Reinvigorating Entrepreneurship Is Key to America’s Economic Future

Even during times of strong job and economic growth, as we’re experiencing today, economists are looking for warning signs about future economic distress – after all, it is called the “dismal science”. The fact that entrepreneurship is declining in the United States, and has been for some time, is one disconcerting trend that, if not reversed, will lead to a less prosperous future.

A 2012 Small Business Administration study, the latest SBA data available, illustrates this trend. The study documents that small businesses’ share of key industries has been declining over time.  Small businesses’ share of the trade sector declined from over 50 percent in 1998 to roughly 44 percent in 2008.  Its share of the professional and technical services sectors dropped from about 70 percent in 1998 to roughly 60 percent in 2008. Overall, small businesses’ share of total economic output declined from 48 percent in 2002 to under 45 percent in 2010.

Worse, the number of new startups has been falling for decades.  According to a Kauffman Foundation report, the number of companies less than a year old declined as a share of all businesses by 44 percent between 1978 and 2012.

Unfortunately, policy mistakes at the federal and state levels make it very difficult, and very expensive, for individuals to become entrepreneurs.  Consider that, according to one estimate by Crain and Crain, America’s regulatory environment imposes nearly $2 trillion in costs on the economy – these costs impose a significantly higher burden on entrepreneurs and small businesses than larger businesses because larger businesses have the scale to more effectively navigate the regulatory state.

The new Pacific Research Institute (PRI) series “Breaking Down Barriers to Opportunity” documents that these government-created roadblocks are indeed thwarting a more robust entrepreneurial sector.

So, just how bad is the problem?  The PRI study reviewed 3 measures of the regulatory state – the total pages in the Federal Register of federal government regulations, the share of employment in regulatory-compliance jobs, and how states rank relative to the labor regulatory burdens they impose on businesses.  It used this information to determine whether increased regulations are associated with a worse climate for small businesses as measured by small business creation and job growth.  Based on every measure, the study concludes that regulations are making it harder for small businesses to grow and expand.

What are some of these burdens?  They range from excessive permits and government-mandated reporting requirements to broken state workers’ compensation systems and other expensive labor regulations.  Collectively, these burdens increase costs and require entrepreneurs to spend more money and manpower on regulatory compliance.

Ironically, many regulations like a $15 minimum wage are proposed in the name of protecting workers.  In practice, these collective burdens result in lower wages, reduced hours, and fewer jobs for those looking to move up the economic ladder.  Getting a handle on the ever-expanding regulatory state is key to reinvigorating new small business growth, which could be particularly valuable for communities where there is currently a lack of economic opportunity.

To continue promoting America as a land of innovation, policymakers must act to lift these self-inflicted hurdles standing in the way of new innovation, such as high taxes and fees, and expensive workers’ compensation costs brought about by overly-intrusive regulatory systems.  They should also look to reform occupational licensing laws that deny job opportunities for many and impose expensive fees and exorbitant training requirements on people who are just looking to get a well-paying job.

Encouraging entrepreneurship and small business creation and growth is especially important as we chart our economic future.  It’s even more critical amid the great debate about technology and the future of work.  After all, the tech giants of today like Google, Facebook, Apple, and Microsoft began as small businesses as their innovative founders decided to take a chance on their ideas.  The next Googles and Apples will be started as small businesses, too.  It would be a shame if they never got off the ground due to government-created barriers to opportunity.

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.

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