Scott Shane is Professor of Economics at Case Western Reserve University and author of Illusions of Entrepreneurship. He also writes for Bloomberg's Business Week.
ConservativeHome's Ryan Streeter recently asked Scott Shane 3 questions about the effects of Obamacare and regulation on small businesses. Here they are:
RS: Why have small businesses been less than enthusiastic about the new health care law?
Shane: For several reasons. First, it doesn’t solve the problem that they face, which is rapidly rising health insurance costs. Surveys show that small business owners wanted the kind of reform that would have kept their costs of offering insurance to their employees from rising faster than inflation. But they didn’t get it. Moreover, the vast majority of them want to offer health insurance, but many simply cannot afford it. Even with the tax credits for small business, the small business owners who couldn’t offer insurance before the law find they still can’t pay for it. So small business owners are frustrated that Congress passed a law that didn’t solve their actual problem.
On top of that, the law is very complex and many of the ways that the federal bureaucracy will interpret the law are unknown. Small business owners are uncomfortable with the uncertainty that this creates. They feel that they can’t make hiring and investment decisions because they don’t know the impact of the law on their businesses. Add to that the fact that the complexity means that they have to spend money hiring advisors to explain the impact to them when understanding the impact won’t improve their profits, and you can see why they are upset.
Finally, small business doesn’t like the way Congress passes laws. They are very upset that a law about health care increases the cost of tax compliance by requiring them to file 1099s to all vendors starting in 2012. This unrelated compliance burden makes no sense from a business perspective and therefore upsets them.
RS: We Americans love to celebrate the entrepreneur. You've made the case in the past in your writings that what really drives entrepreneurship is the business idea and opportunity, more than the characteristics of "entrepreneurial individuals." Can you talk a bit about the implications of this for public policy?
Shane: We need to be careful about over-celebrating entrepreneurs. Most people who start businesses create no jobs, contribute little to GDP, and then fail. This is a statistical reality. So we can’t assume, as many in government do, that everyone who starts a business knows what they are doing, and that entrepreneurs are the solution to all our problems. That leads to a belief in policy circles that more entrepreneurship is always better. That belief is problematic.
Let me give one example to show the fallacy of that reasoning. There is a correlations of 0.77 between the rate at which people start businesses in industries and the rate at which businesses in those industries fail. The industries with the highest odds of business failure have the most start-ups. That’s because most people don’t choose to start businesses in the industries where they are most likely to succeed but rather choose the industries easiest to enter.
The problem is that when we give people subsidies to start businesses or otherwise encouraging more entrepreneurship, we are disproportionately giving incentives to people who will start unsuccessful businesses rather than successful ones. We would be better off recognizing that some businesses have much higher odds of creating jobs and contributing to GDP than others. We should get rid of the generic incentives for everyone to start businesses and, if we need to offer incentives at all, target them to people who are starting high potential businesses.
RS: You've recently written in The American that regulatory reform efforts aimed at reducing the burden of government agencies' rules on businesses are good, but that they don't go far enough since the burden of regulation on small business today is coming more from what Congress is doing in areas such as health care and financial reform legislation. Can you elaborate on this and offer any advice for lawmakers on how to reverse this trend toward statutory over-regulation?
Shane: I have two specific recommendations. First, politicians need to follow the advice of country singer Toby Keith. We need “a little less talk and a lot more action.” It’s nice that the President now recognizes that small business is overregulated and that those regulations need to be reduced. But telling federal agencies to review what the effects of regulation are and have several agencies say – within the same week – "we did it and our regulations are fine," indicates that much of this is talk
I would suggest that we need specific targets on reducing regulation. For instance, cut the number of small business regulations so that the cost of compliance in real dollars is the same as it was back in 2004.
Second, if you are going to regulate small business, pass simple straightforward regulations that are easy to understand, not laws that require years of bureaucratic interpretation before small business owners even know what they mean for them. Most small business owners realize that the government needs to regulate some things. Few people want companies dumping raw sewage into our lakes and rivers, people dying because they can’t get health care, or banks lending money to companies that can’t pay back the loans. But you don’t need 2000 plus page laws that no one understands to do that. You don’t need laws that require companies to hire experts just to understand the law. It’s the complexity of regulation and the cost to understand its effects that is so unproductive and bothersome to small business.
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