Monday 28 June 2021

A bit of supply-side

A revamped New Enterprise Allowance would do wonders for business creation

It is not often you find a Thatcherite policy that is just as likely to be celebrated in The Guardian or the RSA, as it is by The Daily Telegraph. The Enterprise Allowance Scheme (EAS) was a rare exception.

The idea is simple: pay the unemployed to start a business. The results were impressive. Success stories included Alan McGee’s Creation Records and Julian Dunkerton’s SuperDry clothing brand. It also helped launch the careers of Young British Artists (YBAs) such as Jeremy Deller and Tracey Emin.

It was also excellent value for money. One analysis by the World Bank estimated that it cost under £5,000 (adjusted for inflation) per job created. This is about as good as it gets for labour market policy. By contrast, some recent schemes have cost as much as 40 times more per job created.

Yet its successor scheme, the New Enterprise Allowance (NEA), falls short in a number of key ways. At its peak, more than 100,000 were enrolled on the Enterprise Allowance Scheme at one time. By contrast, there have only been slightly more starts on the NEA over the past decade.

What explains the relative failure? A key problem is the level of support on offer. The EAS offered recipients £40 a week in the 80s, which is slightly more than what they could get from Job Seekers Allowance (JSA). The NEA is a fair bit stingier: you can claim up to £1,274 over six months, roughly 25% less than what you would have got on JSA.

The support does not last for long either. At the end of six months, you are effectively on your own. This wasn’t the case for the original EAS, where support lasted for a year.

There’s a further complication too. Under Universal Credit, benefits are gradually tapered away, which can create further uncertainty for the self-employed as to what they will have at the end of the month.

A scheme closer to the original EAS could have a powerful impact in the parts of the UK where poverty and deprivation are most stubborn to shift. We recently worked with Sage and Portland to poll over a thousand SMEs and people open to the idea of starting a business in some of the most deprived parts of London and Newcastle.

The polling revealed that starting a business is seen as a route to a better life for many people who are currently stuck in low-paid work. Entrepreneurship isn’t just a pipe dream either. Almost half the people we spoke to had clear business ideas. However, these ideas were not translating into new business creation because of two key barriers: finance and confidence.

Sometimes the problems were a matter of perception. The people we polled thought starting a business would cost £12,000. By contrast, the SME owners we spoke reckoned it only cost them £5,000. Most people would still fall short, but the gap isn’t insurmountable.

To make up the shortfall, external finance will be necessary. But the idea of taking out a loan, especially in a year where most have seen their income fall and businesses close, seems daunting to most.

In theory, the NEA should be perfect for them, but it is unlikely that just over £1,000 over six months is sufficient. If we were to expand the NEA to £100 a week over 12 months, as Policy Exchange have advocated, it would enable every recipient to find that £5,000 to cover startup costs.

There is one aspect of the NEA that is worth keeping. Under the current system support is frontloaded. After all, you are most likely to need support in your first few weeks before you’ve made that crucial first sale.

An expanded NEA should keep that aspect but increase flexibility. On the approval of a business mentor, you should be able to access up to 50% of your last six months worth of entitlement upfront.

We should also look at expanding eligibility. The scheme is only available to people receiving benefits. As a result, we might be missing out on supporting people who have developed side-hustles while on furlough. Similarly, those under 23 earning less than the National Living Wage could also benefit from support to start a business. Indeed, many of the Enterprise Allowance Scheme’s biggest successes were people who joined the scheme in their early twenties.

It wouldn’t be a silver bullet – we still need better support in terms of mentoring and entrepreneurship education up and down the curriculum. But it could help us take advantage of the massive opportunity to support the creation of new businesses in the parts of the UK where they are most needed.

Friday 25 June 2021

Bureaucracy & red tape in Germany

A fun read too. I have been following the story of the Tesla factory in Germany with a lot of interest - environmentalists have been howling in anger about it. This article puts it into perspective in terms of slowing innovation and growth, something that needs to be factored in to essays that contrast different economic regions.

What Was Elon Musk Smoking When He Chose Germany?

The 25-year saga of a missing traffic light in Berlin speaks volumes about contemporary Germany.

Andreas Kluth

24 June 2021, 06:00 BST

Every traffic light should cause such bliss.

Hear, hear! Armin Laschet, boss of Germany’s center-right Christian Democrats and candidate for chancellor, just hit bull’s-eye with his ad hoc analysis of what ails Germany. Spontaneously naming this affliction “bureaucratic ping-pong,” he illustrated it with a nondescript intersection on the eastern outskirts of Berlin.

Some 25 years ago, it appears, the local mandarins decided to install a traffic light to make the crossing safer. Then the ping-pong paddles came out.

First, it seems, the folks in the municipal administration got into a tiff with the guys at the water utility about who was to drain what, given that the area was environmentally protected. Then regulations changed and the light needed new specs. Next, the public-transport people discovered that the signal would mess up schedules at nearby stops. And so it went until last fall, when somebody had an epiphany and placed a provisional traffic signal at the corner, in anticipation of the permanent iteration. That should arrive any decade now.

Bureaucracy isn’t unique to Germany, of course, but these time spans appear to be par for the course in Europe’s largest economy. At about the time the traffic light was conceived, for example, Berlin also began planning its new airport. After several delays, it opened — wait for it — last fall.

So it goes, wherever you look. All administrations since the 1990s have promised to “digitize” the country. This is now bearing fruit. Over a year into the pandemic, Germany’s health agencies have recently begun switching from fax to the Internet in reporting new cases.

Time is relative, as Laschet pointed out dolefully this week as he presented his party’s election platform, and that’s a problem for an open economy that trades in global markets. “During the time we were playing bureaucratic ping-pong,” he lamented, “Amazon, Google and Tesla became tech giants.”

Laschet could also have cited artificial intelligence, where the U.S. and China have sped ahead and Germany trails far behind. Or Germany’s ballyhooed energy transition, which is stuck in part because bureaucratic nimbyism keeps blocking pylons and power lines that would carry electricity from the windy coast to the industrial hinterland. Or the red tape that slows construction in German cities, causing rents to soar. Or almost any other aspect of German society.

But Laschet’s choice of benchmarks is telling, for Germans are peculiarly conflicted about this fast-moving and unbureaucratic U.S. trio of Amazon.com Inc., Google (owned by Alphabet Inc.) and Tesla Inc.

At one level, they love shopping on the first, searching on the second and driving in the third. They’re also green with envy, because the only German tech company in the big leagues is SAP SE, which makes comparatively boring enterprise software and, founded in 1972, is getting long in the tooth.

At another level — and especially on the political left — Germans frown at what they see as rapacious Yankee cowboy capitalists. They suspect Amazon of undermining German labor standards, Google of violating Germans’ vaunted data privacy, and the whole lot of them of paying too little tax. Hence their German reflex: Let’s send the bureaucrats to give them a good talking to.

Germans are having particular conniptions of late about Tesla, which provokes them in every way imaginable. It specializes in sexy cars that are also electric and thus climate-friendly. Germany specializes in cars that increasingly look like mutton dressed as lamb and — despite the marketing you may have seen — still mainly guzzle gas and diesel.

Even more embarrassing, Tesla is run by Elon Musk, a risk-loving and impatient Anglo-Saxon who also smokes dope in podcasts, hosts comedy shows, drills through bedrock, launches rockets into space and is preparing to colonize Mars. Musk is as close to the opposite of the archetypically risk-averse, wooden, paper-pushing German executive as you can be. He’s Germany’s perfect foil.

Musk, as it happens, has chosen a sandy forest near Berlin to build a Tesla factory. As you’d expect, there are some Germans who find that interesting: The site will create thousands of good jobs and it checks every box Germans claim to love: It’s green, digital, and cutting-edge.

But nobody seems to have told Musk about the ping-pong. The environmentalists who should love his electric cars hate his factory because it uses lots of water and might endanger wildlife. Germany’s largest labor union, IG Metall, is fighting him tooth and nail because he doesn’t want to sign its dotted lines. The factory’s opening has already been delayed, and Musk must be wondering what he was smoking when he chose this location.

So Laschet deserves kudos for making bureaucracy an issue in the campaign leading up to September’s federal election. His party has been in power so long, it obviously shares some blame for the ping-pong he decries. But the truth is that the German obsession with rules and regulations, paperwork and red tape, is mainly the result of leftist policies, often well meant.

Like his main rivals, the Greens, Laschet wants to defeat both the pandemic and global warming. But unlike the Greens and other left parties, he’s also spotted the need to simplify German governance. That’s what it’ll take to unfetter the energy and innovation necessary to achieve these goals and keep Germany prosperous. When Laschet promises to take the ping-pong paddles away from bureaucrats, he’s onto something, and deserves support.

Quote of the day