To Help Small Business, Cut Regulation

The regulatory burden on small businesses is now higher than it was when President Obama took office. Circumstances must change.

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By Scott Shane

Opinions expressed by Entrepreneur contributors are their own.

One of the best ways for Congress to help small businesses would be to reduce their regulatory burden, which is heavier now than when President Obama took office in January 2009.

This increase in regulation is both unfair and inefficient: Compliance with governmental rules and laws is a greater encumbrance on small companies than large ones, and regulation hinders small business formation, growth, and job creation.

The cost of federal regulations rose by $70 billion during the President's first term in office, the Heritage Foundation reports. And small business has not been exempted from the rising tide. At the end of 2012, the number of federal regulations affecting small companies was 13 percent higher than at the end of 2008, Forbes reports.

Related: Fast Food CEO: U.S. Government Making It Hard for Us to Grow

Between 2008 and 2013, regulation went from being small business's fourth most important problem -- after sales, taxes and the cost/availability of insurance -- to being its biggest difficulty. In November 2008, only 8 percent of small-business owners responding to a National Federation of Independent Business survey said that "governmental regulation and red tape" was the single most important problem that small business faces. In November 2013, however, 22 percent of respondents said that regulation and red tape was their biggest issue.

The rising small-business regulatory burden is unfair. Because regulatory compliance has a high fixed cost, small businesses face a larger per-employee cost of adhering to government regulations than big companies. In a report for the Office of Advocacy of the U.S. Small Business Administration, Nicole and Mark Crain of Lafayette University explained that the per-employee cost of federal regulatory compliance was $10,585 for businesses with 19 or fewer employees, but only $7,755 for companies with 500 or more.

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An increasing small-business regulatory burden also has adverse economic effects. It reduces new business creation, as research by World Bank economists has shown. Moreover, additional rules lower small-company employment and investment by raising the cost of business activity. Furthermore, heavier regulation makes domestic companies less competitive internationally, and motivates businesses to transfer operations to less heavily regulated venues overseas.

In a 2011 op-ed in The Wall Street Journal, President Obama acknowledged this problem, saying "sometimes, those rules have gotten out of balance, placing unreasonable burdens on business--burdens that have stifled innovation and have had a chilling effect on growth and jobs." He called for federal agencies to reduce the regulatory burden on small companies. Unfortunately, the presidential request has done little to address the problem.

Now, it's time for Congress to act. The House and Senate Small Business Committees should assign staffers to benchmark what has been done to reduce the regulatory burden in other countries, with the goal of copying the best initiatives enacted elsewhere. The legislative branch should review the regulatory consequences of the laws it passes prior to voting them in to avoid discovering later the regulations that the bureaucracy will implement in response to its laws. Furthermore, our lawmakers should require all federal agencies to seek the OK of Congress before putting any major regulations into effect. Finally, our representatives should insist that all regulations to have expiration dates to prevent out-of-date rules from remaining in force and to compel the bureaucrats to ask for renewal of regulations they wish to preserve.

Related: Regulations Get Sticky as the Danes Ban the Danish

Scott Shane

Professor at Case Western Reserve University

Scott Shane is the A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. His books include Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses (Pearson Prentice Hall, 2005).

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