PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

No Way to Celebrate Small Business Week: The Regulatory Overload Targeting Small Businesses

By at 27 April, 2024, 9:27 am

 

by Raymond J. Keating & Karen Kerrigan –

Political rhetoric about how much elected officials say they love small businesses is completely meaningless if reality makes clear that those same elected officials consistently push and impose policies that increase burdens and costs onto small businesses. That’s the glaring, unfortunate reality this National Small Business Week (April 28-May 4).

From the Biden White House to many striding the halls of Congress, increased regulations top the policy agenda, and that’s grim news for entrepreneurs and their small businesses, and in turn for the overall economy. These same politicians refuse to admit the economic reality and harm imposed by new regulations. Consider that in one week alone in April 2024, the Biden Administration advanced new regulations totaling $875 billion. As noted by House Small Business Committee Chairman Roger Williams (R-TX), “In 2024 alone, the total cost of final rules sits at $926.3 billion, with another $34.4 billion in proposed costs.”

The regulatory burdens on small businesses already are enormous.

As SBE Council recently reported, the National Association of Manufacturers’ updated study by economists Nicole V. Crain and W. Mark Crain titled “The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business,” found that the total cost of federal regulations in 2022 registered an estimated $3.079 trillion (in 2023 dollars), “an amount equal to 12% of U.S. GDP and larger than the manufacturing sector’s entire economic output.” The costs of regulations fall most heavily on small businesses.

While the annual federal regulatory cost per employee for all U.S. firms is $12,800 (in 2023 dollars), these per employee regulatory costs registered $14,700 for small businesses with fewer than 50 employees, $13,800 for firms with 50-99 workers, and $12,200 for firms with 100 or more employees.

That means that the per employee costs of federal regulations are 20.5 percent higher for small businesses (fewer than 50 employees) versus larger businesses (100 or more employees). Matters get worse when looking at the manufacturing sector, where most firms are smaller businesses (e.g., 75.2 percent of manufacturing employer firms have fewer than 20 employees, and 93.4 percent fewer than 100 workers (2021 latest Census Bureau data)), with per employee costs of federal regulations more than double for small manufacturers (fewer than 50 employees) versus larger manufacturers (100 or more employees).

Consider another study that found that regulations diminish innovation and economic growth.

A study from the Mercatus Center at George Mason University (“The Cumulative Cost of Regulation,” April 2016, authored by Bentley Coffey, Patrick McLaughlin, and Pietro Peretto) focused on the effect that regulations have on investment choices, and in turn, on innovation and economic growth. It was reported that since 1980, the cumulative effects of regulation slowed the real economic growth rate in the U.S. by 0.8 percentage points per year. If regulation had been held at 1980s levels, the U.S. economy would have been $4 trillion, or 25 percent larger, than it was in 2012.

Unfortunately, the regulatory burdens continue to grow. For example:

● The U.S. Department of Labor has imposed a burdensome Overtime Rule.

As SBE Council President and CEO Karen Kerrigan explained: “DOL’s final overtime rule is not a welcome development for American small businesses. The outcome will not be favorable for their workers. The intrusive rule will increase the minimum salary threshold in two stages ultimately boosting it to $58,656 on January 1, 2025. That is more than a 60% hike over the current threshold of $35,568. The first increase to $43,888 is scheduled for July 1, 2024. In addition, the rule implements automatic updates to both the minimum salary and highly compensated employee thresholds every 3 years. The rule significantly raises costs for small businesses, disrupts the effective compensation and incentive models they use, and pushes more employees into hourly non-exempt jobs, which means less flexibility, and fewer benefits and career growth opportunities. Combined, the effects of the rule will make small businesses less competitive and less able to withstand ongoing challenges.  Complying with the new rule will be a complex headache for small businesses.”

The DOL has also released a new “walkaround rule” and the new independent contractor rule, intrusive measures that not only impact costs and liability but the viability of entrepreneurship in America. In addition, the National Labor Relations Board’s new joint employer standard takes aim at the successful franchise model in the United States. Congress nullified this overreach, but President Biden will likely veto that action.  There’s hope that the various legal challenges to these rules will be successful in tossing out or vacating these rulemakings.

● The Federal Trade Commission (FTC) just banned the use of employer non-compete agreements.

On this FTC move, Kerrigan noted: “Today’s action banning the use of non-compete agreements is not only uninformed and economically damaging, it’s illegal. The FTC lacks the constitutional and statutory authority to take such action. Even so, and after hearing from the small business community about the damaging effects of a total ban, the FTC pushed forward. Make no mistake, a ban will hit startups and small businesses hard. Small firms use non-competes for a range of appropriate businesses purposes, such as to protect their intellectual property and guard sensitive company information.”

Not considering (or ignoring) the small business impact of regulatory proposals has become standard operating procedure at the FTC, as SBE Council and others have noted in the agency’s rulemakings on merger guidelines, M&A filings and more.

● Indeed, the FTC has become a hornet’s nest of hyper-activism regarding antitrust regulation that will cost the U.S. economy, including small businesses, dearly. For example, SBE Council’s recent piece titled “5 Major Woes for Small Businesses Due to Antitrust Activism,” explained the various ways in which antitrust activism damages small business. Noted in those key points were:

1) “When antitrust regulators take action against large tech firms, like Amazon, Meta, or Alphabet (Google), the consequences, including higher costs and reduced choices, certainly fall hard on the small businesses that partner with these large firms in all kinds of ways, from being suppliers to these large companies and their employees, to partnering with them in myriad ways.”

2) “Indeed, a key problem with antitrust interference in the economy in the hands of hyper-active regulators, … such as the FTC’s Lina Khan, is that their very activism creates uncertainty in the market; eliminates or discourages mergers that could benefit consumers and the economy; and hurts entrepreneurial firms as investment is disincentivized due to very real concerns about mergers and acquisitions being disallowed due to the political assumptions of regulators.”

3) “Among the over-arching effects of this antitrust hyper-activism is an actual reduction in competitive activity. Make no mistake, while increased regulation raises costs for all businesses, the straightforward fact is that large existing firms are better able to deal with such costs compared to startup entrepreneurs and smaller enterprises. So, since small businesses in the technology arena, for example, cannot handle high regulatory costs, entrepreneurship and competition – current and future – are reduced, with resources channeled elsewhere.”

4) “Dampening entrepreneurial activity, of course, means dampening innovation and growth.”

5) “When government undermines large firms that have gained market share by serving customers – including small businesses – … small business customers suffer from the resulting increased costs and/or reduced choices.”

The list of regulatory burdens continues to lengthen, again, with entrepreneurship, small businesses and their employees, investment and innovation suffering. A range of seismic rulemakings have moved forward at the Federal Reserve, Securities and Exchange Commission, and Consumer Financial Protection Bureau (regarding so-called “junk fees” and small business lending) that will all serve to negatively impact the availability and cost of capital.

Moreover, the Federal Communications Commission (FCC) on April 24 advanced an unneeded and harmful “net neutrality” rule, which will have a chilling effect on investment and undermine innovation and (ironically) access to quality broadband for consumers. New “digital discrimination” rules and price control efforts will do the same.

If our elected officials were serious about celebrating Small Business Week, then they would announce the launching of a regulatory reform effort to rein in excessive and unnecessary costs. Sadly, the regulatory actions highlighted in this post are only the tip of the iceberg when it comes to Biden Administration regulatory activity.

A regulatory reform effort would need to feature, for example, establishing independent congressional regulatory means to analyze new and existing rules and regulations, such as subjecting them to rigorous cost-benefit analysis (see SBE Council’s support for “The Prove It Act”); passing legislation requiring that Congress must approve all major rules and regulations generated by federal agencies before such measures take effect; requiring that all rules and regulations must be sunset, with Congress again mandated to re-evaluate regulations after a certain period of time to see if they still make sense; and moving to require supermajority votes by Congress regarding bills that impose major regulations on businesses, entrepreneurs and investors.

Again, this crusade inflicting enormous regulatory costs on American businesses and entrepreneurs is no way to celebrate a week dedicated to acknowledging “the critical contributions of America’s entrepreneurs and small business owners.”

Indeed, appreciating the role of small businesses in our economy means not hoisting massive regulatory burdens onto the backs of those small businesses. Shouldn’t we understand and emphasize this during National Small Business Week? And not only through words, but action.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist, The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.

 

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