published Wednesday, June 12th, 2013

Investment Report: Over-regulation hinders job creation

Chris Hopkins

Last Friday's employment report from the U.S. Bureau of Labor Statistics produced few surprises. That is unfortunate, since the 175,000 jobs created last month was in line with the average since the end of the recession, and far below the 300,000 monthly rate one would expect in a typical recovery.

While there are many reasons for the tepid pace of job creation, one of the most significant is the onerous and increasingly burdensome regulatory burden, particularly as it pertains to new businesses.

It is almost axiomatic that small businesses are the engine of employment in America, given that 97 percent of all companies meet that description. But it is actually new business startups that are responsible for the lion's share of new jobs, and the rate of startups is on the decline, thanks in large part to the increasing difficulty of complying with labyrinthine rules and regulations.

The Kauffman Foundation has compiled and analyzed government statistics going back to 1977, and discovered that older businesses (over five years old) generally destroy jobs on average as they invest in labor-saving technology, move operations offshore, or stop growing. Young companies, on the other hand, are responsible for essentially all of the net new jobs created in the U.S. economy. It is not just small businesses, but new businesses that provide most of the new employment.

And regulations are choking startups. Venture capital firms, for example, are curtailing investments in early-stage life science innovations due to the increasing difficulty and delays in obtaining FDA approval on new devices and medications. According to the Small Business Administration, federal regulations alone cost small businesses $10,000 per employee annually (compared to about $7,500 per employee at large companies). And today, nearly one-third of all workers in the United States require some type of government license to ply their trade, compared witsh one in 20 a generation ago. Hairdressers, interior designers and florists must generally obtain a government sanction to practice (although it must be admitted that the incidence of ugly furniture fatalities and chrysanthemum-related illnesses is remarkably low).

To his credit, President Barack Obama at least made an effort to rationalize the federal rulemaking process by appointing a "czar" tasked with applying cost-benefit analysis to the process of issuing new regulations. But in the end, the tsunami of new rules has proven impossible to stem, the czar has resigned, and the toll continues to mount. New regulations costing more than $100 million to implement have accumulated nearly 40 percent faster under the current administration than either Presidents Bill Clinton or George W. Bush promulgated.

The official annual digest of all U.S. government rulemaking is called the Federal Register. It has ballooned from 2,600 pages in 1936 to 79,000 pages last year, and added 1.4 million total pages over the past two decades. It is hard to imagine that the general welfare of American citizens would be substantially diminished had we adopted, say, just half a million pages of new rules. But we can say with certainty that many more Americans would be working today.

Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at dflessner@timesfreepress.com.

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