businesses. Consider New York City, where taxis were first regulated in 1935. That year 13,500 medallions, or individual licenses, were issued. Today there are only 11,800 outstanding. That is why a medallion now costs $140,000 -- even though there are still parts of the city where taxi service is spotty. A 1984 Federal Trade Commission report found that New York City is by no means anomalous. The commission found the industry regulated in 87% of large U.S. cities, and it calculated the added cost to U.S. consumers due to that regulation at $800 million a year (in 1992 dollars).

Consider Denver, where a new license to operate a taxicab company has not been granted since 1947. Denver has all of three cab companies. One of them is embroiled in bankruptcy proceedings, and the other is on the verge of bankruptcy.

Logic would imply that Denver's taxi market is ripe for entry. That's what Ani Ebong, Leroy Jones, Girma Molalegne, and Rowland Nwankwo figured when they set out, three years ago, to start Quick Pick Cabs. With 30 years of experience among them, the four men seemed qualified. They sought to differentiate their company by focusing on the underserved central city and offering their drivers a higher payout and more equity and autonomy than they could enjoy at rival companies.

In the past decade Denver has seen the steady deregulation of various transportation services, including limousines, couriers, household movers, and tour-bus operators. Taxis, however, remain a bastion of regulated privilege. In the past 10 years there have been no fewer than five bills introduced to deregulate the industry and open up the market. All have died a quick death in the state legislature, in part because of the work of Isaac Kaiser, a lawyer who spearheads challenges to new license applications before the state's Public Utilities Commission (PUC), and Freda Poundstone, a lobbyist employed by two of Denver's three cab companies.

Kaiser is a liberal labor lawyer who describes in fond detail the battles he has fought for the drivers of Yellow Cab, one of the three established cab companies in the city. He spins a tale of championing the little guy. But raise the Quick Pick case and he replies, "The market is inelastic in this town." Add more competitors, he warns, and chaos would ensue.

Poundstone, on the other hand, is a free-market Republican who counts Ronald Reagan as a personal friend and was a Reagan delegate at both Republican conventions that nominated him. She too asserts that the taxicab business is atypical -- not responsive to the touch of the invisible hand. "The people who want to have this industry deregulated are the ones who don't want health inspectors in restaurants."

The taxicab business in Colorado is a "regulated monopoly." In exchange for a limited number of licenses granted by the PUC, the holders agree to provide consistent service at a regulated price. But in Denver the process regulates what drivers -- not the companies -- make. The PUC regulates taxicab fares -- which, along with tips, make up the drivers' sole source of income. Meanwhile, what goes unregulated is a lease payment made -- in advance -- by the driver to the company on a daily or weekly basis. That payment, appropriately known in industry jargon as "the payoff," covers company overhead.

The payoff is set by a contract between the drivers and the company. In 1986, after a previously unsuccessful attempt, Yellow Cab, the former employer of Leroy Jones and his three partners, prevailed upon the drivers to change the contract, allowing the company to raise the payoff on short notice. In the 12 years Ani Ebong was a driver for Yellow Cab, the company was granted two fare increases totaling 10%. Meanwhile, it raised the payoff required from drivers who didn't own their cabs by 144%.

In February 1990 the drivers persuaded the PUC to examine the payoff system. Arthur Staliwe, an administrative law judge at the PUC, concluded, "Most Denver drivers appear to be working for between $2.75 and $3.00 per hour, excluding gratuities. . . . Further, because there are only three certificated taxi companies (an oligopoly) the companies are in a position to extract 'economic rent,' i.e., sums of money greatly in excess of costs from the drivers."

He further noted that "neither this agency nor anyone else regulates this payoff . . . and it is this charge which must be regulated pursuant to statute."

Efforts to change the law were met successfully in the state legislature by opposition from the cab companies. To this day the payoff remains unregulated, and only three cab licensees continue to operate in Denver.

As for Leroy Jones, his phone has been turned off, and the bills mount as he struggles to provide for his wife and five children. He holds down two jobs. By day he is a peddler. He drives an old van, its body dented, its windshield cracked, to street fairs, where he sells T-shirts, mugs, picture frames, and other odds and ends. At night he is a vendor at Colorado Rockies baseball games, lugging cases of beer.

Jones is a good-natured, heavyset man, and in his hustling to get by, he represents many on the margins of the U.S. economy, for whom effort does not always translate into reward. For him, the last two years amount to "Russian roulette on a roller coaster. You know you're right. You believe in the system, and then you don't see justice. All we are asking for is the right to fail or succeed on our own merit."

Jones adds that he is a person without much education, without any special advantage, without many resources. That, he fears, dooms him. "The lawyer's son will be a lawyer; the doctor's son will be a doctor," he says. "But my son is destined to be a laborer. All I can offer him is the sweat off my back, but right now there are all these other people living off that sweat. Why shouldn't I profit from my own labor?"

Jones and his three partners left Yellow Cab to start their own company because of the hefty payoff demanded of them. They had grown tired of the featherbedding and favoritism that took place within a company that had little competition from without. Yellow Cab, they believed, was being run for the benefit of a select few in the company's hierarchy -- even though it was nominally a cooperative and all the drivers were considered shareholders.

Yellow Cab is now in receivership, a step to forestall bankruptcy. The receiver, Karen Mathis, is a lawyer with no prior experience in the industry. Since her appointment, in April 1991, fees paid to her and her law firm have ranged from $25,000 to $30,000 a month. (Mathis acknowledges that this is part-time work for her -- "I also have my law practice." She says she cannot estimate how many hours a week she spends on Yellow Cab matters.) Meanwhile, since Mathis took over, Yellow Cab's financial condition has deteriorated. She is currently negotiating to sell the principal assets of the company -- to infuse it with capital. Thus, in two years Mathis and her firm took more than $500,000 out of a company she has publicly described as "undercapitalized."

America's law schools continue to crank out more lawyers. In 1992, according to the National Conference of Bar Examiners, 52,826 people passed the bar exam, a 23% increase since 1983. Last year Bill Clinton appointed a cabinet that he claimed "would look like America." Thirteen of its 18 members are lawyers. So, too, are the president and his wife.

Lawyers, like the rest of us, need to stay busy. One way they do so is by defending special interests -- by going where the money is, by writing rules to favor one client, by resisting rules to defend another. Isaac Kaiser and Freda Poundstone act as advocates for established companies like Yellow Cab, but they are not alone. Al Micklejohn is a state senator in Colorado who heads up a powerful transportation committee in the state senate that has persistently stifled efforts to deregulate the taxi industry in Colorado. He is also a partner in a Denver law firm that represents a number of established transportation interests. Micklejohn has repeatedly stated that he sees no conflict of interest in that arrangement.

In the spring of 1992, the Quick Pick case came to the attention of the Institute for Justice. It filed a civil-rights suit in federal court in Colorado, arguing that the PUC's "regulatory regime" was so onerous that it denied Quick Pick's founders "the basic right to pursue their chosen livelihoods and to operate a legitimate business."

The state -- represented by the office of the Colorado attorney general, Gale Norton, who also happens to be a staunch free-market Republican -- argued that no such right exists. In her motion to have the case dismissed, Colorado assistant attorney general Mana Jennings-Fader wrote that since the Quick Pick four were working, they had no case: "Has the regulatory scheme impaired [the plaintiffs'] ability to pursue a business or to seek employment? . . . The answer is a resounding no. . . . While it may not be the employment of their choosing, that is not the issue here. The fact of their employment is sufficient to overcome an asserted liberty interest."

In August 1993 the federal district court in Colorado dismissed Quick Pick's case, barring the four men from entering the Denver taxi market. The following month, the Institute for Justice filed an appeal in the case.

Going Underground
Opportunity In the Shadow Economy
It is little more than three miles from Five Points, in the heart of Denver's inner city, to the gleaming skyscrapers of downtown, where people like Isaac Kaiser and Karen Mathis work, but across that distance you might as well be traveling from a third-world country into the developed world. Five Points is home to Ani Ebong's hole-in-the-wall convenience store, whose stucco facade butts up against the painted brick facade of the Church of Peace. Stand out front, and it won't be long before you'll see a drug deal going down across the street -- even in the middle of the day.

An outsider wandering into Five Points is greeted by Ani Ebong with a knowing smile and a wary laugh: "This is not the same America that you know. There are all these gangsters around here." But that doesn't intimidate Ebong, who emigrated from Nigeria about 20 years ago. "I used to be afraid. I wouldn't come down here. Now I know all the people, and I know, what I wish for myself and my life, they want the same for themselves," he says. "If you come here from a distance, you can't see that. You just think that everybody is running around crazy and nothing works. The closer you get to the community, the better your understanding."

Ebong, after all, is an entrepreneur, and he has an entrepreneur's native optimism. In addition to his convenience store, he is opening a restaurant next door. By the time he left Yellow Cab to found Quick Pick, he owned three taxis, which he leased to friends. If anybody can make a new cab company go in Denver, it is likely to be someone like Ebong. Moreover, he intends to base Quick Pick in the neighborhood, not only improving service but also spinning off jobs in the process.

But the sorry state of the inner-city market itself has become a barrier to many minority entrepreneurs, contends Jack Litzenberg, a program officer with the Charles Stewart Mott Foundation, in Flint, Mich., which focuses its philanthropic activities on education and on economic and community development. "The market has declined, so there is a lack of market opportunity," he says.

Katherine Stearns, the director of U.S. operations for Accion International, which has been doing grass-roots lending in the third world for more than 30 years and now is trying to replicate that model in this country, cites an additional structural problem. "The economy is so overdeveloped here. Our manufacturing companies must compete globally. In retailing and distribution you have sophisticated, technology-intensive companies." That leaves little room for undercapitalized, undertrained entrepreneurs gasping for subsistence. "You just need to be much more sophisticated to run a business in the United States," says Stearns. "You can't buy tomatoes wholesale, walk down to the corner, and sell them at retail. You can do that in Latin America and earn a living. Here you can't make enough of a profit."

The structure of the U.S. economy contrasts markedly with what Accion has found in Latin America, where from 1985 to 1992 the organization made 467,000 microloans totaling nearly $300,000. It's a part of the world where, as Stearns puts it, "there's a business behind every other door," and the typical loan might be to a street vendor for $100, allowing him or her to buy, not lease, a pushcart.

"Half of all the economic activity in Latin America involves the 'informal' economy," says Stearns. Much of that results from corruption and ineptness within the bureaucracy, which drives entrepreneurs who lack the right connections underground. That's also noted by Peruvian entrepreneur and economist Hernando de Soto in his book The Other Path (Perennial/Harper & Row, 1989). He says, for instance, that entrepreneurs operating in the nonregulated informal economy have built 43% of all housing in Lima and provided 90% of its public transportation. He writes, "We appear to be witnessing the most important rebellion against the status quo ever waged in the history of independent Peru."

It is convenient for Americans to think of Peru as the economic basket case of the hemisphere, yet de Soto asserts that it harbors a thriving shadow economy. On the other hand, the U.S. economy is seen as the most developed in the world. But de Soto's observations and the Denver taxi experience beg a provocative question. At what point does the U.S. economy begin to resemble Peru's, with entrepreneurs heading underground, driven by a system they deem not just arbitrary but corrupt?

Access to Capital
Priming the Pump
What will hasten the "Peruvinization" of the U.S. economy is lack of access to capital at the grass roots. Although the mainstream entrepreneur complains about lack of access to capital, the fact is that lack of money rarely kills companies run by entrepreneurs who truly understand the game of business. On the other hand, a minority entrepreneur trying to break through and borrow money for the first time often hits a wall. That person would barely get inside the door of a typical U.S. bank, because the banking system is structured to serve the mainstream economy. High overhead and transaction costs mean that the same effort is needed to make a $100,000 loan as is needed for a $10,000 loan. More important, a $1,000 loan, which is what many grass-roots entrepreneurs could use, is simply too small, unprofitable, and risky for a bank even to consider.

Chicago's South Shore Bank is known for being one of the most active and creative banks in Chicago's inner city, yet banker Mary Houghton admits that South Shore, like other mainstream banks, is poorly equipped to help minority start-ups. It needs customers who are higher up the food chain. "We look for survivors, not people just starting out. We want to provide them with resources that will allow them to grow and prosper," says Houghton. "When a regulated bank tries to do business with somebody in a class and culture other than its own, it's almost an impossible interaction and not cost-effective for the bank."

Another Chicago bank trying to make that interaction work as cities like Chicago grow increasingly multicultural is the First National Bank of Chicago. It has aggressively expanded its franchise in the city, growing its base from 5 to 77 branches in the past eight years with the acquisition of some large but faltering savings-and-loans, which has taken it into some ethnically diverse neighborhoods. In one instance the branch manager turned her bank into more of a "currency exchange" that cashed paychecks and issued money orders because that is what many people in the Hispanic neighborhood expected the bank to do. Another branch arranged for payment of utility bills, with a large, official-looking seal stamped on the receipts, because that was what immigrants expected. At one branch on the city's North Side, the bank's employees collectively speak 46 languages.

First Chicago sees a lot of people with fledgling businesses and no track record as entrepreneurs. To those would-be entrepreneurs, the bank makes personal loans, home-equity loans, or credit-card loans in lieu of business loans. Says Ed Jacob, a community-banking officer with First Chicago: "This allows us to bypass the traditional business-approval process. We also have to assess profitability on a long time line. You've got to be looking out five years."

The bank uses intermediaries to help it reach into the community. One is Chicago-based Women's Self-Employment Project (WSEP), the largest nonprofit entrepreneurial-services program targeting low-income and moderate-income women in the city. Its executive director is Connie Evans. "Banks can't make money on small loans, and they require more support to help the lending process along," she says. "You seldom run into a financial institution, government-loan program, or even private organization that will finance a start-up."

Enter WSEP, which works mainly with start-ups. Evans sees a lot of people from whom banks would flee. Many of her customers have poor credit histories or none at all. They lack collateral. Many are on welfare.

WSEP lends money on the so-called Grameen Bank model, which is communally based and was first developed in Bangladesh. Borrowers form a "lending circle," consisting of perhaps half a dozen people. Each entrepreneur borrows funds in succession from the circle -- only after the previous borrower has repaid his or her loan. The Grameen concept uses peer pressure and support to help businesses get started and boasts a historically high rate of loan repayment -- nearly 100%.

At WSEP a lending circle involves five people. Evans believes that having the circle composed of just women imparts solidarity and a sense of security that might not result if a man were allowed into the circle and sought to dominate it. Members of the circle can't be related. If someone drops out of the circle, it must halt lending activity until the group replaces that person with an agreed-upon substitute.

WSEP has been operating since 1986, working with low-income and moderate-income women, 90% of whom are minorities. Since then WSEP has lent out nearly $650,000, with the average first loan being $1,500. When the first loan gets repaid and a client's business gets off the ground, she is eligible to "step up" to a larger loan. The lending circle's repayment rate is 100%.

But for all its apparent success, WSEP is not self-sufficient in a for-profit sense, revealing the structural flaws in trying to lend money efficiently at the bottom of the economy. Forty percent of its $1-million annual budget comes from the state and federal government, 50% from private foundations, and the balance from fees paid by clients.

Evans says WSEP will likely never be self-sufficient because her clients need ongoing technical support and advice, not just money. The organization holds free monthly orientations for women who might be interested in its program. Two years ago the attendance was around 35 women a session. Now it ranges from 50 to 80.

Evans believes that the jump in interest reflects a changing economy. In the inner city, people are losing jobs, and those jobs are disappearing for good. Second, she says, the rising interest reflects a desire by many inner-city women to escape the debilitating clutches of welfare. "In other countries you have to do something because there is no welfare system." Here, welfare is an option but an increasingly unpalatable one, claims Evans, a situation in which "too often the safety net becomes just a noose around someone's neck."

Evans thinks the value of a program like WSEP lies as much in its human payoff as in its business payoff. It's a way for people to dig themselves out of the isolating experience of poverty and to develop a sense of self by connecting with other people whose experiences they share. It's as much a community-development project as it is a program to foster entrepreneurship. "People in poverty live such isolated lives," says Evans. "We want to reduce that isolation and free people up to address other issues in their lives."

Economic Self-Sufficiency
Redefining What's Possible
A key issue for Connie Evans is teaching what she labels "economic self-sufficiency." She acknowledges that many women who come to WSEP will not immediately start businesses. Nonetheless, she hopes they will at least gain a sense of possibility in their lives. They will know that down the road, opportunity may present itself, and that they will be able to grasp it. To the typical entrepreneur the feeling that anything is possible, that he or she can make things happen, is a sixth sense. That confidence is always there. To women like Deborah Payne it is a learned trait.

Payne is a dressmaker and designer who has been sewing for her friends since she was 14, yet she has spent most of her time and talent in recent years just earning a paycheck. She wanted to break free from the long hours, low wages, and other sweatshop conditions that defined her working existence. On the other hand, she was a shy, soft-spoken woman, a single mother, a person who felt vulnerable. "There were times when I would feel something, but I would just never speak out." A couple of years ago she came to WSEP and got a loan, which bought her a new sewing machine and gave her a chance to go into business for herself.

Payne says the virtue of WSEP, beyond emboldening her to start a business, is that "you realize that you are not alone." Her lending circle has become a support group for her on a range of issues. Sitting in WSEP's office one recent morning, she recalls a disagreement she was having with her teenage son before school, in the middle of which a member of the lending circle called. Told by Payne what was happening, the other woman asked Payne to put her son on the phone. They talked awhile and straightened the matter out.

Debra Davis, another WSEP client and a borrower, is more assertive, a model of sorts for Payne. But she, too, has known loneliness and doubt. She has just been better at hiding it. "No one really understood me," says Davis, who sees herself as "an artist and an entrepreneur." A year ago, she says, she was just "another person crying the blues." She had been designing and sewing clothes for private clients part-time and wanted to start her own business, but she was discouraged by friends and family who wanted her to stick to her full-time job behind the cosmetics counter in a downtown department store. "I would be so depressed. I had to force myself to go to work each day." Then she saw an ad for WSEP, and she liked the way it was phrased: "Give your best hours to yourself." It brought her to WSEP -- and into her own business full-time.

Through past connections she landed an audience with the publishers of the Spiegel catalog, and that led to the catalog's carrying some of her designs targeted at the African American community. The response was so strong that before Davis knew it, she had four people sewing for her. The day I spoke with her, she was late to our appointment because of a flat tire she had gotten earlier on her way to Spiegel with some sketches. "A year ago, if this had happened to me, I would have just sat there and cried. Now I had somebody to call who could come and pick up the sketches while I got the tire fixed."

Shanta Nurullah was a part-time storyteller while working for the Chicago Housing Authority. After being laid off from her full-time job for the third time in a year, she prayed that the unemployment office "would just lose my number." She says, "WSEP helped me conceptualize what I wanted to do." With a peer group of 12 other women, she took a 12-week course in which she learned how to focus her ideas and put them into a business plan. She turned her part-time story-telling into a full-time business that now supports her and her four children, one of whom is about to go to college.

Looking back on her life before WSEP, Nurullah says, "I saw a lot of people who were stuck. They were afraid of what was on the outside. People in public housing were paying more for rent than I was, but they wouldn't leave it because if they lost their jobs, they at least had a roof over their heads." Nurullah says that when women come to WSEP, it's a transforming experience. "People come here, and the experience empowers them to start a business. Their families benefit; they see the motivation, the initiative that people take."

But that is just a first step. Nurullah, who now has a national reputation, has met other storytellers in the process of building her business. She now wants to grow it by starting a production company that will record some of the artists she has met. For her, coming to WSEP has meant transcending the issues of creating a job and finding independence, to seeing how she could grow and sustain her business.

Discouraging Productivity
Jack Litzenberg of the Charles Stewart Mott Foundation says the shift in the lives of people like Deborah Payne, Debra Davis, and Shanta Nurullah is based on what he calls "linkages," the informal yet vital contacts that entrepreneurs typically develop to exchange everything from encouragement to information. While such linkages are commonplace in the mainstream economy, they are tenuous in the inner city, where the struggle for survival does not unite people but isolates them.

Litzenberg says of the Mott Foundation: "Our money goes to trying to establish institutions that are so lacking in low-income neighborhoods: banks, credit unions, educational resources, community centers. You can create that scale of economy right in the neighborhood." He believes those organizations are vital because "if a neighborhood is socially chaotic, you cannot do economic development. You need institutions that can intermediate for people."

Litzenberg contends that the process of ending the isolation of poverty and creating linkages "has to be people centered. We have a bias in this country toward building real estate. We put up a shopping center. But how many stores are owned by the people in the neighborhood? How many jobs are created by that development?" The answer to both questions is very few. "I don't know why we think that if you develop physical infrastructure, people will automatically get better. Too often the building is hiding a cancer."

Nowhere else is the chronic underdevelopment and psychic malnourishment of people more pronounced than among people on welfare. Welfare to people who have never been on it is an abstraction leading to stereotype and caricature. To those sustained by it, it is a trap.

Discussions of welfare's failings usually focus on how it drives families apart and penalizes the working poor. Less well known is that welfare makes it virtually impossible to start a business. There are two simple reasons for that: First, if a person on welfare accrues liquid assets exceeding $1,000, he or she gets kicked off public aid. Try starting a business and living on less than $1,000. As for owning a car, that is permissible, but it can't be valued at more than $1,500. In other words, it's OK to own a car, but not one that may function reliably. Second, if you go off welfare, you often lose something of greater value than cash -- medical benefits. Connie Evans says that programs like hers allow people to replace the income from welfare easily, "but the risk of losing medical coverage for your children is a huge disincentive to leave welfare."

She estimates that about 40% of the women who come to WSEP remain on welfare for that reason alone. One woman she knows in the program is making $1,400 a month, while her Aid to Families with Dependent Children (AFDC) check is only $246. She can replace that income easily, but she needs the health-care benefits. Evans says that a frequent topic of conversation among her clients is "not wanting to play the game and wanting to be honest and aboveboard." But welfare always drives them back into the realm of dishonesty.

If a welfare recipient does happen to start a business, he or she is denied standard business tax deductions, the presumption being that business supplies will be turned to personal use. "The public-aid system assumes that everyone is a liar and a cheat," says Evans. "Why can't we allow a woman to make $10,000 in her business and keep whatever part of the welfare subsidy she needs?" The answer to that is that modern bureaucracy is inflexible and unresponsive, presenting welfare recipients with an all-or-nothing proposition. Evans notes that woman entrepreneurs in the mainstream economy often have spouses who bring in income and vital benefits -- a totally legitimate means of support for a fledgling business.

Meanwhile, the status quo creates a spending, not a saving, psychology, leading people on welfare to draw their savings accounts down to $1,000 -- the asset limit -- or less each month for fear of losing welfare benefits. They are psychologically locked into month-to-month thinking that shapes their world view. "That's not how you get out of poverty," says Evans. "The whole system is based on getting money and then spending that money." Meanwhile, Evans, noting that the basic monthly AFDC payment in Chicago is $246, says, "No one lives in Chicago on $246 a month. At that level you are just maintaining people in poverty."

Michael Sherraden, a professor at Washington University in St. Louis who has studied and written extensively about welfare, seconds that notion. "The system doesn't allow people to accumulate assets," he says. "This is not a feature of welfare that gets talked about." Yet at the very basis of living a planned and orderly existence is the ability of people to save money and develop wealth. Sherraden has proposed setting up so-called individual development accounts for welfare recipients, whereby a certain percentage of public-assistance grants paid to a welfare recipient are put into escrow just as if that person had an IRA account, resulting in forced savings. The concept is currently being tested in Iowa.

But, says Sherraden, "there are political and cultural barriers to allowing people to receive money while they're also receiving public assistance." He notes that total welfare spending on the poor, including Medicaid, accounts for about 10% of federal expenditures. "Not that I don't think welfare is a big mess, but it's not a big budget problem. The problem is entitlements to the middle class." Federal payments and subsidies to the nonpoor amounted to $651 billion in fiscal year 1990, more than five times what was paid out to the poor. Adds Sherraden, "The major problem with welfare is not that it creates dependence but that it doesn't promote development." In sum, we may spend on the poor, but we don't invest in them.

One woman who does work and is on welfare is a woman I'll call Renee Gonzales. The pseudonym is necessary because revealing her true identity would threaten her welfare benefits.

In the abstract -- a single mother with three children -- Gonzales is a typical welfare recipient. In the flesh and in spirit, she seems anything but. Alert and combative, Gonzales is in the process of digging herself out from a lifetime of deprivation, having recently completed her second year of college while starting a small business on the side. Welfare, she says, is a state that envelops and owns you because it becomes the norm. "If you grow up on welfare, there's no shame there. Everybody you know is on welfare. Once you're on welfare, you're hooked. It's a trap, and there's nothing you can do to escape except gnaw your foot off."

Gonzales, now age 20, has been on her own most of her life. Her father developed schizophrenia when she young, and the burden of raising a family alone overwhelmed her mother, a factory worker. Gonzales was put in a foster home at the age of eight.

Gonzales, like many welfare recipients, has been reduced to working the system to keep body, soul, and family together. She receives $314 in public assistance every two weeks. That buys groceries. She pays $250 a month in rent and $80 a month in day care. Her business selling clothing and accessories, which she started with a $200 loan, operates marginally. She would like to move it out of her apartment and into a storefront, but if she starts making more than $150 a week, she loses her medical benefits. She receives child support under the table from her former boyfriend, the father of her three children. "If I received that aboveboard, they would cut my welfare check." When Gonzales goes for her case review, she tells her caseworker that she doesn't know where her boyfriend is. "If you're honest, you hurt yourself."

The impression Gonzales leaves is of a person alternately defiant and self-conscious. "What do you think of when you think of the typical welfare person?" she asks. "A single mother with children, right? Do I look like a person on welfare?" Every day, she says, amounts to a trial in which she has to face "ignorant people who don't know what I've been through." Their ignorance only fires her determination. "I just look at them and say, 'You laugh now, but someday you'll still be here drinking your cheap wine, and I'll never see you again."

The Economics of Inclusion
'Victims Make Bad Entrepreneurs'
In times of economic change, people scramble all the more to protect what they have. They feel vulnerable, abandoned by traditional allies. The government today no longer delivers services in a cost-efficient manner. Its regulations seem increasingly arbitrary and onerous. The public education system once provided a vital point of entry into the American economy, the American experience. Today it spits out many "students" hardly prepared for the baffling world into which they emerge. Special interests preach the free-market gospel but then jockey for market protection and special favors at the expense of the less powerful.

As the economy has grown more complex, it has also grown more Darwinian. The highly skilled prosper. The skilled survive. The unskilled fall prey to change. The solution is not to penalize the successful but to include the heretofore excluded -- those with the potential to succeed who have simply never had access to the right levers.

When Bob Friedman, chairman of the Corporation for Enterprise Development, an economic-development and policy-research organization based in Washington, D.C., appraises the welfare system, he sees a "massive economic and social mistake that assumes that poor people have no talent and no capacity for vision."

Steve Mariotti sees government regulations and the tax code as amounting to nothing less than a violation of the fundamental civil rights of many inner-city residents.

People like Friedman and Mariotti concur that change must begin at the bottom of the economy because it has not come from the top. It must begin with people like Leroy Jones, Shanta Nurullah, and Renee Gonzales, who have defied the odds while understanding, as Friedman puts it, "that victims don't make good entrepreneurs."

But many people at the bottom of the ladder will continue to have a hard time becoming entrepreneurs unless institutional changes afford them better access to the economy. Right now too many people are lost, wandering through a labyrinth in which they are trapped.

And for that, we are all the poorer.

Published on: May 1, 1994