A Small Business Boost from ... Regulations?

Do regulations really hurt small businesses? Or do businesses thrive when local residents can afford their services, and a good quality of life attracts skilled workers?
Cash Register photo by Paresh Gajria

Photo by Paresh Gajria.

If last week's Republican National Convention had a mythic protagonist (other than Mitt Romney, that is), it was the struggling small business owner. In speech after speech, we heard about the same basic person in the same basic dilemma: a small-business owner overcome by the burden of government regulations.

This isn’t exactly a surprise; lashing out at regulations has become daily bread for the GOP lately, and the narrative has been eagerly parroted by the media (an April analysis by the Institute for Policy Integrity found that use of the phrase “job-killing regulations” by U.S. newspapers has increased by more than 17,000 percent since 2007).

Indeed, many small-business owners report that regulations are their biggest obstacle to success. But are they really?

Small businesses thrive in places where local residents can afford their services and where good quality of life attracts skilled workers.

This spring, the service directory Thumbtack.com and the Ewing Marion Kauffman Foundation asked small-business owners across the nation to rate how friendly their states—and particularly their states’ regulations—were to small businesses. Their answers generally matched conventional analysis: Utah and Texas, with fewer and looser regulations, scored well, while states with more aggressive environmental and labor standards, such as Vermont, California, and New York, scored worst.

But researcher Stacy Mitchell of the Institute for Local Self-Reliance noticed something odd: Comparatively speaking, many of the states with the best scores, and the loosest regulations, weren’t actually home to very many small businesses:

Vermont, for example, which earned an “F” in the ranking, in part because of its cumbersome environmental and zoning regulations, has nearly twice as many small businesses per capita as laissez-faire Texas, which scored an “A+.” Low-ranking New York and Rhode Island likewise have more small businesses than most states.

Of the five most “friendly” states, only one, Idaho, outperforms the national average on numbers of small businesses. The other four lag behind, with Louisiana ranking 36th and Texas 47th in the nation.

In other words, the GOP's talking points about the impact of regulations don’t necessarily line up with reality. One reason is that politicians and pundits are too quick to make assumptions about the impact of regulations. The Institute for Policy Integrity, in the same report that noted the massive increase in discussion of the term “job-killing regulations,” discussed the problem with overly simplistic analysis:

If we want to create places where small businesses can truly thrive, we have to start thinking more carefully about what that phrase [“business-friendly environment”] really says.

“Even the most sophisticated job impact analyses have only limited predictive power in our complex and dynamic economy,” the authors note—and sophistication isn’t a notable feature of recent job analyses generated to make political points. They conclude that too many of our analyses of whether better regulations will cost jobs are too narrow or too short-term. “If analysts and advocates cannot reverse course, then the use of job impact analyses will remain a misleading distraction—nothing more than a red herring.”

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It’s not easy to isolate the factors that make an economy healthy, but many of the things that regulations are meant to promote (healthy workers and environments; protections against exploitation and monopolistic business practices) are certainly part of it. Small businesses thrive in places where local residents can afford their services and where a good quality of life attracts skilled workers.

They also do best when they’re not shaded out by national chains, another potential boon of strong regulations. “It may also be that these rules have a more limiting effect on their big competitors,” notes Mitchell. “Vermont’s land use policies, for example, have done much to preserve the vitality of the state’s downtowns and protect its farmland from sprawl, which has been a boon to local businesses and food producers, while also inhibiting the spread of Walmart and other big-box retailers.”

Along with “job-killing regulations,” another phrase repeated over and over at the convention was “business-friendly environment”—too often defined as an unregulated free-for-all. But if we want to create places where small businesses can truly thrive, we have to start thinking more carefully about what that phrase really means. Business-friendliness doesn’t necessarily depend on how many regulations there are. It depends on the environment: on creating healthy, vibrant communities in which small businesses can grow.


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