Regulatory Reform Could Revitalize Sluggish Business Creation

The U.S. economy recently marked 10 years of economic expansion – its longest in history – but there’s an important exception: new business creation. In recent decades, the American entrepreneurial engine has decelerated. Regulatory reform could help revive American entrepreneurship, reducing the burden on new businesses and realizing gains in economic growth. That doesn’t necessarily mean deregulation, but rather streamlining and updating old or obsolete rules to provide entrepreneurs with flexibility in today’s fast-changing world.

New and young businesses are the foundation of the United States’ economy, creating jobs and spreading wealth across our society. “Together, startups and high-growth firms (which are disproportionately young) account for about 70 percent of firm-level gross job creation in a typical year,” write entrepreneurship researchers Decker et al. Many of these young companies go on to become the next generation of small businesses, which employ 48 percent of private sector employees.

Unfortunately, the rate at which new businesses are being created has fallen off in the wake of the Great Recession. While firm deaths have returned to their pre-recession levels, firm births are down 22 percent compared to 2006 levels. And, for the first time since the Census Bureau began collecting data, firm deaths exceeded firm births from 2009 to 2011.

Smart policy can help increase the number of new businesses that are created and the number that scale up, though. Regulation is one area where policy can be made more efficient. A 2017 National Small Business Association survey estimated that the average small business owner spends at least $12,000 every year on compliance, with nearly one in three spending more than 80 hours every year dealing with federal regulation.

We know from research by Victor Bennett and Ronnie Chatterji that many people have entrepreneurial aspirations, but fail at many steps along their path to move to actual business formation. While many fail at early stages, such as basic market research, others undoubtedly run up against these mountainous regulatory costs and say, “not worth it.”

One way to reduce these costs is to focus on the steady buildup of regulation, or regulatory accumulation. The Code of Federal Regulations, where rules promulgated by the federal government are published annually, swelled by 17 percent from 2008 to 2018 alone. While Washington has dozens of agencies that issue new rules, not one institution is dedicated to streamlining the accumulated body of regulations. That’s why PPI proposed the Regulatory Improvement Commission (RIC). The RIC would fill an institutional vacuum in regulation policy by creating a mechanism for the periodic clearing out of obsolete rules.

Modeled on the Base Realignment and Closure Commission (BRAC) and comprised of a bipartisan group of highly qualified stakeholder appointees, the RIC would be an independent commission of eight members, appointed by the President and Congress, with regulatory expertise across industry and government. It would meet as authorized by Congress to review and, following a public comment period of 60 days, draw up a list of 15 to 20 rules for elimination or modification. The package would be sent to Congress for an up-or-down vote, and the RIC would be disbanded. If the proposed changes pass Congress, they would go to the president’s desk for signature or veto.

In 2015, bipartisan groups of lawmakers introduced bills in the House and Senate to establish the RIC based on the BRAC model. House cosponsors included Mick Mulvaney (R-SC), now acting White House Chief of Staff, and Kyrsten Sinema (D-AZ), now a Democratic Senator from Arizona.

Startup-friendly policies such as the RIC can help reduce compliance and opportunity costs, catalyzing a rebound in America’s startup rate and spurring economic growth. Streamlining regulation would help inventors and entrepreneurs spend less time and resources on regulatory compliance and focus instead on delivering goods and services and scaling their enterprises.

Research assistance was provided by Roman Darker, economics intern at the Progressive Policy Institute.

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