Big government slams small firms

Jun. 27, 2013 @ 11:22 PM

Regulatory policy is about striking a proper balance.

Virtually no one disagrees with the propriety of government designing, promulgating and enforcing regulation. When health, safety and property are threatened by private action, there are some private penalties or remedies. Risky individuals or firms tend to face higher insurance premiums or liability for lawsuits. If they pollute or fail to keep up their property, its value falls.

But not all harms are captured within private markets for insurance, labor, capital or products. Nor is deterrence or remedy by the judicial branch sufficient in all cases. If you are breathing dirty air or drinking dirty water, it may be difficult to establish in a court of law which particular emitters should be held liable for damages. So the legislative branch intervenes, by passing broad statutes authorizing the executive branch to issue and enforce regulations.

Where liberals get tripped up sometimes is to assume that because a government can take a given action, it ought to take that action. In the real world, you have to weigh the estimated costs against the estimated benefits. Inevitably, that means using a common unit of measurement, typically dollars.

How can you put a price on health or safety? Well, it’s certainly not easy. But it is also inevitable given the realities of scarce resources and inherent tradeoffs. If you propose a regulation that costs $1 billion per life saved, you have to consider the reality that you would be foregoing other uses of that $1 billion – including the possibility of adopting, say, 100 other rules that cost only $10 million per life saved. In other words, being too risk-averse in one area can actually allow greater suffering and loss in another area.

In my experience, one way to improve public understanding of regulatory tradeoffs is to use the example of highway safety. As cars increase in speed, the potential damage, injury and loss of life increase. So why don’t we have a statewide maximum speed limit of, say, 20 miles an hour? Surely that would reduce the number and severity of traffic accidents. Yet no one seriously advocates this policy, because they understand that it would slow commerce to a crawl and have huge, negative consequences for our quality of life.

Regulatory tradeoffs contain many subtleties. For example, the cost of complying with business regulations isn’t simply passed along to the owners of businesses. Some of that cost turns into lower wages for employees and higher prices for consumers. Furthermore, regulatory compliance can have disproportionate impacts depending on the size of businesses. A large multinational corporation with an entire division devoted to legal and regulatory affairs may be able to handle constantly changing state rules without a great deal of trouble. But what about a small company with just a few employees? The owner might also be the one in charge of regulatory compliance, and have little time or knowledge to apply to the problem.

A new study in the journal Small Business Economics seeks to quantify this effect. Authors Peter Calcagno of the College of Charleston and Russell Sobel of The Citadel used a large sample of business data from 1992 to 2004. They found that, adjusting for other factors, the number of very small firms (fewer than five employees) tends to be lower in states with more and costlier regulations. Even within larger categories of firms, high-regulation states tended to have relatively bigger companies. “The implication of our results,” Calcagno and Sobel wrote, “is that the regulatory system may inefficiently influence the scale of firms and that this cost should be added to any sort of cost-benefit analysis of the general merits of economic regulation.”

As North Carolina legislators and policymakers continue to reform the state’s regulatory system, they should take into account the disproportionate burden on small business. Some 35 states have a formal process for doing so. Our state should, too.

John Hood is president of the John Locke Foundation.