Government regulation adversely affects small business.
While the finding may be intuitively obvious (to those not in government), World Bank economists recently showed that entrepreneurs create fewer new businesses in countries with regulations that make starting companies more difficult.
Reducing regulation also enhances the performance of small companies. For instance, researchers found that efforts to simplify the new business formation process in Mexico boosted small business employment by nearly 3 percent.
Why Regulation is a Problem
Economists believe that regulation hurts small business in four ways. First, as Nicole and Mark Crain of Lafayette University explain, regulatory compliance exerts a disproportionately large burden on small companies because the fixed costs of adhering to rules can be spread out over more revenue in large firms than in small ones. Crain and Crain estimated the per employee cost of complying with Federal regulations at $10,585 for businesses with fewer than 20 employees but only $7,755 for businesses with more than 499 workers.
Second, government regulations make small businesses less competitive against foreign competition. As Crain and Crain explain, government regulations create “inefficiencies in the structure of American enterprises;” adversely affecting “the international competitiveness of domestically produced American products and services;” and leading to “the relocation of production facilities to less regulated countries.”
Third, adding regulations creates uncertainty, which keeps small business owners from investing and hiring. Because few business owners can predict the scope or impact of new regulations, they often delay buying capital equipment or adding workers as they wait to see the impact of new regulation.
Fourth, new regulations often have unintended consequences. Consider the new health care law, which requires businesses to file 1099 forms for all payments to a single payee exceeding $600 per year beginning in 2012. The effort to increase health insurance coverage has resulted in an unrelated tax filing that imposes heavy compliance costs on small business owners, an outcome that even surprised many in Congress who voted to pass the law.
Our Poor Showing is Getting Worse
The United States does not compare well with many industrialized nations on the dimension of small business regulation. The Organization for Economic Cooperation and Development (OECD) found that the U.S. had higher regulatory barriers to entrepreneurship, greater administrative burdens on small business owners, and higher barriers to competition than a number of other industrialized countries.
The regulatory burdens on U.S. small business are getting worse. Both the World Bank and the Global Entrepreneurship Monitor report that U.S. entrepreneurs faced more start up red tape in 2007 than in 2003.
American small businesses are now being adversely affected by two massive new laws: the Patient Protection and Affordable Care Act and Dodd-Frank Wall Street Reform and Consumer Protection Act. A recent Discover Card survey of small business owners indicates almost half of small business owners believe that new health care law is harmful to their businesses and only a little more than one quarter see it as beneficial. Respondents to a 2010 Discover Card survey showed that 55 percent of small business owners believe that the financial reform bill will make small business finance more difficult, while only 9 percent think the new law will make it easier.
We Need More Action
Our leaders talk of reducing the regulatory burden on small businesses. In a recent Wall Street Journal article, President Obama wrote, “Sometimes, those rules have gotten out of balance, placing unreasonable burdens on business—burdens that have stifled innovation and have had a chilling effect on growth and jobs….Today I am directing federal agencies to do more to account for—and reduce—the burdens regulations may place on small businesses.”
Of course, some of us remember when former President Bush said in his 2004 State of the Union speech, “Our agenda for jobs and growth must help small business owners and employees with relief from needless federal regulation…”
Perhaps I should stop quoting Presidents and start quoting country singers. As Toby Keith said what we need is “a little less talk and a lot more action.”