Want to Help the Working Class? Right-size the Regulatory State

Government regulations are not a sexy topic. They’re a nearly impenetrable bunch of bureaucrat-driven rules, written in language that makes James Joyce seem readable, and constantly updated and amended so you’re always out of date. And yet, regulations are probably are closest interaction we get with the government on daily basis.

The issue becomes even more important if you are a small business owner, or hope to one day be one. Although candidates for office often spend a lot of time talking about taxes, polls of small businesses owners and entrepreneurs almost always suggest that the regulatory environment is a much larger concern than taxes (or anything else).

Take the results of the latest Thumbtack poll on states’ and cities’ friendliness towards small business.

“When evaluating their cities, small businesses said the ease of compliance with licensing rules mattered far more than tax rates, and that taxes mattered far less than any measure of regulatory compliance,” writes Thumbtack’s John Lieber. “For example, labor rules were 88 percent more important in driving states friendliness scores when compared to tax rates.”

Regulations are more than just thorns in the side to existing small businesses, they actively reduce business formation, thereby reducing job creation, dampening economic growth, and chilling innovation. It’s no coincidence that the number and complexity of regulations has been rising at the same time that new business creation has been falling. After all, they increase the complexity of running a business, thereby taking time and resources away from creating a useful good or service. And they increase the cost of running a business in both direct (e.g. licensing fees) and indirect (e.g. hiring attorneys to comply with paperwork burdens) ways, which puts startups at a distinct disadvantage to established players

This problem is especially acute for young adults. As small business expert Jonathan Ortmans testified before the U.S. House Committee on Small Business:

While more Americans will be entering the peak age for entrepreneurship, this same age group is also increasingly burdened by student loan debt, which may discourage potential entrepreneurs from starting a business.9 Moreover, it has been well documented that college graduates who entwwsered the workforce during and in the wake of the Great Recession faced bleak employment opportunities. Even now, the unemployment rate for college graduates age 21 to 24 is 8.5 percent.10

Tackling debt and delayed employment issues would boost entrepreneurship by reducing the financial constraints on younger entrepreneurs. Since young firms disproportionately employ young workers and also pay a premium to young employees relative to older firms,11 the additional new and young businesses would also provide more plentiful and more lucrative job opportunities for younger workers, further deepening the pool of potential entrepreneurs. This potential multiplicative effect provides an especially strong motivation to address student debt and delayed work opportunities for younger Americans.

One of the most pernicious, but prevalent forms of regulation is occupational licensing, which is often nonsensical and almost always disruptive to upward mobility. Take a look at this excerpt from a recent column by Debra Nutall, who pulled herself off the welfare rolls by starting a hair care salon.

Unfortunately, the state Board of Cosmetology ended all of this in 1998. It claimed my business was in violation of state law because I did not have a cosmetology license. We were simply braiding hair in my salon, a practice that is entrenched in the African-American community and a distinct part of our heritage and culture. But nevertheless, the government was determined to make me get a license just to work.

A cosmetology license can cost from $15,000 up to $32,000, and requires 1,500 hours of training. Furthermore, the license has practically nothing to do with hair braiding (or shampooing, for that matter). I had invested all my savings in my business; if the state closed my business, I would have had to go back on welfare.

Sadly, shampooing and hair braiding are just a small sliver of the occupations that often require expensive licenses. For instance, it takes a license to pump gas in New Jersey, a license and fee is required to be an upholsterer in seven states, a packager in another seven, a travel agent in eight, and an interior designer in four. Although its absolutely silly to think that someone would need to go to school, pass a test, pay a fee, or even demonstrate skills to others in the profession (as was the case with florists in Louisiana), to many who are just trying to make a living it can be a serious burden.

If candidates really want to discuss ways to make life easier for the working- and middle-class Americans, especially those who hope to achieve their own slice of the American Dream by starting a business, the conversation needs to start with ways to cut down on unnecessary regulations. That would be true populism.