January 12, 2014

As Goes Small Business… So Goes America

by Hal Gershowitz

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While we both have enjoyed senior positions in major firms in our respective careers, in the interest of candor, we’ll disclose our mutual bias in favor of small business.  It’s not just because we grew up in households whose breadwinners were small businessmen (Gershowitz, the son of inner city, corner grocers, and Porter whose father worked for a company that sold dry-goods to retailers), but, more importantly, because small business has been, and is, the backbone of the American economy.  New enterprises in America have always grown from small businesses, from ideas of small businessmen and women, and most importantly, from their pursuit of that nebulous phenomenon known as the American Dream.

Should the day ever come when ambitious and industrious men and women no longer believe it possible to fulfill that dream; should that dream ever be relegated to wishful thinking or be banished to fantasy, then we will have come to the proverbial end of the road.  We will have become both the product and the victim of conformity, regimentation and stagnation.  The dream will be over and the nightmare will have begun.

Our purpose is not to cast aspersions on big business.  Far from it. Nearly all big businesses began as small businesses, and that small-to-large cycle has been the envy of the world. It is almost cliché today to talk about great enterprises in America that began in someone’s garage.

Successful small businesses grow into larger businesses and some larger businesses often grow into big business.  Think about it. The Coffee Bean & Tea Leaf, also known as “The Bean” has approximately 350 company-owned stores, with locations in Southern California, Las Vegas, Honolulu, New York City and Southeast Asia.  But it began as a mom-and-pop coffee shop started by Herbert B. Hyman in 1963.  Then there’s Ben & Jerry’s, which was founded in 1978 by Ben Cohen and Jerry Greenfield in a rundown gas station in Burlington, Vermont. In 2000, Unilever purchased Ben & Jerry’s for about $326 million. Even Wal-Mart, the biggest company in the world with more than two million employees and 8,500 stores worldwide, began when Sam Walton, opened Walton’s Five and Dime in Bentonville, Arkansas in 1950. Two small grocers, John Mackey and Rene Lawson Hardy opened up a small natural foods store called Safer Way Natural Foods in Austin, Texas in 1978, They merged with Clarksville Natural Grocery owners Craig Weller and Mark Skiles and together they created the original Whole Foods.

Small to large is, in many respects, the American Dream. It is a vital cycle, and that growth cycle plays a vital role in the economic growth of the country. And when all is said and done, economic growth is the only reliable answer we have to the myriad of challenges we face.  Burden small business enough, and we simply burden the economy and the people it serves.

In the aggregate, small business is anything but small.  The nation’s 30 million small businesses employ nearly 60 million people, even though most of these firms have five or fewer employees.  No one in Washington really seems to care very much about firms with five or fewer employees, but you should.  Here’s why.  These small firms actually create two-thirds of the net new jobs each year in America, and, collectively, they represent half of the entire economy.

Every politician and every government official embraces, in word, fidelity to Main Street and to small business.  But their collective deeds fall far short of their words.  They are mostly people who never planned inventory, or planted crops, never made a product or, for that matter, met a payroll.

We have thousands upon thousands of bureaucrats whose livelihoods depend on writing rules and regulations complemented by yet another huge cadre of enforcers who hold the hoops through which our entrepreneurs must jump.  Regulation writing and enforcement has become Washington’s great growth industry. And what an industry it is.  It requires no customers, and it runs on the only payroll that can be printed at will.

We recognize the need for sensible rules and regulations in a large and diverse economy such as that of the United States.  But we also believe that every new regulation on business, especially small business, should be subjected to careful scrutiny to determine the need and necessity of any proposed regulation.  That just isn’t happening.  As we go to press this week there are over 3500 new federal regulations in the pipeline and over 20% of them directly impact small business.

According to a recent study conducted by George Washington University in Washington, DC and Washington University in St. Louis, there are more than 283,000 full time government employees dedicated to drafting and enforcing regulations and less than 50 employees in the Office of Budget and Management reviewing new regulatory mandates to determine if they are justified prior to implementation.  Does this possibly make sense to anyone?  Of course not.

While federal rules say that all new regulations must be subjected to public review and comment, the Government Accountability Office determined that between 2003 and 2010 one third of all major new rules (those costing business over $100 million to implement) were subject to no public review or comment. $100 million here and $100 million there adds up pretty quickly.  One recent study estimated that the annual cost to business of complying with various government regulations is about $1.8 trillion.  That’s more than half of what it takes to run the entire federal government.

The US Small Business Administration (SBA) says the annual cost of federal regulations per small business employee is $10,585 compared to $7,755 for large companies. Yes, the cost per employee is higher for small companies than it is for big companies.  That’s because big companies have more employees over which to spread the cost.  SBA reports that it costs small business 36% more to comply with federal regulations than big business.

President Ronald Reagan used to joke that in America the nine most terrifying words in the English language are “I’m from the government, and I’m here to help.” Twenty years ago that was just a good laugh line.  Today, nobody in business thinks its funny.

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One response to “As Goes Small Business… So Goes America”

  1. Mark J Levick says:

    To start or operate a small business one must be an entrepreneur. A completely diferent type run both corprate America and Government — bean counters who lack creativity and imagination but are supported by massive amounts of money and resources. Corporate America hires lobbyists who influence legislation favorable to their clients. As you pointed out no one oversees bureaucrats and they are influenced solely by the minions of the President. The current occupant of that office has no business experience. Neither do his staff. Those folks do have fundraising experience and relationships with Corporate America and determine who gets a pass (Big Pharma) and who gets regulated out of business (Big Coal). The result of this myopia and political muscle is no job creation program other than expansion of Government and its public employee unions and focus on increasing the compensation of small business employees to a “living wage” standard pushed by paid union organizers. As you pointed out, small business is our engine of growth and prosperity. That engine has little clout in Washington and is being systematically derailed by those who see the economy as something to be manipulated to achieve ideological, political and monetary remuneration objectives.

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