The Need for Better Governance: An Example
Posted by Hana Ryan on August 03, 2018 at 2:11 PM
By Hana Ryan, The Bridge Alliance
Being a small business owner in America is not easy. You need the right amount of capital, the right team, and the right market just to launch your business, let alone be successful. Yet one of the biggest challenges facing small business’ is an unlikely enemy: the US government. A recent study by the National Federation of Independent Business found that 45% of small business owners consider government regulations a very serious business problem. Why? The sheer volume and compliance cost of regulations eats up a significant amount of human and financial capital - resources in scarce supply for small business owners.
Last year I had the chance to sit down with Laurel McConville, founder of Nectar & Green, to get an inside perspective on the regulatory challenges start-up business owners can face.
Nectar & Green is a pressed almond milk company that offers door-to-door delivery in Boston. However, it didn’t start out that way. Laurel’s original plan was to start a natural juice business, but because of stringent FDA regulations and the high amount of initial capital required in that industry, she altered course and decided to sell all natural pressed almond milk instead. Her vision was to be the “modern milkman,” delivering her product to customers’ doors. Her vision was partly out of necessity; FDA regulations forbade her from selling her milk wholesale. Because she didn’t put preservatives and chemicals in her milk, she was not legally allowed to sell to grocery stores or other food retailers.
Outdated regulations were also challenging for Laurel’s business. Under regulations in effect at the time, plant based milk products were treated more like animal based milk products than juice products. Laurel remembers being sent to talk with the dairy department of the FDA about organic almond milk. Regulatory requirements were so antiquated that Laurel was asked fill out a form on a typewriter. She observed of the regulatory environment, “the pageantry of it all” and all of the “needless” forms and fees, were so “incredibly inefficient”.
Laurel found it difficult to operate an innovative business in an environment governed by antiquated regulations. All in all, it took an extra six weeks for her to get the final necessary approval from the FDA; critical weeks for a startup where every day a product is not launched, money is lost.
Laurel’s story is not unusual. Every day, restrictive and antiquated regulations hurt the growth of small businesses. In fact, a recent U.S. Chamber of Commerce study found that regulations have a disproportionate impact on small businesses. As regulatory compliance is a fixed cost, small business face a larger per-employee cost of adhering to government regulations than big companies. Small businesses must spend thousands of dollars -- on average $12,000 per employee per year -- to wade through thousands of pages of antiquated and confusing regulations, fill out lengthy licensing applications, and wait weeks (if not months) for agency decisions. Laurel said the cost of compliance and the opportunity cost of waiting for agency decisions can be debilitating. Others agree. A study found that in the first year of a small business, often before it even opens, it faces around $83,000 in regulatory costs alone.
Why does this matter? The opportunity costs of compliance with outdated regulations impact the US economy as a whole. Small businesses like Laurel’s provide jobs to the American economy. They create two out of three new jobs annually, and employ half of the private sector workforce. Yet, our current regulatory environment -- with its overlapping and outdated rules -- is a strong disincentive to entrepreneurship. Philip K. Howard from Common Good blames regulatory compliance costs -- both in time and money -- as part of the reason for the decline in business start-ups.
Deregulation, such as simply repealing outdated rules, is not necessarily the answer. Most of the regulations Laurel needed to comply with, such as making sure her product was safe to eat and her kitchen space was clean, were necessary. However, they were far too complex. Additionally, the opportunity cost of the hours of miscommunication and the monetary cost of redundant licenses and fees were significant, unnecessary hurdles that her small business needed to overcome.
So how do we move forward? Actions such as simplifying the tax code by updating antiquated and obsolete laws are a start. Further, allowing small business owners a seat at the table with policy makers -- and continuing to push for improved regulatory analysis in the rulemaking process -- would not only help small businesses, but the American economy and society as a whole.
Solutions require non-partisan collaboration from everyone, from anti-regulation conservatives to pro-government liberals. The push for smarter regulation is not a partisan issue, it is an American one. This is why the Bridge Alliance is so critical. We are not focused on liberal or conservative solutions, but solutions that are best for all Americans. We bridge partisan divides and bring organizations together that share the same focus. Because for our society and economy to keep moving forward, we all need to unify around better governance.
Disclaimer: The views expressed in this blog post are strictly those of the author and do not represent the views of the Bridge Alliance Education Fund, the Bridge Alliance, or the Bridge Alliance’s member organizations. Additionally, the Bridge Alliance Education Fund makes no representations as to the accuracy of this post’s contents.