Death by 7,647 Pinpricks

If you’re not a regulation wonk, or a small business wonk, or, even less commonly, a small-business regulation wonk, then chances are that the late September release by an obscure federal agency of a 95-page report on regulatory impacts on small firms will simply pass you by. But that report has been eagerly anticipated for the better part of a year by those wonks (myself included), and for good reason: it represents the best picture of the burden faced by entrepreneurs each and every day in the face of federal regulations.

The agency is the Small Business Administration’s Office of Advocacy, and their report is innocuously titled, “The Impact of Regulatory Costs on Small Firms.” A project undertaken twice in the previous decade, the report previously let us know that the impact on small businesses (those with fewer than 20 employees – or ninety percent of all the businesses in the United States) was roughly $6,975 per employee per year. That number drops, because of various economies of scale, when the number of employees goes up.

To those of us who work on a day-to-day basis with small business owners struggling to understand and comply with the myriad of regulations they labor under, we see that regulation is a slow bleed – a death by thousands of pinpricks. This report measures each and every one of those pinpricks, and for 2005, we know that number has gone up – from $6,975 to $7,647, an increase of more than nine percent! What’s more, the total impact of regulation on business as a whole has jumped, from $876 billion to $1.1 trillion annually – or roughly 10% of national income.

It’s not just that there are so many regulations that are on the books (there are), it’s also the difficulty in figuring out just what needs to be done to be ahead of the law that makes the costs go up. For larger firms, the owner of the business can hire permanent professional help to interpret the regulations and ensure that the firm is in compliance. These professionals generally deal with human resources, environmental, and occupational safety and health regulations, the regulations that are the most complex and raise the greatest issues of liability for the small business owner.

But the smaller business owner can’t have these professionals on staff full-time – it doesn’t make economic sense, and so they either have to hire someone on an ad hoc basis or they themselves have to figure out what rules apply to the business and what they need to do to comply. And they need to do this in that spare time when they’re not actually attending to the day-to-day operation of their business. This drives up the costs – especially because the economies of scale don’t allow that cost to be spread over many different employees.

The problem, as anyone can understand, is one of scope. Every law passed by Congress is translated by federal agencies into pages upon pages upon pages of regulations. There is no possible way for anyone, let alone a small business owner, to know every federal regulation that applies to him. This creates the quixotic situation where every well-intentioned person is now potentially a criminal. It turns what is supposed to be a just legal system on its head.

The Advocacy report doesn’t focus on the fairness issue, it focuses on the costs associated with the actual compliance with regulations. That’s their job—and they do a damned fine one, too. In addition to measuring the impact every five years, Advocacy is also responsible for analyzing new regulations, measuring their potential impact on small entities, and offering up suggestions for minimizing that impact. They have saved small businesses billions of dollars over the years in alternate solutions to regulatory programs.

Just what does that mean overall? Well, consider the possibility of a small business being saved twenty thousand dollars in regulatory costs annually. Considering that small businesses are positively hurting for want of new employees, this affords them the opportunity to attract new employees, as well as to offer more competitive compensation packages to keep the employees they already have.

The necessity of regulation aside (that’s an argument for a different time), what is clear is that a $1.1 trillion regulatory state is an overall drag on our economy. The fact that it has risen so appreciably in the last five years is something that concerns all of us. This report should be required reading for all those who are adding to the regulatory morass which hobbles small businesses on a daily basis, along with an accounting of what these businesses might be doing, if they had more of their own time and money for themelves.