Regulatory Burden Threatens California’s Entrepreneurial Roots

Regulatory Burden Threatens California’s Entrepreneurial Roots

California has been a red-hot destination, and comfortable home, for entrepreneurs at least as far back as the mid-19th Century, when 300,000 fortune hunters swarmed West during the Gold Rush.

In 2019, it is still attracting business pioneers. But at the same time, Sacramento operates one of the most obstructionist regulatory environments in the nation. Imagine the entrepreneurial surge that would result if that barrier were lifted.

A willingness by industrious merchants, resourceful innovators, and motivated upstarts to take risks “sank roots very early in the California consciousness,” says University of Texas historian H.W. Brands.

“I think that attitude toward risk is probably more distinctive in California than just about anywhere else in the United States,” Brands said last year.

California entrepreneurs created premier companies such as Apple, Uber, Disney, Google, SpaceX and Oracle, to name a few. These and many others have succeeded despite the state’s hostility toward business, which is underscored by its next-to-last ranking in state regulatory environments in a just-published Pacific Research Institute study. This brings up two questions:

One, wouldn’t these companies have achieved even more than they have had they not been forced to overcome California’s burdensome regulatory framework?

Two, will the state’s swelling regulatory framework quench the next generation of entrepreneurs’ fire — will they be so handicapped that they have no chance of repeating the others’ towering successes?

California is a state of contrasts, says Wayne Winegarden, author of the PRI series Breaking Down Barriers to Opportunity. Despite the regulatory barriers, there’s a robust entrepreneurial culture, “and due to its vibrant economic history,” California has developed an infrastructure to support business ventures that’s “second to none.” The universities keep turning out enterprising graduates, while Silicon Valley has nurtured a thriving life sciences sector.

“These historical advantages help entrepreneurs in these sectors succeed, even in the face of the strong policy headwinds,” says Winegarden, a PRI senior fellow.

Yet, Winegarden continues, disturbing signs are present.

“Successful life sciences and technology companies are moving to greener pastures with fewer regulatory and tax burdens,” he said.

While a procession of tech IPOs in 2019 is expected to lift the state’s economy, creating as many as 5,000 new Bay Area millionaires, California is made up of more than life sciences and technology companies. The state is filled with entrepreneurs from many other sectors who don’t directly benefit from the advantages Silicon Valley companies enjoy.

“For these sectors,” Winegarden says, “the anti-entrepreneurial policies are particularly damaging.”

A 2011 U.S. Chamber of Commerce study determined that California’s employment regulation alone sacrificed “more than 130,000 new jobs” and slowed “new business formation by more than 10,000 businesses a year.” Five years later, another chamber study found excessive regulation “adversely affects” California’s economic performance, and warned “the state is relinquishing its lead on measures where it has traditionally had an advantage, such as business dynamism.” The more-recent study also tells us the state’s minimum-wage hike, enacted in 2016 and rising to $15 an hour in 2022, will eventually mean 373,000 fewer jobs and prevent the formation of 19,000 new businesses.

“California’s traditional advantage in the rate of new business formation and the proportion of jobs created by startup companies has declined significantly over the past two decades,” said Jeffrey A. Eisenach, the economist who wrote the chamber’s study.

He also noted California’s edge over the rest of the country in the employment rate and in the rate of growth of real output has “steadily declined.”

There is substantial evidence, says Eisenach, that a strong connection between the state’s labor market regulation and economic performance exists. The “increasing thicket of labor and employment mandates is jeopardizing” California’s economic future.

Without reforms to the regulatory structure, says Winegarden, tomorrow’s companies are less likely to achieve what their predecessors have.

“The innate advantages of San Francisco, Silicon Valley, and San Diego will begin to fade as places like Austin and Raleigh-Durham continue to thrive,” he says. “Should this last strong incentive to start an entrepreneurial venture in California fade, the consequences from the anti-growth policies will be felt more acutely.”

Tech will continue to enrich the wealthy enclaves of California for the foreseeable future. The rest of the state, however, will suffer diminishing economic prospects if lawmakers don’t lift the crushing regulatory weight.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.