Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Can Basic Income Save the American Dream?

We must ask can basic income save the American Dream, because the dream and Middle America are dying. In fact, Americans are less-likely to start businesses or become entrepreneurs than in the 1970s.

Frighteningly, the number of start-up businesses in the United States was around 600,000 in 1977; and between 400,000 and 450,000, between 2008 and 2017, Steven Blakeman writes at Inc. Thus, America generates 200,000 to 250,000 fewer businesses a year than it did in the 1970s.

Yet, America’s population grew by 108.86 million between 1977 and 2018. In detail, the United States had a population of 220.24 million on 1 July 1977, and 329.1 million on 1 December 2018, estimates.

America has fewer Start-Ups and More People

Consequently, America has fewer smaller businesses and more people. This leads to economic stagnation and decline; because small businesses employ 47.5% of America’s workforce, the Small Business Administration estimates.

Moreover, the lack of small businesses keeps wages low because there are fewer businesses competing for Americans’ labor. In fact, the Brookings Institute estimates the lifetime incomes of American men who entered the US labor force in 1983 are one fifth lower than those who started work in 1967.

Additionally, the percentage of Americans earning more than their parents drops by 50% for those born after 1984, Brookings claims. Thus, the dream is dying because Americans have less money.

Why aren’t Americans starting Businesses?

Americans are not starting businesses because they lack the money. For instance, the US Census Bureau estimates the Median Individual Income in the United States at $31,177 for 2013-2017.

Plus, the Census Bureau places the Median Household Income at $57,652 for the same period. Thus, most Americans lack the finance resources to start a business or go solo as a freelancer or entrepreneur.

Meanwhile, the average American pays $321 a month for individual health insurance, and the average American family paid $833 a month for health insurance in March 2019, the Balance estimates. Plus, the average individual health insurance deductible in America is $4,358 and the average family deductible of $7,983.

Therefore, many Americans are barely making a living and could not afford healthcare; or health insurance without an employer paying the tab. Not surprisingly, those people are afraid to quit working for the man.

The Vicious Cycle that kills the American Dream

These statistics reveal the vicious cycle that kills the American Dream.

First, Americans lack the resources to start businesses. Second, there are fewer businesses employing fewer people, driving down wages.

Third, those with jobs have less money so it is harder for businesses to make a profit. Fourth, there is less economic activity in many areas, which further discourages job creation. Fifth, businesses stay away because people cannot afford their goods or services.

Finally, the lack of economic activity gives big corporations a huge competitive advantage over small businesses. For instance, Big Business has the advantages of cheaper labor, the ability to provide benefits like health insurance, and greater access to capital and technology. Specifically, bigger corporations can offer higher quality goods and services at low prices making it impossible for small business to compete.

Plus, Big Business becomes more competitive because it is in a better position to adopt and deploy new technology early. Consequently, wealth becomes increasingly concentrated in a few large corporations and their owners.

Why Entrepreneurship is Dying in America

In the final analysis, entrepreneurship is not occurring in many parts of the United States because there is no market for the entrepreneurs’ goods and services.

This forces would-be entrepreneurs to move a few large cities like Los Angeles and New York where it is increasingly impossible for average people to afford to live. For example, the average 786 square foot apartment in LA cost $2,371 to rent in in May 2019, RentCafe estimates. In addition, that rent grew by 7% between May 2018 and May 2019.

Under these economic conditions, the rational choice for a smart and creative person is to stay in her hometown and take a secure low-paying job with good benefits. For example, administrative work at a state agency; which could offer health insurance, and steady wages. Moreover, the average person can probably afford to buy or rent a decent place to live in her hometown.

How the Brain Drain Harms Middle America

Another reason why American entrepreneurship is collapsing is the “Brain Drain from Middle America.”

To explain, better-educated Americans; who are more likely to have the skills, courage, tenacity, and resources to start a business, are increasingly moving to a handful of states. “Many states that are not only bleeding highly educated adults; but failing to attract others to replace them,” Rachel Sheffield and Scott Winship conclude in The American Conservative.

To clarify, Sheffield is a senior policy adviser to the chairman of the United States’ Congress’s Joint Economic Committee. Meanwhile, Winship is the executive director of that committee. The two base their conclusions on data from the Joint Economic Committee’s Social Capital Project.

How the Brain Drain Kills Entrepreneurship in Middle America

For instance, 23.99% of high-educated people left South Dakota and 20.37% of well-educated individuals fled Wisconsin in 2017, the Social Capital Project estimates.

Disturbingly, states in the Rust Belt and the Deep South are hardest hit by the Brain Drain. In particular, the Social Capital Project estimates 16.93% of well-educated people left Mississippi and Alabama in 2017. Meanwhile, and 19% of those with higher educations exited Ohio in 2017.

This Brain Drain suppresses entrepreneurship in three ways. First, those most likely to have the skills and resources to build a successful business leave town. Second, there are fewer high-income customers for those businesses that stay. Third, the higher-educated people are most likely to move to places where the high cost of living discourages entrepreneurship.

A related problem is the $1.56 trillion in student loan debt, Student Loan Hero estimates Americans owed in February 2019. In detail, the average US college graduate pays $222 to $393 a month in student payments. In addition, 11.5% of student loans are delinquent or in default.

Obviously, a student with a mountain of debt is more likely to move the big city for a high-paying job than to stay and open a business on Main Street. In the final analysis, entrepreneurship is not occurring in Middle America because the entrepreneurs are not there.

How Basic Income could encourage Entrepreneurship

I think a basic income; an unconditional cash payment the government makes to most citizens, could encourage entrepreneurship.

First, a sensible basic income of $1,000 a month will provide a safety net that can enable people to take the risks of entrepreneurship. For instance, basic income could give a start-up owner enough extra cash to buy groceries and pay rent and utilities during a slow month.

In addition, a basic income the government pays to children will enable parents to take the risk of quitting their jobs and starting a business without worrying about how their kids will eat. Moreover, a basic income will enable smarter and better educated Americans to stay in their hometowns and start businesses.

Plus, more educated Americans could afford to take lower-paying and insecure jobs with start-ups if they had a basic income to augment their salaries. In addition, a basic income will allow many higher-educated people to move back to their hometowns or other areas where they can afford a house and a middle-class lifestyle.

How Basic Income can Help Businesses and Entrepreneurs succeed

Finally, a basic income will give people more money to spend at those start-up businesses.

For example, basic income could give a cashier, a waitress, a senior citizen on Social Security, or person on disability will have more money to spend on life’s little luxuries. In particular, more average people could afford pastries from a local bakery, breakfast at a local diner, or beer from a local brewpub if they had a basic income.

How Basic Income can save Small Town America

As anybody who drives through small towns like Florence, Colorado, Clayton, New Mexico, and Phillips, Texas, knows much of middle-America is in depression.

Driving through such communities, one sees only empty shops and sidewalks on Main Street, and many abandoned houses. In places, like Penrose, Colorado, the only retail activity is dismal discounters like Dollar General (NYSE: DG). Dollar General succeeds in places like Penrose because it is the only place residents can afford to shop.

A basic income can help depressed small towns by providing cash. Take Hollandale, Mississippi, where author Paul Theroux estimated the tax base at $300,000 a year for 3,437 residents, The National Review’s Kevin D. Williamson wrote in 2015. Tellingly, a 2008 University of North Carolina study describes Hollandale as a “a small community that has been mired in poverty for decades.”

A $1,000 a month basic income like the presidential candidate Andrew Yang’s (D-New York) Freedom Dividend could add $3.437 million a month; or $41.224 million a year, to Hollandale’s economy. Consequently, a Basic Income could make it profitable for both small entrepreneurs and more big retailers like Walmart (NYSE: WMT); or Kroger (NYSE: KR), to operate in Hollandale and create jobs.

How Basic Income could save the American Dream

Thus, basic income in combination with policies like Medicare for All, Tuition Free College, Student Loan Forgiveness, and infrastructure investment could revive the dream of entrepreneurship for many Americans. Only an economic environment that encourages entrepreneurship can save the American Dream, basic income could create such an environment. 

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