Wednesday, July 01, 2009
A professor at Case Western has data -- graphs with trend lines -- that purport to show that Americans are starting fewer businesses than they used to do. He attributes it to the greater efficiency and competitiveness of massive organizations such as Wal-Mart.
Maybe. Or perhaps Americans are starting fewer businesses because our local, state and federal governments, in a thousand little steps, have increased the risks and lowered the rewards. When (to pick one obvious example) you massively increase the financial and managerial cost of simply being a public company, you have effectively lowered the exit returns for start-up investors and therefore raised the hurdle necessary to attract the financing to found the business in the first place.
The only way we are going to turn the American economy around and pay off all this debt is to make it systematically easier to start and run businesses. There is no other option. Unfortunately, most American governments, including virtually all the larger ones, are doing precisely the opposite.
Just one example. The Uniform Building Code used to be one thick book. The current building code in California spans several volumes and would take weeks to read, and years to understand. The handicap curb ramps required by the old code are now being torn up so new improved ramps can be installed. It can be argued that most of the code improvements were necessary for health and safety reasons, but why can't the state understand that the money for this stuff doesn't grow on trees?
In the older parts of Orange County there are still hundreds of small business shells that were constructed by sole proprietors for their family business without government aid or tax incentives. If the liberals hate the "big box" stores so much you would think they would help us dismantle the miles of regulation that supports their success by driving out the smaller competitors.
You are quite right TH. The jungle of regulations is a frustrating disaster. Sometimes satisfying one regulatory agency runs you afoul of another. One time I was unaware that I was in violation of a regulation until a bureaucrat knocked on my door and told me so. Then there are the legions of inspectors that show up at your door to tell you how to run your business, there license and permit procedures and their accompanying costs/fees and finally all the government induced costs, in addition to wages that go with employees. The cumulative effect IS to discourage entrepeneurship. Who wants to fight all that?
I've been involved with small, start-up companies in America and Asia for much of my career, and still own a company I founded nearly twenty years ago. But the business environment has changed considerably over that time. I tell aspiring business owners today that, in my opinion, they should go elsewhere. Going to China, or in it's orbit, might be best of all. Much less government to contend with.
The tax and record keeping requirements are onerous for very small businesses. To the regulators, a small business is anything up to a several million annual gross. The requirements implicitly assume a business has accounting and legal departments.
I speak from personal experience and involvement in such an enterprise for the last dozen years or so.
The tort system helps as well to discourage new businesses. Not only does the new business have to worry about legal action against them, but every customer wants to be protected from fault (if you do not deal directly with the public). Insurance endorsements, waivers, bonds etc. are exploding as large firm legal departments seek to immunize themselves to the n'th degree.
Well said TH.
I am the owner of a business that employes over 50 people and I have about had it.
IRS, OSHA, DOT, EPA, on and on and on.
The small business person doesn't stand a chance.
Wal-Mart, Lowes, Et. Al. have legions of attorneys, accountants, lobbyists, etc. to fix or avoid problems. I can't afford to hire a specialist everytime one of these a** clowns shows up at my door.
Lets not talk about taxes either. The big stink about taxing health care - as a majority owner I am already taxed on my health care as salary. Nice huh - who worries about me. I'm supposedly rich.
What happens though when I, and the others like me, have had enough. What will happen to my employees and their families? You can bet the govt. will not treat them as well as I do. And, of course I will be the bad guy.
I really do feel like I am in Atlas Shrugged
The tort system does need to be overhauled. Here in Southern California we have a number of millionaire lawyers that have gotten that way by suing small businesses using the Americans with Disabilities Act as an excuse to redistribute the wealth. No warning is given and no actual damages need to be proven, just sue and collect an easy $5000.
There are, of course, many contributing factors, if one is honest (as academics should be).
But we hope (yes hope) that the leading factor is economies of scale in industries where there are true economies of scale.
Consider this little model of the world. You are a grist mill in New England, situated along a stream or river powerful enough to churn a water wheel. This powers your mill. You grind corn and the like. You hire a man to service and fix the mill, since his expert services are better than you trying to learn two things expertly - milling corn and fixing mills.
There are literally thousands of other 'entrepeneurs' like you spread throughout New England. Then, whoosh, bang, they build a damn on one of the streams or rivers and a hydroelectric plant. Now you find it cheaper to power the mill using electricity. The repairman, and 100s like him, are out of business.
Then one day someone figures out a way to build a very large mill where all the corn in your region can be ground. It is much cheaper on a per unit basis. and whoosh, bang, 1000s of mill owners are now out of business.
This, however, is progress as long as the end product is in essence more socially desirable (price, quantity and quality all considered). One would naturally expect increasing economies of scale in any economy where technological innovation (and productivity gains) are occurring. They are two sides of the same coin - not unrelated phenomena. Walmart may in fact provide certain services more cheaply and efficiently and not others. Their profits are a net social welfare gain (in the sense of economic welfare). And so this is a good thing.
Now what is often missed, and what we have not come to grips with well, is what this means for work in our society. John Maynard Keynes forecast 70 or so years ago that by 2030 we all would only need to work 3 hour days. Because of productivity gains. And yet we have the 'sense' that these productivity gains, which put people out of work - since there is less work to do, without considering exports - are in fact harmful to society. That is an interesting conundrum. But any more would be borrowing your blog; though I do think you might post this response below your own post. I think people need to think these issues through more, as do I, toward what is really going on, not what is superficially going on, in the sense that it makes for a cute little New York Times story.
Nobody argues that businesses get destroyed all the time because the market changes, and certainly large scale enterprises can clear the table and shut down a lot of businesses in a trice. The question is whether new businesses form rapidly to exploit opportunities created by the productivity gain in the consolidating industry. There are always new businesses starting somewhere. The question is, are we promoting policies that are discouraging businesses from starting here, as Europe has done since the 1960s. It seems we are, and that is a tragedy, because it is killing off our great national advantage.
The outrageous pay and benefits from working a government job surely can't help. It used to be that one took a pay cut to get the benefit of working for the government, but no more. Why take the risk of starting a business when you can do better for less work in government? Anybody else notice the spate of new books telling you how to get a government job?
I believe one reason fewer businesses are started is because people are simply less tolerant of risk. They've been told repeatedly that the American Dream won't happen for them by the media. They've been steered into waiting for others to take care of them, be it a corporation or the government.
A friend wrote a book, and she and I set up a small publishing business to sell it. Over ten years, we did something like $30k of sales.
After we ran out of the final printing, we closed. Doing the taxes was driving me mad; it just wasn't worth it for maybe $1k a year net divided among two people.
In the Middle Ages, all the presumptions of law were against the "masterless man", the fella who didn't have a feudal overlord in charge of him. We're re-creating that today. Governments want wage droids with full withholding. It makes their lives easier.
Good lord yes, regulations can kill small businesses from ever even starting.
My wife is trying to open a cake bakery that probably won't employ more than 10 people if things work out well and the number of hoops and hurdles, fees and documents we are having to go through is ridiculous.
One of the problems with economy-of-scale businesses like Wal-Mart is due to what gives them their success, and that is reduction of variety. Big-box stores can sell a lot of things inexpensively, but only if they can sell LOTS of each item. If their business model dictates that they will not buy less than, say, 100,000 copies of an item, then they simply do not order it if they estimate that they can sell only 90,000, and it will not be available at their stores. Smaller companies, such as mail-order and InterNet stores, can make specialty items available to everybody, but only so long as they can make a profit at it...
I have a small business of 30 employees. Latest thing, business census, spent 6.7 hour filling out a form with confidential business information or face a $500.00 fine.
I'll take the fine.
Or now medicare can go after you if they by mistake pay a bill of a employee who works for you and is covered by your health insurance.
Is there not some way of using legal Ju Jitsu to stop this? By this I mean using their own laws against them.
For example, surely there is a disparate impact to all these regulations on the rates of minority business start ups, or handicapped.
It would demonstrably take a genius supermind to keep in mind all of the necessary regulations for even a small business, which by definition cannot afford the legal specialists necessary to interpret it all.
It's a feature, not a bug!
I'm surprised that no one has identified in the comments (or in the post itself) the real reason regulation is killing entrepreneurship: That's what it is intended to do.
Regardless of party, the burning desire of the Congress and the Executive is to concentrate power in federal hands. The Dems are just doing it more nakedly and aggressively than the Reps.
Since the number-one function of government today is to use the federal largesse to reward friends (voting blocs) and punish enemies (opponents' voting blocs), both parties write laws with tax breaks or grants to favored constituencies, or tax penalties to unfavored ones.
To make that work, you can't have ordinary folks out there doing freelance business. Entrepreneurship undercuts Congress' control.
This, coupled with the simultaneous rise of the welfare state (well advanced now into cradle-to-grave socialism), was foreseen by de Tocqueville, who wrote that Americans would lose our freedom by benevolent authoritarianism that seeks to keep the people "in perpetual childhood" and dependency on the government.
Please see my essay, "How Democracies Perish," and ours is nearly gasping its last.
We closed one of our small business investments last year. Employed 18 people, granted, only $8 an hour, but after increases in costs, especially utilities; taxes, especially unemployment insurance fund; government fees (business license, annual corporate report); liability and worker's comp insurance rate increases; expected rise on our income tax rates; an OSHA inspection (we can't use existing face masks without sending everyone to a training course on how to use them; or we could buy new respirators at hundreds a pop); and a building inspector who thought that we needed to move 15 pieces of heavy equipment around to create an additional 2" of space separation (current spacing: 4'; downtime involved: at least a week b/c of the need to re-hard wire), etc. etc., "screw it" was the most economically rational option for us. We were only netting around 10-20k a year to begin with after taxes (over 40%fed/state tax rate); given the known cost increases, potential downside risks, and free time loosened up, we're better off. Not so the employees. FWIW, we offered to lease the equipment back to the employees if they wanted to try and make a go of it themselves; none took us up on our offer.
Oh Yes - yes
I have a small business idea - I have potential customers - I have all the tools, The web page is there - heck, I have orders, but I have not pulled the trigger.
Paperwork. This will NEVER be a full time business. If sales from this business makes it to 4 digits annual sales, it'll be more successful than my dreams. The whole goal is to get some money for my hobbies.
Guess what - between quarterly tax filings, other paperwork, and the like, even if I do them myself, the cost is more than the business is worth in my time.
Yet, it's something a nice consistant 2-3 people per month are willing to pay me in my spare time to do. Just enough to take my wife out to dinner once a month
I use to have a small business doing Information systems consulting. I learned that the IRS basically does not want independents or small businesses because it is more work collecting taxes from them. A big place like Walmart sends them a tape (or an electronic file) that automatically updates all their data. The IRS relies on Walmart to collect the taxes and forward it to them. With a small business you do all that but you do more of it in a manual manor. Also the IRS is sure you are cheating them and with a big company they are positive (or mostly) that you do not have the opportunity to do that.
The effect of high taxes on the creation of new businesses is a lot like lousy payouts at a casino. For example, in roulette, it's pretty much irrelevant what the odds are that the little black ball is going hit your number or color -- so long as you are getting the right odds on the payout. The problem at a casino is that when you do get lucky, the house doesn't pay you enough when you do win. If you're odds of the ball hitting your number are 1:33, but your only getting paid 30:1, when you do win, you will not make enough to justify the bet. In essence, gambling at a casino is a bad bet because you lose when you win (by not being adequately compensated for the risk). High taxes work the same way on new businesses; when you finally do create a business that is profitable, you can't keep enough of it to justify the risk.
Oh, PS: In San Francisco, there are some situations where the building is so close to the street that an ADA-compliant ramp cannot be built without extending into the city-mandated easement. It's a literal Catch-22; to comply with one set of laws, you have to break another set!
1. Proposed changes to the USPTO that would move the U.S. to a first-to-file process is very bad for early-stage businesses. They can never afford to compete in the patent arena with larger, well-funded companies. Questions regarding the harmonization of enforcement is another related problem that is never discussed.
2. Changes to the Small Business Innovation Research grant program(s) will also hurt emerging technologies. Why take money from small businesses and provide it to companies that have already received several million in Venture Capital? This is a zero sum game and the loser will always be the start-up. SBIR funds should not be used as bridge financing and that is essentially what these changes will enable.
3. Sarbanes-Oxley helped kill the ability for investors to be taken out of early-stage investment. Once the IPO market was killed then M&A was the only exit. The acquiring companies know there is a lack of alternative exits so the supply/demand model changed, valuations dropped, and time-to-exit was extended. This preceded the economic crash. If I get 20x on my EBITDA and it cost $500,000 to comply then my value gets whacked.
Beside SOX doesn't prevent cheaters from cheating. What happened to the leadership at FNMA who were cooking the books? Nothing. They have some authorship in the greatest financial collapse ever, fraudulently cooked the books, and SOX had zero impact. SOX is punitive to honest people and needs to be reformed or eliminated.
So yes regulation kills emerging technologies and innovation.
Thanks for asking...
Not only is all the government meddling hindering new business start-ups, it's also slowing the growth of existing small businesses. My wife and I have owned a consulting business and been its sole employees (most of that time) for 16 years now. We could hire more people and expand, but by keeping it just the two of us, working less and enjoying life more, we skate in under the alternative minimum tax. We don't have to deal with employees and all the withholding, hiring laws, added liability insurance, office rent, vehicle costs, and on and on, nor the law of averages that says if you hire four people one will work his tail off, one will be a prima donna, one will be a slacker, and the fourth will try to steal you blind. (At one point we had 45 people working and we took home less than we do now!)
And now Obama promises to soak the rich to pay for all his programs, which means we'll be going just a little more Galt. That's okay, we live quite well and take long vacations. We'll just vacation a bit more in the future.
I can't believe we're the only ones who've looked at the workload, the tax load, and the bottom line and come to the same conclusion. I also can't believe that discouraging people from working to their full capacity is doing anything good for the economy.
The worse the regulations get, the more we'll see of gray market or black market businesses.
We are seeing a lot of that now. How many of the people selling stuff at craft boutiques or swap meets have an accountant or even keep records of their sales? How many are complying with the new CPSIA regulations? How many of them even KNOW about CPSIA? (if you don't, go to http://www.whatisthecpsia.com for more info)
Making the law too complicated for a layman to comply with just breeds disrespect for the law. This is not a good thing in a country ruled by a Constitution, for what is the Constitution but a law? If no one respects the law, why bother having one?
I run a software development company and have been successful for 15 years. Thankfully I started it when I was young and dumb(er) and without the knowledge of government induced headaches... I'd have never started a business at this age.
Because I only sell "services" I don't have to deal with sales tax. But I'd love to sell a few physical products to my customer base. Unfortunately California makes things so darn difficult and if you get something wrong the penalties are ridiculous. So I've decided not to sell the physical products. One of the products doesn't even exist right now so it's not like my customers will be getting them elsewhere... the product simply won't be manufactured and sold.
It's a real shame and I kinda feel like I have a responsibility to bite the bullet and get things done. But I spend enough time away from my family doing my actual work and then burning hours with government-imposed paperwork as it is. Stealing more time away from my family to be frustrated by yet another set of government entities makes it just distasteful enough for me to opt out. :(
Undoubtedly making it easier to finance small business will always be 1 way to improve the economy. At the least it would help grease the system. But this is not a cure-all. Small businesses have a very high failure rate, and probably for a good reason. It's also easy to imagine a scenario which unfairly favors small business, & this can have just as bad an effect as unfairly favoring large business. Unnecessary costs & fees, for instance, take a larger bite out of businesses that have less capital, which are likely to be the small ones; but so do everyday operating costs.
Liability decreases the size of a business, immunity increases it.
Here are historical examples, including some on-off-on-off (the KKK).
I propose to increase governmental liability, and it will shrink, leaving productive people alone.
1) All regulation and law are human experimentation. Before any may be enacted, prove their safety and efficacy in small jurisdictions.
2) End all governmental immunities. Reverse the Hans v Louisiana decision granting states immunity from lawsuits by their own citizens. The Eleventh Amendment only covered immunity from lawsuits by citizens from outside the state.
3) Allow lawsuits against any government passing an unfunded mandate. If a ramp is forced upon a business, then send the bill to the federal government. If a defective child must be educated, according to a new rule, send the bill to the federal government, or allow the disobedience of the rule, as with any other deadbeat, suspend service.
1. It's not possible to obey the government, because the government is too vast, dozens of agencies to deal with plus tens of thousands of pages of codes regulations statutes policies precedents programs publications forms etc which are always changing.
2. It's not possible to obey the government, because it contradicts itself and fails to establish it's case. i.e. the Internal Revenue Code which doesn't define income (although it appears to do so if one doesn't understand the legal requirements for a legal definition) and is often too vague or poorly constructed to be understood.
3. Taxes take away 25-33% or more of people's revenue - that amount not only impoverishes their personal lives but it prevents the accumulation of savings and it's investment into capital. Capitalism died with the implementation of the income tax. I work at a coffeeshop in Silicon Valley. I don't earn that much - but I'd have saved up to 2000 dollars per year or more over the last four years if it wasn't for the federal income tax. Over 4 years that would now be 8 grand - not counting the thousands more I'd have made from investing it.
4. To start a business there are countless forms, permits, insurances, codes, licenses, regulations and regulatory agencies to deal with. Dealing with all of this costs dozens or hundreds of hours. Merely studying the law to ensure full compliance and the most efficient and cost effective means of doing so is enough to make it not worth it.
5. Taxes are about to rise dramatically - particularly for those who do as well as I'd like to.
I've got not less than 8 different small businesses I'd like to start. I've been working on business plans and product development and networking and sourcing supplies and employees and customers etc. I haven't had any problem thinking of ways to make money - but deciding which business will allow me to make the most money while paying the least in taxes and time to the government is a perplexing and impossible conundrum.
I wouldn't mind working say 80-100 hours a week for three to five years to become a multi-millionaire. If I have to work an extra 30-50 for taxes and another 10-30 for compliance then it's just not possible. I must either work much harder to get the same amount I want or I must work just as hard to get much less than I want.