Both sides agree: Regulation chokes small business
Excessive licensing
rules can shut out competition, making it harder for small operations to
succeed
As the political season fires up, we’re hearing more about the economic pitfalls of government regulation. What’s more surprising is the warnings are coming from both sides of the partisan divide.
Last month the right-leaning Pacific Research Institute unveiled a study that found California offered the worst regulatory climate in the nation for small businesses. The study measured everything from rising workers’ compensation premiums and minimum wages to legal liability and licensing requirements.
And in July, President Barack Obama’s left-leaning economic team — which has presided over a historic expansion in federal regulation — issued a report concluding that excessive licensing rules from state governments destroy jobs and opportunity, especially for the working poor.
If the issue of red tape makes you hit the snooze button, consider the latest Census data showing that more companies are dying than being born in the U.S. for the first time in 35 years. We’ve fallen to 12th in the world, somewhere behind Italy, in net business formation per capita.
This is important because older companies shed more workers than they hire over time, while startups create new jobs in the aggregate.
Nobody can fully explain the demise of new companies, but a chief culprit is rapid growth in regulation.
Certainly, all these rules are costly. Federal regulation cost nearly $2 trillion in 2014 through higher prices and lost productivity, estimates the Competitive Enterprise Institute.
At the same time, big numbers like this are best viewed skeptically, because the costs versus benefits are so hard to measure. Also, most of the headline-generating political fights involve giant industries like oil fracking or health care.
So I find it useful to remember that the regulatory Leviathan reaches deeply into the ordinary lives of Americans.
Take licensing, for example. More than one-quarter of all U.S. workers need some kind of license to do their jobs.
Lest we think it’s always been this way, the Obama administration reports that such state requirements have increased fivefold since the 1950s.
To be sure, regulation can provide benefits. When designed properly, rules that make people get licenses to work can protect health and safety of consumers and workers.
However, they often aren’t designed well. “There is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities, and make it more difficult for workers to take their skills across state lines,” the Obama report said.
Hair threading is an ancient practice, typically passed down from mother to daughter in South Asian countries.
It’s also completely unregulated in California. This makes it unique in the cosmetology universe, where even shampooing is part of a licensing regime that requires nearly a year in school and $17,000 or more in tuition.
Threading is booming in popularity. Proponents say it’s faster, more precise and easier on skin than waxing, lasers or other hair-removal processes that, incidentally, require state licensing.
Amid surging demand for “brow artists,” the private sector is rushing to provide training.
“We have a really, really strict training program, and we’re outsourcing that program for anybody who wants to learn,” said Natashah Torki, manager and part-owner of Beauty by Dolly, a hair removal salon in Hillcrest.
Torki is a fourth-generation hair threader. Her first class, which will cost $750 for early registrants and take a week to complete, has generated strong interest with no advertising.
As for income, threading generates about $10 for a 10-minute eyebrow session. Good threaders stay busy. Mastering the craft is a ticket to a decent job — much faster and less expensive than a full-blown cosmetology license.
Wesley Hottot, a lawyer for Institute of Justice, successfully argued that threading is unlike hair styling, waxing or other cosmetology practices, which often involve chemicals and sharp objects.
“Any practice of public styling is going to require observing basic sanitation,” Hottot said. “But the sanitation required in threading to keep people safe, required about an hour to learn: Wash your hands, keep your work area clean and don’t reuse thread.”
In California, lawmakers have agreed, exempting threading from licensing rules in 2009 after a similar overreach by regulators.
Noting that licensing and other regulations apply to hundreds of occupations, from florists to scrap metal recyclers, the Obama administration called for states to conduct a cost-benefit analysis to regulatory burdens.
Another suggestion was to replace licensing with certifications, when it would cut costs, align with other states, and compress requirements to demonstrating competency.
Hottot notes that cosmetology associations have lobbied for threading regulation in Texas and other states, but he sticks to arguing the merits of leaving this particular marketplace alone.
“You don’t have to be a progressive to recognize that it’s unfair,” Hottot said. “And you don’t have to be a libertarian to recognize that regulating threading is stupid.”
Especially now, when customers can turn to online review sites to weed out bad operators in a variety of occupations. A government website won’t tell you if a dentist is any good, but Yelp might.
This brings us back to the Pacific Research Institute study that found California’s regulatory burden was the nation’s heaviest.
Land use restrictions drive up costs. Workers’ compensation costs are growing rapidly. Minimum wages are rising to $10 an hour, with major cities such as Los Angeles leapfrogging to $15. Tort laws encourage lawsuits.
Taken together, such regulations erect barriers to new business. This increases profits to incumbent companies and drives up costs to consumers.
Some states have thoughtfully reduced regulations and watched economic growth rebound. Indiana, which cut taxes and regulations while balancing its budget, has posted among the nation’s fastest job growth since 2009. And North Dakota’s oil boom could never happen with California’s restrictions on land use.
Yet reversing the trend to greater regulation seems politically impossible in the Golden State. The Legislature, which last year outlawed plastic shopping bags, churns out more rules governing business operations each session.
Certainly, government should protect us from dangerous chemicals. But do state regulators or Getty lawyers think I would eat their statue? And then, in my lead-enfeebled mental state, I might sue?
In the Pacific Research study, economist Wayne Winegarden found that states with high regulatory loads experience net losses of small businesses, while those with lighter burdens generally create more.
For example, third-ranked Texas had 10.5 percent net formation of small businesses in the decade to 2011, while 50th-ranked California had just 4.69 percent.
The performance was better than other heavily regulated states, such as New Jersey and Connecticut, that lost large numbers of businesses.
However, thriving Silicon Valley accounts for much of California’s better showing. Setting the tech phenomenon aside, regulation is certainly choking out jobs, especially among conventional startups that struggle for funding.
“It’s a little bit like a bad diet,” Winegarden said. “There are some people who eat horribly, don’t exercise, and live to 90. That doesn’t mean a bad diet is good for you.”
Beauty
by Dolly stylist Yasra Altoas threads the eyebrows of Jennifer Williams, 30, of
Ocean Beach, at the Hillcrest location. Most aspects of cosmetology are
regulated, but hair threading isn't. Growing demand for workers has prompted
Beauty by Dolly to design a curriculum and offer training. Nancee E. Lewis /
Nancee Lewis Photography. No other reproduction allow with out consent of
licensor. Permission for reproduction required. Nancee E. Lewis
As the political season fires up, we’re hearing more about the economic pitfalls of government regulation. What’s more surprising is the warnings are coming from both sides of the partisan divide.
Last month the right-leaning Pacific Research Institute unveiled a study that found California offered the worst regulatory climate in the nation for small businesses. The study measured everything from rising workers’ compensation premiums and minimum wages to legal liability and licensing requirements.
And in July, President Barack Obama’s left-leaning economic team — which has presided over a historic expansion in federal regulation — issued a report concluding that excessive licensing rules from state governments destroy jobs and opportunity, especially for the working poor.
If the issue of red tape makes you hit the snooze button, consider the latest Census data showing that more companies are dying than being born in the U.S. for the first time in 35 years. We’ve fallen to 12th in the world, somewhere behind Italy, in net business formation per capita.
This is important because older companies shed more workers than they hire over time, while startups create new jobs in the aggregate.
Nobody can fully explain the demise of new companies, but a chief culprit is rapid growth in regulation.
Certainly, all these rules are costly. Federal regulation cost nearly $2 trillion in 2014 through higher prices and lost productivity, estimates the Competitive Enterprise Institute.
At the same time, big numbers like this are best viewed skeptically, because the costs versus benefits are so hard to measure. Also, most of the headline-generating political fights involve giant industries like oil fracking or health care.
So I find it useful to remember that the regulatory Leviathan reaches deeply into the ordinary lives of Americans.
Take licensing, for example. More than one-quarter of all U.S. workers need some kind of license to do their jobs.
Lest we think it’s always been this way, the Obama administration reports that such state requirements have increased fivefold since the 1950s.
To be sure, regulation can provide benefits. When designed properly, rules that make people get licenses to work can protect health and safety of consumers and workers.
However, they often aren’t designed well. “There is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities, and make it more difficult for workers to take their skills across state lines,” the Obama report said.
Questions on threading
To
see how this works, or doesn’t work, consider hair threading, which involves
using thread to pluck unwanted hair. Hair threading is an ancient practice, typically passed down from mother to daughter in South Asian countries.
It’s also completely unregulated in California. This makes it unique in the cosmetology universe, where even shampooing is part of a licensing regime that requires nearly a year in school and $17,000 or more in tuition.
Threading is booming in popularity. Proponents say it’s faster, more precise and easier on skin than waxing, lasers or other hair-removal processes that, incidentally, require state licensing.
Amid surging demand for “brow artists,” the private sector is rushing to provide training.
“We have a really, really strict training program, and we’re outsourcing that program for anybody who wants to learn,” said Natashah Torki, manager and part-owner of Beauty by Dolly, a hair removal salon in Hillcrest.
Torki is a fourth-generation hair threader. Her first class, which will cost $750 for early registrants and take a week to complete, has generated strong interest with no advertising.
As for income, threading generates about $10 for a 10-minute eyebrow session. Good threaders stay busy. Mastering the craft is a ticket to a decent job — much faster and less expensive than a full-blown cosmetology license.
Certifications suggested
Yet
regulators seem determined to make it harder. Recently the Texas Supreme Court
overturned a crackdown by state officials who drove law-abiding hair threaders
out of business, ordering them to undergo 750 hours of training and pay $2,000
penalties under a broad interpretation of state cosmetology regulations.Wesley Hottot, a lawyer for Institute of Justice, successfully argued that threading is unlike hair styling, waxing or other cosmetology practices, which often involve chemicals and sharp objects.
“Any practice of public styling is going to require observing basic sanitation,” Hottot said. “But the sanitation required in threading to keep people safe, required about an hour to learn: Wash your hands, keep your work area clean and don’t reuse thread.”
In California, lawmakers have agreed, exempting threading from licensing rules in 2009 after a similar overreach by regulators.
Noting that licensing and other regulations apply to hundreds of occupations, from florists to scrap metal recyclers, the Obama administration called for states to conduct a cost-benefit analysis to regulatory burdens.
Another suggestion was to replace licensing with certifications, when it would cut costs, align with other states, and compress requirements to demonstrating competency.
Barriers to business
Nobel
laureate economist Milton Friedman pointed out decades ago that efforts to
expand regulation almost never originate with consumers. Rather, the push comes
from industry players trying to block competition and thus increase profits. Hottot notes that cosmetology associations have lobbied for threading regulation in Texas and other states, but he sticks to arguing the merits of leaving this particular marketplace alone.
“You don’t have to be a progressive to recognize that it’s unfair,” Hottot said. “And you don’t have to be a libertarian to recognize that regulating threading is stupid.”
Especially now, when customers can turn to online review sites to weed out bad operators in a variety of occupations. A government website won’t tell you if a dentist is any good, but Yelp might.
This brings us back to the Pacific Research Institute study that found California’s regulatory burden was the nation’s heaviest.
Land use restrictions drive up costs. Workers’ compensation costs are growing rapidly. Minimum wages are rising to $10 an hour, with major cities such as Los Angeles leapfrogging to $15. Tort laws encourage lawsuits.
Taken together, such regulations erect barriers to new business. This increases profits to incumbent companies and drives up costs to consumers.
Some states have thoughtfully reduced regulations and watched economic growth rebound. Indiana, which cut taxes and regulations while balancing its budget, has posted among the nation’s fastest job growth since 2009. And North Dakota’s oil boom could never happen with California’s restrictions on land use.
Yet reversing the trend to greater regulation seems politically impossible in the Golden State. The Legislature, which last year outlawed plastic shopping bags, churns out more rules governing business operations each session.
Startups can struggle
Voter
initiatives pile on. Last year, during a visit to the Getty Museum in Los
Angeles, a Proposition 65 notice alerted me that a certain statue contained
lead.Certainly, government should protect us from dangerous chemicals. But do state regulators or Getty lawyers think I would eat their statue? And then, in my lead-enfeebled mental state, I might sue?
In the Pacific Research study, economist Wayne Winegarden found that states with high regulatory loads experience net losses of small businesses, while those with lighter burdens generally create more.
For example, third-ranked Texas had 10.5 percent net formation of small businesses in the decade to 2011, while 50th-ranked California had just 4.69 percent.
The performance was better than other heavily regulated states, such as New Jersey and Connecticut, that lost large numbers of businesses.
However, thriving Silicon Valley accounts for much of California’s better showing. Setting the tech phenomenon aside, regulation is certainly choking out jobs, especially among conventional startups that struggle for funding.
“It’s a little bit like a bad diet,” Winegarden said. “There are some people who eat horribly, don’t exercise, and live to 90. That doesn’t mean a bad diet is good for you.”
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