The risk tolerant benefit more from entrepreneurship training

Policymaking always utilises a broad brush with which to redraw the lives of individuals. However, though broad, with the right evidence this brush can be narrowed by taking account of the heterogeneity of human behaviour.

Just consider the many and varied schemes designed to support entrepreneurs. Putting aside the debate over whether or not this is the best use of tax revenues, nobody could deny that if we are to spend money on promoting entrepreneurs we should do so in most efficient way.

In “Entrepreneurship Training, Risk Aversion and Other Personality Traits: Evidence from a Random Experiment”, Robert W. Fairlie and William Holleran from the University of California draw on data from Growing America through Entrepreneurship (Project GATE), the largest randomised control experiment on providing entrepreneurship training ever conducted in the United States. Fairlie and Holleran find that:

[I]ndividuals who are more risk tolerant benefit more from entrepreneurship training than individuals who are less risk tolerant. The estimated interaction effects are large: averaging our estimates across the three waves implies that individuals who have a one standard deviation higher level of risk tolerance experience a 2.9 percentage point larger increase in business ownership and a 3.7 percentage point larger increase in the likelihood of starting a business from receiving the treatment than individuals with the lower level of risk tolerance.

This is a useful insight and suggests that we should consider identifying specific groups that may benefit more or less from government programmes to help people start a business. There can be no sure-fire way for spotting the next Zuckerberg, but we can increase the odds. Interestingly, Fairlie and Holleran also find “no evidence that individuals who are more innovative benefit more from entrepreneurship training than individuals who are less innovative.”

As the paper states: “some of the most disadvantaged groups such as at-risk youth and individuals with a criminal background have high levels of risk tolerance, and thus might benefit more for entrepreneurship training than more traditional job training programs.” There might be something in this: John Timpson has found ex-offenders fit in well with his unique entrepreneurial, bottom-up model for running his high street retailer.

As things stand in the UK, we have a remarkably limited understanding whether the schemes used to support entrepreneurship are doing any good. According to Gov.uk, business owners have 278 schemes to choose from. With proper analysis it might turn out that this is the correct number and they are being targeted at exactly the right group in the most efficient way. But I doubt it.

Philip Salter is director of The Entrepreneurs Network.

Politics: It’s a funny old game

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Is there anything more off-putting to people outside the Westminster Bubble than witnessing the carnival of party conference season? If you don’t support a party, you’ll be as perplexed as an ornithologist at the Manchester derby. Everywhere you turn, discussions rage about the latest transfer news with rumours of the latest Conservative MPs to migrate to Ukip, and tactics discussed in intricate detail about how to defeat the opposition. You’ll even hear chanting: “Five more years!”

The football analogy can only be stretched so far though. While support for football clubs remains as popular as ever, people are becoming less interested in political parties – at least the top three:

“Membership of the three main political parties is at a historic low: less than 1% of the UK electorate is now a member of the Conservative, Labour or Liberal Democrat Party, compared to 3.8% in 1983. Latest estimates suggest that the Conservative Party claimed 134,000 members, the Labour Party 190,000 and the Liberal Democrat Party 44,000.”

And don’t expect this to change any time soon: Less than a third of young people express interest in politics, according to a recent ONS survey. It found that only 31% of 16 to 24-year-olds were fairly or very interested in the subject.

This decrease in interest in established parties and politics is offset by one trend though – a growing interest in small parties:

“[M]embership of smaller, often nationalist parties has risen markedly since the new millennium. In June 2014 membership of the UK Independence Party was around 39,000; in September 2014 membership of the Scottish National Party was around 64,000; in December 2013 membership of the Green Party was around 14,000. Though none of these parties can claim to equal either the Conservatives or Labour in size, their rise nonetheless represents a notable change in the make-up of the UK’s political landscape.”

There is plenty wrong with all major political parties, but there is a lot more wrong with these smaller parties. Ukip represents the worst of Little Englanders and the SNP the worst of Little Scotlanders. The Green Party has a more international outlook, but one in which the entire globe returns to a utopic state of nature; a time where our lives were very nasty, very brutish and all too short.”

In the long run, I don’t think this matters very much. In Britain, our lives – from money to morals – will increasingly become disconnected from political decisions. The next generation is more open to others doing what makes them happy, while Bitcoin and blockchain technology offers the prospect of capital accumulation and exchange without the state. This, in part, might be why so few young people care about politics. But whether or not tolerance and tech trumps politics, we have a few elections between now and then; elections where the result will greatly impact the wealth and happiness of us all.

So what can be done? You don’t necessarily need to rush out and join a political party, but I think we would benefit from smarter, more open-minded people in politics and the policy process. For example, we know immigration is a hot topic, but we should also know that removing all barriers to migration throughout the world is calculated to increase global GDP by between 67% and 147.3%. This isn’t going to happen, but it should be the sort of data to inspire a generation. Perhaps not Steven Woolfe’s generation though; Ukip’s spokesman on migration and financial affairs thinks we should cap net immigration at 50,000 per year.

It might not be rational or feel particularly empowering to vote but occasional elections aren’t the only way of engaging in politics and policy. For example, if you’re a student on a gap year, you could apply to work for the Adam Smith Institute.

The game of politics isn’t always beautiful but the key players influence the result – even if they aren’t sitting in the House of Commons.

Philip Salter is director of The Entrepreneurs Network.

The visa and the sausage

The policy making process is a messy business. It is widely and fairly quoted that “laws, like sausages, cease to inspire respect in proportion as we know how they are made.” Think tanks sit at the very start of the policy process – writing recipes for politicians to feed to the public (as well as writing recipes for the public to feed to politicians). However, polices can become adulterated as they are funnelled through the sausage machine of government.

Some policies are just bad ideas – such as the creeping reintroduction of incomes policies, which dramatically and unequivocally failed in the 1970s – but some good policies fail in their implementation. At least one is failing because nobody knows it exists: the Tier 1 Exceptional Talent Visa for tech.

As Sam Shead explains at TechWorld:

As part of an effort to get more of the world’s best tech entrepreneurs and software engineers to come to the UK, prime minister David Cameron announced last December that the government was going to allow Tech City UK to endorse 200 of the 1000 slots. At the time, Cameron said more overseas talent was needed if the UK wanted to overcome the skills gap that exists in the tech sector.

The Tier 1 Exceptional Talent Visa should be a fast-track for tried and tested entrepreneurs to enter the UK, but even though Tech City UK has been free to endorse entrepreneurs since April, the policy is struggling to get off the ground.

The failure is largely the result of so few people knowing the visa route even exists. I’ve spoken with plenty of entrepreneurs, recruiters and lawyers – all of whom are needed to make this policy work in practice. Most haven’t heard of this visa route and none has the information required to understand the process. There is plenty of blame to go around but Tech City UK and UKTI probably deserve the brunt of it.

The failure of the Tier 1 Exceptional Talent Visa tech demonstrates how government departments and quangos are falling short in their job of communicating policy to so-called stakeholders (for want of a better word). We can’t rely on MPs to spread the word. In a recent poll commissioned by The Entrepreneurs Network it was discovered that they are largely ignorant of current policies to support entrepreneurs.

Based upon the evidence (and my cosmopolitan biases), fiddling with the Tier 1 Exceptional Talent Visa doesn’t go nearly far enough in liberalising the immigration system. But before this great battle of ideas is won – which will encompass cultural as well as economic clashes – every failing policy is a setback.

Philip Salter is director of The Entrepreneurs Network.

Small firms, giant leaps, and the elephant in the room

IPPR has recently released a detailed and thought-provoking report. In Small Firms, Giant Leaps, Spencer Thompson considers the contribution small and medium-sized enterprises (SMEs) have made to Britain’s economic recovery since the financial crisis and the role they could play over the coming years – specifically in getting more people back into work. Small Firms, Giant Leaps suggests some sensible reforms that this Government should take seriously, but it falls short of dealing with the real problem; a problem so much discussed and so obvious that its mere mention is liable to induce a collective yawn: too much complex regulation.

As the report makes clear, SMEs have contributed enormously to the labour market recovery since the financial crisis – 84% of jobs growth between the start of 2010 and the start of 2013 came from SMEs: “Overall employment rose by 1.5 million between the start of 2010 and the start of 2013. Of this, 1.2 million was in enterprises with 0–249 employees. Given that they only account for two-thirds of total employment, it is clear that SMEs are disproportionately driving the jobs recovery.”

The report suggests four policies for using SMEs to the end of creating “full employment” (defined as 80% of the workforce). I’ll first consider two through four.

The second recommendation is to retain and reform statutory sick pay recovery. Obviously, businesses are less likely to hire workers who have a higher risk of getting sick and not turning up to work, and this is more weighty burden for smaller businesses. Thompson suggests targeting current support towards individuals that face the greatest sickness-related hiring risks and only making this available to small firms (those with an annual NICs liability of less than £45,000). It is estimated that this reform would cost just over £20 million, which is good deal less than the £50 million currently spent on statutory sick pay recovery.

The third recommendation is to intermediate labour markets in welfare-to-work policy: “Providers under the next iteration of the Work Programme should be allowed and encouraged to act as a temporary employment agency for claimants in particular groups, securing short-term paid work placements with employers.” The fourth recommendation is for an occupational benefit insurance scheme for SMEs. Thompson calls on employer associations – such as the Federation of Small Businesses and the British Chambers of Commerce – to work with insurers to help SMEs club together to offer occupational sick, maternity and paternity pay to their employees.

The first recommendation is less convincing and gets us to the nub of the problem. Thompson calls for more business support for new employers and existing micro and small businesses. The problem is easily identified: “those not large enough to employ a dedicated HR professional and unable to afford the cost of external support have to navigate through an often complex system of employment law and labour market regulation.” The solution, according to Thompson, is to give up to £1,000 in support and services.

Rather than setting up yet another scheme to navigate the complex regulation, the Government should exempt small businesses from as much of the labyrinthine system of employment law and labour market regulations as is feasible. Since 2001, the Government has been committed to exempting microbusiness from upcoming “burdensome” new regulations. The logical conclusion is to exempt them from existing burdens too. For those who suggest that this can’t be done, just consider that in 2012 the Government exempted hundreds of thousands of low-risk workplaces from health and safety inspections.

Information is certainly important for SMEs – the chopping of Business Link and the various changes since then must have done significant harm – but by their own reckoning regulation is the key reason SMEs aren’t hiring more. As is shown in the Figure 2.1 (page 33) of the report (see below), when asked in an FSB poll about the barriers to taking on more staff, only 5% of SMEs said it was “not finding the appropriate information”, while 32% said it was a “fear of litigation/employment tribunals”, 30% “employment law/regulations”, 16% “other regulations”, and 14% “administrative burden”.

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Some may suggest that SMEs fears are unfounded, but the 321,800 claims accepted by employment tribunals in 2011/12 suggest that the hesitancy is based on real and present dangers. One of the costs of regulations designed to protect the currently employed is that it restrict access to those on the margins of labour markets. If your goal is 80% employment, then, whether you like it or not, deregulation is the most powerful weapon in your armoury.

Philip Salter is Director of The Entreprenuers Network.

Why David Blanchflower is wrong

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On Bloomberg.com former MPC member David Blanchflower argues that the ‘Conservative austerity idea is failing‘. The former external member of the Bank of England’s Monetary and Policy Committee (MPC) suggests that the coalition government is driving the economy into another recession. Yet despite the confidence with which he asserts his prediction, Mr Blanchflower does not have a crystal ball. Of course, we might indeed experience two successive quarters of negative growth, but likely not for the reason put forward in this article.

Despite his academic credentials, Mr Blanchflower is a political beast – and his analysis reads as such. His thesis is built upon his belief that tax cuts – or even the thought of tax cuts – will cause a double-dip. But Keynesian obfuscation on the animal spirits doesn’t really get us anywhere. As much as the coalition government’s rhetoric and policy proposals of tax rises and cuts might be worrying consumers and businesses, the previous government’s head-in-the-sand deficit denial was also causing uneasiness. Let’s not forget that the hawks were circling around UK government debt. When politicians have brought your country to the point of bankruptcy and central bankers are ignoring the inflation eating away at your wealth, lacking confidence is a pretty natural reaction.

So rather than coming in on the side of whether the disease or the medicine leads to the greater loss of confidence, better to focus on what works. Luckily, Alberto Alesina and Silvia Ardagna of Harvard University have done the hard work. In a 2009 paper entitled ‘Large changes in fiscal policy: taxes versus spending’ they conclude that:

Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions.

The paper is worth reading in full as it is comprehensive in scope, has a simple and convincing methodology, and comes to the unequivocal conclusion that tax cuts trump spending. Confidence is a tricky policy lever to pull, one based on facts tends to be much more successful.