Death Of A Million Paper Cuts

I’ve posted about small businesses before.

The fact is that small businesses employ a huge chunk of the people who have, like myself to work on the fringes outside the corporate drone world.  Working in a smaller company can be more rewarding for those looking for flexibility and greater responsibilities.  The downside is that there is no place to hide.

Frankly I’ve known small business people all my life. I’ve worked in them, shopped in them, talked to them, probably since I was 15 or so.  So the pains and troubles of the small businessman are all too familiar to me. The effort that goes into trying to run a small business and maintain payroll is bad enough without the heavy burdens place on small businesses all the various and sundry things that the small business has to comply with.

One paper cut is a small issue, a million cuts and you bleed to death with flayed skin.  That’s what’s facing the small business here in the US.

“In one year,” wrote Warren Meyer in 2015, “I literally spent more personal time on compliance with a single regulatory issue — implementing increasingly detailed and draconian procedures so I could prove to the State of California that my employees were not working over their 30-minute lunch breaks — than I did thinking about expanding the business or getting new contracts.”

Meyer is the owner of a company that runs campgrounds and other recreational facilities on public lands under contract from the government. It doesn’t seem like regulatory compliance should be eating up so much of his time; he is not producing toxic chemicals, operating a nuclear facility, or engaged in risky financial transactions that might have the side effect of sending our economy into a tailspin. He’s just renting people places to pitch a tent or park an RV, or selling them sundries. Nonetheless, the government keeps piling on the micromanagement lest some employee, somewhere, miss a lunch break.

I know what you’re going to say: Employees should have lunch breaks! My answer is “Yes, but.…” Yes, but putting the government in charge of ensuring that they get them, and forcing companies to document their compliance, has real costs. They add up.

An economy with but one regulation — employees must be allowed a 30-minute lunch break, and each company has to document that it has been taken — would probably not find this much of a drag on growth. But multiply those regulations by thousands, by millions, and you start to have a problem.

A new working paper from the Mercatus Center attempts to document the cumulative cost of all these regulations. It finds that the growth of regulation between 1977 and 2012 has shaved about 0.8 percent off the rate of growth, costing the nation a total of $4 trillion worth of GDP.

Stories like Meyer’s are the tangible face of the economic theory. As is the fact that in the annual small business survey by the National Federation of Independent Business, taxes and government red tape are far and away the biggest issues that business owners cite as their most important problems. Forty-three percent of those surveyed cited one of the two as their top issue.

That matters, and not just because of business owners’ headaches. The burden of regulation is not distributed symmetrically. It falls heaviest on firms that deal with dangerous substances, yes. But it also falls most heavily on smaller businesses, which cannot afford staffs of pricey compliance specialists to make sure that their desk chairs meet the new California workplace seating requirements. This may help explain why the number of firms is falling, and markets are consolidating.

Even within those businesses, the burden will tend to be disproportionately concentrated. Employment conditions are heavily regulated, so firms that employ a lot of workers to get a given level of output will have more regulatory overhead. And firms that employ a lot of low-wage labor get hit from every direction: Businesses like fast food and retail tend to have thin profit margins, so they don’t have a lot of room to absorb the extra cost, and they also can’t really cut wages to reflect the higher cost of labor, because they’re already operating at or close to the statutory minimums. A consulting firm that has five employees, on the other hand, will probably have a higher compliance cost per employee, but also much more room in pricing and profit margins to absorb that cost.

How much does this matter? Well, if you want to camp at Meyer’s rec sites, but can’t afford to pay Hilton prices to do so, it probably matters to you a lot. But it also matters to the rest of us, because when you add that burden up, it potentially has big effects:

  1. Regulations can knock the lowest-skilled workers out of the labor force, at which point they’ll struggle to get a better job. It’s fashionable to say that these are terrible jobs anyway: hard labor and they don’t pay enough, so who cares? But those jobs are where people learn the basics of work: showing up on time, being nice to the customer, attending to every detail, and so forth. The regulatory burden is effectively a cost wedge between the amount you pay your worker, and the amount it costs you to employ them; the bigger that wedge, the more likely it is that some people simply won’t be able to find employment. The result is a great human capital loss to the economy, and the devastation of unemployment.
  2. Small businesses are vital to the economy. They’re sort of like the engine oil that lubricates the economy, because a lot of things aren’t profitable at a larger scale. For example, a few years back, I interviewed the owner of a wire basket maker in Baltimore, who was making racks for a car manufacturer to store their parts in on the assembly line. These were a cog in a great industrial enterprise, but he was turning them out in tiny batches — six at a time, or a dozen. That sort of job simply wouldn’t be profitable for a major manufacturer, because the cost of retooling a big assembly line, and the bureaucratic controls needed to run a large firm, would eat all the profit margin. An owner-operator of a smaller business has a lot more flexibility, and the cushion provided by that flexibility is absolutely necessary.
  3. Regulations can make it unprofitable for small businesses to grow. Let’s say your firm has room to scale, and might even become a big business someday. That’s great! But now we run into the problem of small business carveouts. A lot of laws, including Obamacare, have them, so that politicians can claim their policy won’t affect small firms. The problem is that when you hit one of the thresholds, there is an absurdly high marginal cost to hiring the next employee, or taking in the next dollar of revenue. That can retard growth, which is not something the U.S. can currently spare

The regulatory costs are only the obvious ones.  You also need to consider the societal costs.  Each small business that closes reduces the local diversity.  Every one of those little shops that closes up had customers that now lose a bit of the joy in their lives every independent restaurant that closes means life just gets more bland.

A popular New York City restaurant is closing its doors after 25 years because of what the owners call a stifling regulatory environment that treats the restaurant as a “cash machine.”

China Fun, a Chinese restaurant in Manhattan, announced its Jan. 3 closure because of increases in minimum wage and a city atmosphere that treats “mom-and-pop” eateries like cash cows to pay for all the ills of society, Albert Wu, told reporters. Wu is a representative of China Fun.

“The climate for small businesses like ours in New York have become such that it’s difficult to justify taking risks and running — never mind starting — a legitimate mom-and-pop business,” read a letter posted by the owners in the Chinese restaurant’s front door.

Wu, whose parents Dorothea and Felix have owned the eatery since its inception two decades ago, said the city’s endless amount of paperwork have taken their toll over the years and finally led to the restaurant’s closure.

“When we started out in 1991, the lunch special was $4 a plate,” Wu said. “Now it’s $10, $12. The cost of doing business is just too onerous.”

He cited one New York City regulation requiring China Fun to provide an on-site break room for workers despite its limited space as just one of the rules that helped kill the restaurant. The state and city government “seems to believe that we should be their cash machine to pay for all that ails us in society,” Wu added.

Adele Malpass, who chairs the Manhattan Republican Party, said Wu’s complaints are common among the city’s small business owners.

“For smaller businesses like China Fun, each little thing that occurs makes it harder,” Malpass said. “Each regulation, each tax — you put it all together and it’s just a hostile business environment.”

Read more:

You could say that the result is the WalMarting of America.  The end result of high regulation isn’t smaller businesses, but bigger ones.  A large business can obtain the economies of scale to avoid the issue of exponential regulatory compliance. The large business can afford to treat their customers like crap.  Big business tends not be friendly business. You would think the even the bureaucrats would figure this out, but instead they come up with things like Dodd Frank.


The reason Dodd-Frank failed is because it ignored the government’s actions that contributed to the financial crisis, instead blaming “predatory lending,” the idea that it was purely the banks’ fault that people took out loans they couldn’t afford.

This isn’t to absolve the banks of any role in the housing bubble, but consider: The left wants us to believe banks just wanted to lend money to people who couldn’t pay it back so they shoved money down people’s throats in order to foreclose on homes no one wanted to buy during the housing slump.

In reality, Dodd-Frank was named after two veteran lefty pols, former Connecticut Sen. Chris Dodd and Massachusetts Rep. Barney Frank, who enabled the feds’ failure. They sat by and allowed years of recklessness by Fannie Mae and Freddie Mac, the quasi-government agencies that were created to expand home ownership.

Through Fannie and Freddie’s financial engineering, banks gave out home loans like candy.

Housing prices then exploded until the market imploded. But instead of getting rid of Fanny and Freddie, Dodd-Frank kept both doing much of the same stuff that got them and the housing market in trouble to begin with.

Like Fanny and Freddie, much of the structure of the pre-crisis banking system remains. There are fewer banks, but they’re bigger and no less prone to risk taking. Banks are forced to keep more capital as a buffer for another crisis, but that’s also a double-edged sword: the more capital they sit on, the less they can lend to legitimate borrowers like small businesses.

Dodd-Frank didn’t even do away with the problem of banks being “too big to fail.” In fact, it’s nearly codified into law because taxpayer-funded bailouts of big banks aren’t ruled out. The feds can now step in “for an orderly liquidation” of troubled banks before they explode like Lehman Brothers, but as everyone on Wall Street knows an orderly liquidation of such large entities is nearly impossible, ensuring that “too big to fail” will remain banking policy.

Plus, the prospect of a bailout encourages risky behavior yet again. Lather, rinse, repeat.

At a press briefing with big business executives, including JP Morgan chief Jamie Dimon and Stephen Schwarzman of private equity powerhouse Blackstone Group, Trump said: “Frankly, I have so many people, friends of mine that had nice businesses, they can’t borrow money.”

He wasn’t talking about the men and women in the room, but small-business owners and entrepreneurs who drive our economy and have been complaining for the past eight years they can’t get enough access to capital to expand and create decent high-paying jobs.

It’s time to rebuild the country and in order to do that we have to enable small businesses to be able to grow. The choices are actually pretty stark. Walmart, or the corner store.  YO decide.

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