A new working paper from libertarian think tank CEI called, hilariously, Tip of the Costberg: On the Invalidity of All Cost of Regulation Estimates and the Need to Compile Them Anyway, reveals that regulations cost American businesses $1.863 trillion annually. While that number is staggering, something somewhat buried in the blog post on the report is actually much more important. An earlier Small Business Administration report revealed “the extent to which regulatory costs impose higher burdens on small firms, for which per-employee regulatory costs are higher.”
Sounds obvious, and rather innocuous, doesn’t it? It’s harder for small firms to comply with regulations. What we have here is a classic case of the seen versus the unseen. Costs, we can measure -- even if poorly, as the Costberg paper points out. What we can’t see is the innovation we lose out on when small firms go under in the face of regulatory burdens.
And go under they do. According to the SBA, over 50% of small businesses fail in the first five years. According to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months.
Failure itself isn’t a bad thing. Creative destruction is extremely important in a functioning economy. But many firms are failing due to government regulations instead of market signals.
There are lots of reasons firms fail, but when you look at the industries where startups are least likely to be operating five years in, they closely overlap with the industries with the highest levels of regulation. For example, within just four years less than half of all manufacturing, construction and utilities startups are still functioning. Healthcare, manufacturing, and energy and utilities are the three most regulated industries.