The government should pay entrepreneurs salaries to save the economy

A few weeks ago, I was exercising while listening to the Wall Street Journal This Morning about what the government is doing to save the economy. I have also been paying attention to how governments are giving grants to startups who can prove that they are very innovative.

Having wrote a blogpost on this topic earlier, I formulated what I think is a doable plan for the government to save the economy.

For validation, I took this plan to two of my friends, one who is an ex-VC and Boston Consulting Group Consultant, and the other a Stanford Researcher. They haven’t been able to poke holes in this theory *yet*, so I thought I would share it on my blog and hopefully I will find out the flaws in my thinking or it will get discovered by policy makers to really execute it through.

Foundations of my theory: nodes and 3 coefficients

When the government throws money into the economy, it passes through many “nodes” (person or organization), and each node has three coefficients along with it: spend/save, innovation, and upside.

The Spend/Save Ratio means when people get money, how much of it do they spend, and how much of it do they save up. If they save up all the money once they receive it, then the economy will not improve.

In times of uncertainty, people who are fairly wealthy will save money. The only people that will spend are low income earners that can barely afford their own living. These people are forced to spend all the money they have each month, boosting the economy forward, especially if they pay others who are low in income too.

The SS Ratio is the deciding factor of how many “nodes” money passes through, making the other two coefficients more relevant.

The Innovation Coefficient is how much innovation is driven as $ passes through an entity. Like what most corporations argue, innovation does not just include creative ideas but also includes implementation and market adaption.

In that sense, only money that helps drive new solutions that generate financial sustainability or growth would have a strong Innovation Coefficient.

Finally, the Upside Coefficient is how much more money can each dollar potentially generate if it goes well. The startup world knows this concept well. A Venture Capitalist would invest in ten startups that all have a potential upside of $100M. Most of them would fail, but it only takes one success to cover the rest and more. Now if the upside of the businesses were $10M, then investing $5M into ten businesses makes no sense.

The government needs to aim for a high upside value because their goal is to create thousands of jobs for each batch of money they throw into the economy.

Optimize government spending by maximizing all three values and make sure there are many nodes

Each dollar the government spends need to pass through as many nodes as possible with high coefficient values. So the formula pretty much goes: [$ * spend ratio * innovation * upside] for however many nodes there are until they all get saved up somewhere (and yes, saved up money can be invested, and there’s more debt so hopefully the invested money would go through another strong cycle with high coefficients to justify it)

Money that goes to a large research corporation might have high innovation value (0.8 or 0.9), but the upside coefficient would be lower (you rarely see corporations that make a product that generates 50x the investment) and it will usually get saved up by high-paid engineers/scientists that are uncertain about the economy.

On the other hand, money that goes into a mom-and-pop stores will likely be all spent on covering costs, paying other low wage workers, and consumer spending at other mom-and-pop stores. There is still relatively low upside and innovation value to it though.

Pay entrepreneur salaries as a way to optimize economy recovery

Through this theory, my conclusion is that the best way to pump up an economy is to give grant-like salaries to sustain the lives of entrepreneurs (perhaps biased, but I sincerely think this is the best solution).

The government can give entrepreneurs a VERY low amount of survival money, like $20,000 a year, as a salary to do entrepreneurial work.  This is useful because there are lots and lots of people who would be entrepreneurs but they couldn’t pursue their dreams due to realistic survival issues. They still have to raise their normal funding from investors and grow their business, but this plan allows them to pursue the innovation work they want without the fear of dying on the streets.

Many entrepreneurs are some of the smartest and most creative people in the workforce, and they demand very little to survive. They also need to spend all $20,000 of that money because they don’t have the capacity to save.

I tried it myself. $1200 a month is enough to cover subletting rent, cell phone bills, food money, $250 worth of monthly gas fees, and everything else I need. $20,000 a year is already a premium from that standpoint.

And that generates over 80 hours a week of productivity. If an entrepreneur is running a startup just to have a comfortable materialistic life, he is in the wrong profession.

Entrperenuers would also likely spend on other smaller and cheaper companies and employees that would need to spend most of their money too, passing through many nodes.

Their innovation value is obviously also very high. I would argue that each dollar spent in a startup is more efficient in terms of innovation compared to a large company because they all try to do things the leanest way without the bureaucracy costs.

Again, a great talent working 80 hours a week on an innovative concept with $20,000 a year. Am I missing something here or is this the best deal an economy could ever have?

Finally, and most importantly, the idea about startups is that if it works, it could make millions in revenue and create a lot more jobs. Startups don’t raise money so they can make enough cashflow to sustain their own lives. They raise money in the promise that if it works, the money put in would return a hundred fold, creating new jobs, new markets, wealthy investors, and happy entrepreneurs.

Low spending, high payout

So with this plan, with $2M the government could support 100 entrepreneurs for one year (not even talking about the billions that are spent elsewhere saving dying companies). And if you have a good VC talent in terms of screening which startups have potentials, you just have to play the numbers game and statistically 10 of these startups would become successful and generate millions of revenue with thousands of jobs.

The beauty is that the other 90 entrepreneurs who fail hasn’t wasted the money either. They have produced some innovation in the economy, pushed forward valuable skill sets and experience in that field, and they would have spent all their money into circulation.

Again, keep in mind that, in this plan, it is obviously up to the entrepreneur herself to figure out how to raise money, find talents and all that to grow the business, but at least her survival to be an entrepreneur is covered.

Finally, this will definitely increase the entrepreneurial culture in the area. Entrepreneurs from other locations (if this is a city policy) might come just to apply for this program. It also encourages a lot of young talents to pursue this path right after college. Overall, it should be a win-win-win situation.

I truly believe that if the government implements this plan, there will be more spending, more innovation, and a lot more jobs created in the economy. Please help push this out to policy makers. I’m tired of this recession.

Update: I’ve received some criticism that this is like “welfare” for entrepreneurs and welfare is not efficent + the government should be hands off. I will argue that, in welfare systems, you pay people who are struggling to survive, and that’s it. In my plan, you are giving money to those who could create 1000 more jobs. One is more like a sympathy vote, whereas the other is more like investing into the future of the economy. I’d say if even 1% of the people the government supports on welfare can create 1000 more jobs, the economy would be MUCH MUCH better today.

35 thoughts on “The government should pay entrepreneurs salaries to save the economy”

  1. I know it’s been a while since this post, but just wanted to weigh in that many states are in effect doing something similar. Many are extending or offering unemployment benefits to entrepreneurs without the required time and effort of searching for a job. Of course that helps one segment of the population and leaves out all those who would end up quitting (rather than being laid off) their jobs to work on their startup.

  2. Thanks for the long response Rick. I’ve truly learned from it (much more than some passionate commenters above 😉 )

    I think besides this conclusion of whether entrepreneurs should get stipends, I wanted to make sure that my framework/model is sound to think about other issues in the economy. Since I’m mostly thinking about how the government could better spend stimulus money, privatizing stipends ( 🙂 ) would mean that the government needs to find someplace else that could better improve the economy.

    I think I stand most corrected when you say that there is actually more economy flow and growth when people save up their money (but wasn’t the issue with Japan because of people saving up too much money and no one wants to spend?). So in that case, would you say that the basic framework of $ x SAVE/spend ratio x innovation value x upside would be sound?

    Thanks!

  3. I think your idea can be broken into two pieces:

    1. Entrepreneurs are the people who grow the economy through the creation of value (to customers, investors, and employees), and who therefor ultimately create jobs.

    2. The government should pay entrepreneurs a stipend so that they are freed from the burden of their daily financial responsibilities and can focus on building a new business.

    Of those two points, I think the first is a factual statement which is absolutely and demonstrably true. Unfortunately, I think the second is a prescriptive statement which (although I can sympathize with it) is misguided, and perhaps a bit naive. But I believe it can be saved.

    First off, it helps to understand where money comes from: it comes from the creation of debt. ALL money in the US economy is the result of debt. If every debt were paid off, there would be no money. Zero. Nada. This is a tough concept for many people, but it is the way the Federal Reserve system is structured, and it’s why so many people preferred the Gold Standard (or something similar).

    Now the concept you have of a spend / save ratio is basically the multiplier effect in economics. And while it may seem appealing in the abstract, it has been used to justify the most ridiculous government expenditures. Rather than spending money on something that is obviously needed (say, widening I-80 through Berkeley), the same amount of money can instead be spent on a bridge in Alaska that will serve 50 people a year. But it can be justified by a similar analysis–done very well by a team of highly educated BCG consultants–to show that the overall economy will benefit more from the multiplier effect of the bridge nobody needs, than by the actual value created by the highway many people need. This type of thinking is endemic in Washington, because it is without clear metrics, and can therefor be used to justify any amount of pork.

    Now put these together: when money is saved, it can either be invested (in which case it’s helping grow business at the average rate of market growth), or saved. If it is saved, it can be loaned out at a ratio of approximately $8 loaned for each $1 “saved.” Loaned money is nearly always spent or invested. So by your own logic, the best place to give the money would be to people who will save it, because that will result in a higher amount of money doing exactly what you seem to want it to do.

    But there is a deeper problem: governments are simply not well suited for picking out economic winners. Nor do they do a good job of delegating that task. Nor would anyone want them to. Where there is money at stake, governments simply do not behave in a traditionally economically rational way; it’s not what they are established for, it’s not how their incentives align, and it is not what they do.

    I can give many examples of this, but perhaps the clearest is NASA; for decades NASA has chosen the most important contractors for advanced R&D based, not on their ability to innovate or execute, but solely on their Congressional district. They did this because it secured votes for key Congressional committee members, which ensured they kept their Congressional jobs. Rational for them; not so rational for NASA; highly irrational for the taxpayer. This is why you heard stories of $800 wrenches.

    The effect was to kill innovation in the space industry for decades, since nobody felt they could compete against NASA money, and contractors had no incentive or need to innovate–or indeed perform. Sadly, NASA became known as “welfare for engineers,” and it was entirely too accurate.

    So: what to make of your suggestion?

    I actually think you are making an excellent suggestion, with one modification. The government should NOT give any stipends to entrepreneurs. Instead, the government should create a tax holiday for private investors who want to do this, and allow the private investors to do exactly what you are suggesting: bring entrepreneurs on staff with some stipend, and pay them to create great companies. Then waive the taxes for both the investors and the entrepreneurs and allow the resulting increased wealth creation and spending to boost the economy. This would encourage more people to go into entrepreneurship, and encourage more investors to place a greater fraction of their portfolios in entrepreneurial activities.

    As one of your previous commenters pointed out, $20k is not appropriate for most entrepreneurs. Some might be much more expensive, but worth it for their experience, contacts, and expertise. Others might not be worth it at any price. Making such a judgment is nearly impossible for the government, but is an everyday activity for private individuals.

    So with that one modification, I like the plan. But without it, I think unfortunately it would simply die in the morass of government bureaucracy, and, just as NASA spending killed innovation in space, this would absolutely kill entrepreneurial innovation if managed by the government.

    So: a tax holiday for startup investors and entrepreneurs who grow businesses, create wealth, and add jobs makes a lot of sense to me.

  4. Nice read, I plan on starting a business one day. After all entreprenuers are the backbone to the American economy. Probably alot of potiential laws or bills to control this idea if it ever took effect. Don’t want entrepreneurs to spend government funding like AIG did with their bailout money D:

    1. Hahaha, For sure. but keep in mind that the salaries of the people in AIG would be able to raise 10-50 startups! I think it would definitely be more efficient 🙂

      YK

  5. I think it has to have high innovation value and high upside value. If you can explain why those two are high, then maybe 🙂

  6. Hello Allen,

    You make good points. I am saying that, instead of bashing huge amounts of money to delay the death of large corporations, the government should take 1% of that and do this program. I explained why I think that 1% would do more in terms of recovering the economy compared to dumping it into large firms because large firm professionals will all save that salary up, there is less innovation for each dollar spent, and the upside is a lot lower.

    I’m not asking the government to tax more to do this plan. I’m asking the government to shift it’s priorities.

  7. $20k per entrepreneur. Where does the government get the money from? Often forgotten is that there is no money unless its taken from somewhere else.

    If you should succeed in making a significant amount of money I’m wondering if you’d be willing to just ‘give’ it away and live on this $20k that you talk of. No control over that extra money you’ve earned. It simply is taken.

    Sounds like a good idea to me. Sounds like a good idea to everyone else until they are in the situation of having it taken out of their pocket for someone else’s dream.

    “Selfishness isn’t doing what I want to do. Selfishness is making others do what I want to do.”

  8. I read this post weeks ago when it was first posted and my reaction was that it was a novel idea and something worth considering. I just noticed your most recent post on “haters” and checked back here to see where the bashing comments were coming from.

    It’s funny how some people automatically assume that any type of government assistance is immediately socialism. Society as a whole could not function if it was completely market driven. I think we’ve seen that government does not necessarily bring death to innovation. Besides, this stigma of socialism is over-abused by demagogues and fear-mongers. I used to be much more conservative too, but I’ve come to realize that human nature is highly corruptible, and some structure is necessary to maintain a functioning society. People don’t fear public services like police, fire departments, roads, and the post office as some sort of socialist agenda.

    Also, those who automatically attack your idea as “entreprenurial welfare” miss the point altogether. Assuming for the moment that any sort of government intervention is anathema to capitalism, your novel idea is not throwing more fuel on the flames. It’s redirecting the money that is already being spent on other bailouts to fund innovation through entrepreneurship. Personally, I don’t see any fault in the government helping the most gifted.

    It’s good to see however, that the majority of your feedback seems to be relatively positive. Keep thinking like this and maybe one day you will change the world.

  9. You have good points Heathen. I appreciate it.

    The private sector is best at determining which businesses are profitable, but they are also the ones that made Wall Street out of control. That’s why I think it’s better to discuss a case-by-case decision on what plan is good instead of just saying “This is public so it is bad” or “This is private so it is good”. I think both the public and the private sectors need to make right moves for a society and economy to function well. Without a government, there would even be problems with a universal exchange currency, and that would definitely not be efficient, though very “free”.

    Also, in my plan, I suggested that the government should hire a VC that is passionate about this in the private sectors to make sure things push out more smoothly. Just because the government isn’t very good at being efficient in many things they do doesn’t mean they cannot improve and get better. If you look at world history, there are numerous recessions that are saved because of very active governmental actions. You may argue that if the government is hands-off, it might even recover faster, but one point or another, the recession recovered, so it’s hard to say that the government intervention was “bad and disgusting”.

    I can tell you that a lot of great start ups that create a lot of jobs happened because the founders had middle class parents and they could move home (or they were at school). When you remove that, a lot of these great companies will no longer be there.

    Finally, when I say the government should pay entrepreneurs salaries, I am just saying they are doing work that helps society, so the government actually does not own equity in the startup. I’m sure they can do that too and it matters little. They just have to make sure they don’t eat up too much equity.

    Again, thanks for your comments.

  10. There’s a reason why the private sector is usually best at determining which businesses are the most profitable. The government doesn’t have the best track record at allocating resources.

    If an innovator can’t thrive in the marketplace than is the value of his or her productivity really worth subsidizing like that? There’s a point where people need to accept reality and get a real job. Finally, the terms of an Obama administration plan like that would suck. IF someone really hit it big they wouldn’t see very much of their profits. Just look at how the bailed out firms got jacked with caps on compensation.

  11. Hello Brian. I first was curious if you were a respectable Brian S that I know of, but after reading this, I don’t think you are him. Plus, a respectable figure would back up his words by his real identity. Anyhow, thanks for at least posting something.

    I don’t really see how this kills competition. Can you let me know what aspect of competition is killed? Are you saying that because of this plan legit startups that can do it better would fail to the entrepreneurs that are being paid $20K a year?

    Real entrepreneur or not, there are very talented people who can quit their $80K jobs if they know they won’t starve for the first year of their entrepreneurial career. Yea the other alternative is to move home with parents. But I know people who have their parents lose their jobs too. From what you say, real entrepreneurs are just those who are lucky.

    Having the government pay entrepreneurs to do entrepreneurial work is hardly socialism. It’s more like a paid profession with a potentially huge upside.

    First of all, Boston Consulting Group is the 2nd most prestigious consulting firm in the US, and a person who works at BCG does not mean he is from Boston. With that out of the way, my post specified very clearly that it is up there so people can point out how it is not feasible. I only see you making general statements, but not the specifics that would go wrong. You just don’t like the idea of it.

    I think bail-outs suck too. I would like to see the tax code get fixed too. That has nothing to do with what I am proposing.

    I appreciate you mailing it out to your friends, but for fairness sake, I am a REAL entrepreneur too who is working 90 hours a week and making some ends meet too. Would you like to share something about your background? I would love to have an more in-depth discussion on your thoughts and why you think my model is trash. Perhaps I can learn something from you.

    Thanks again and have a great weekend!

  12. Hello Jon,

    I’m going to disagree with you here. A lot of people in my generation don’t care about making money. They want to make an impact. Before having a family and paying mortgages, they can live poorly and cheaply and not mind it if they are doing something they are passionate about. The only problem is, they have to eat and survive. Once they get rid of the most basic need at the bottom of the pyramid, they can now spend all their time pursuing new innovation. I’m talking about $20K being enough capital to run a start up. I’m talking about $20K being enough to get committed entrepreneurs to commit to entrepreneurship.

    I have a lot of friends who would become entrepreneurs if their basic living is covered. Unfortunately, that’s not always the case and while some decide to flip burgers on the side to sustain their startup lives, some just join the corporate world because they need to become financially independent.

    Thanks for your comment though. I would be more than happy to learn from you other insights! 🙂

  13. Your agenda kills the notion of COMPETITION in the U.S. economy.

    Real entrepreneurs are those that can work through the start-up phase WITHOUT GOVERNMENT INTERVENTION.

    THIS IS NOT ENTREPRENEURSHIP. THIS IS SOCIALISM.

    You have support from a VC from Boston and a professor at Stanford? That does not mean anything in this case.

    The government does not get entrepreneurship. Fix the TAX CODE and other policies. Don’t do bail-outs. This makes NO SENSE at all. I am disgusted with your post and I just emailed it to REAL entrepreneurs (some who are working 80 hour weeks to make ends meet and don’t want t helping hand from the GOVERNMENT) who will also shiver at the thought of this.

  14. $20,000 is not access to capital, it’s a crutch. I might choose this over having my tax dollars spent on General Motors or unionized labor, but overall I think it’s not enough to make a difference. Those who can, do. Those who can’t, work for someone else. $20,000 won’t turn “those who can’t” into “those who can”.

  15. Haha, yea I know about SBA. We actually work with them a lot here 🙂 They don’t necessarily pay people to do entrepreneurial work. They help small businesses get connected with information and assist them to find grants.. And most of them deal with brick-and-mortar businesses and they don’t understand high tech startups (they actually came and consulted for my help because they didn’t know much about the internet industry).

    Grants are nice but they focus on a lot larger chunks of money, and they pay a lot more attention to innovation than other factors.

    Maybe my numbers are inflated. But I started off with numbers I hear about. Then I used the numbers you suggested. If you bring out some data showing the correct ones, I would be happy to work with those too.

  16. Do you know about the SBA? Your plan sounds a lot like what they do.

    I think your numbers for success are greatly inflated and that’s where the confusion sets in.

  17. You have some good points.

    I think if it is a high tech company and is considered “successful”, I agree that it might not be generating millions of dollars, but it should be growing and sustaining the lives of a number of employees. I don’t think it’s very likely that a “successful” just has two people in it and are just doing ok to the point that they aren’t flat on their face.

    I think the average successful entrepreneur is 27 because there are a lot less young people they try. Most people expect to start paying their bills through a job right out of college. It’s only when they get sick of their jobs after a few years that they start a company. Also, 27 may be a very natural number in the sense that if you take the ages of 15-55 as valid times to be running a business, there is definitely a lot more people that are above 27 that would pull the average up. If every single age group has the same amount of entrepreneurs and the same chances to succeed, then the average age should be 35 (15-55 is arbitrary but I think it should be close). The fact that it is 27 may mean that the people below 27 (and you can’t too low below that) manage to pull the average down.

    I agree with you that proven talent is important and therefore are paid more. But that’s an outside CEO. If someone is starting his own company, he’s not going to think “Oh, I am an incredible talent, so I deserve $150,000 a year of salary. I’m going to raise investor money to make sure I can get paid that much.” A big point of mine in the article is that other-wise expensive and excellent talent would be paid extremely little when they are working for their own company.

    In terms of people gaming the system and wasting resources, I think it would be the same for any type of government grant that they give out. They would need to pass through certain procedures to make sure things work out whatever plan it is, so that shouldn’t be exclusive of this plan.

    I agree that 2-3 founders yield a higher success rate. That’s a detail where a government can say “we pay up to 2 founders” or “we give a founding team $30,000, and they can choose to live together or whatever they want.”

    So based on the numbers you said, $2M will still support 50 startups with 2 founders with a 10% chance of being “moderately successful”. That still means there are 5 companies that have 2-5 employees generating revenue that can become effective for the economy. And if lucky, 1 of those 50 startups would become a huge success.

    I think that is better than what the government is doing right now. Bashing money to the large car companies is not a good long term solution. The SS Ratio is very low because investors, executives and engineers alike are all trying to save themselves and will save up their money because they know the company will go down anytime. Innovation is possible but I still think it is not as great as a start up on a per dollar basis. And finally, there doesn’t seem to be much of an upside. It’s mostly downside damage control and extending the lives of inevitable problems. I don’t think if the government puts in $1B into a car company can “possibly” turn into $10B back in the economy.

    So I still feel like this plan is better than the status quo.

  18. Very interesting besides the last statistics :p

    1 in 10 startups may “succeed” – but I think that really means 1/10 just doesn’t fall flat on their faces.

    Also, the average age of an entrepreneur is 27 – not a year or two out of college like us. 30 year old people can’t live off 20K a year because they have families to support. Way more successful companies are born out of companies that have years of experience beneath their founders. Also, for the same reason non-profits have to pay their CEOs hundreds of thousands of dollars – which seems to go against the very mission of a non-profit – it’s worth putting out the top dollar to get the top talent who can generate a much higher upside ratio for the organization. Plain and simple, we are inexperienced and only willing to live of 20K a year because we have no track record that warrants us more money.

    Continuing with the last point above, it’s expensive to figure out what people who are willing to work for $20K a year are not just working the system and/or a waste of resources.

    $2M a year supports 100 companies with 1 founder – and anyone reading this blog knows that 2-3 founders yields much higher success.

    It’s more likely that spending $2M a year on entrepreneurs will lead to 2 moderately successful companies that have 2-5 employees generating revenue (not profit) about equal to the $2M originally invested. This is barring any administration costs of distributing this money and monitoring costs to make sure your investments stay on track.

    So, while this plan may create jobs, I do not see it performing any better than some of the other economic stimulus plans.

    What do you think?

  19. That’s a brilliant idea! I strongly support it! A truely low spending and high payout! Can someone help to push it out to policy makers?

  20. Interesting, do you think we could get Markey or some Rep to support such legislation? Its one thing to talk about it, but another to perform. The SBA already does rather gracious loans and there are Grants out there already. Many are for minority and women in business and require a grant-writer to be hired to even consider it.

    BTW – Me Likey Viralology. &

    Please tweet/promote the HOME post on http://ctngreen/news… these guys are business i want to do and have $$ and genuine about thier Enviroconcerns, even if they dont really know how to go about it. The Youtube videos they have had up are getting measly hits vs the quality of this work.

    Thanks

    — jeff of CTN

    1. Hey Jeff,

      Thanks for commenting! I know the SBA gives nice loans. However, they take a really long time to give out bigger loans for innovation. I think having smaller chunks but diversified to more people would be better.

      CTN Green is a cool site. Hope they will become successful soon!

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    1. Haha, I’m sure I’m not going to be the one who signs people up.

      I just hope that this process won’t be slow, tedious and dysfunctional for startup growth like applying to any sort of program. Investment slowness + government execution could demand some patience.

  22. You got it – I really think the entrepreneurial spirit is an extremely cost effective driver for any economy. Not to mention – given the pressure on our educational system – small businesses provide a unique environment for skill development and training.

  23. That’s a brilliant idea! I strongly support it! A truely low spending and high payout! Can someone help to push it out to policy makers?

You must engage in the conversation!!