Local governments can help address the crisis in entrepreneurship by cutting red tape.
The state of entrepreneurship in America is in a “crisis.” While the cost of starting a small business continue to decline, the number of new firms as a share of all companies has dropped 44 percent since 1978.
The drop in self-employment is “one of the great mysteries in economic data today,” says Jon Lieber, chief economist of Thumbtack.com, a firm that creates digital marketplaces to connect local businesses with customers. Yet while there isn’t one culprit to single out for blame, “creating the right environment for business start-ups is more important than ever.”
In fact, Thumbtack’s latest Small Business Friendliness Survey finds that red tape is a bigger factor than taxes when it comes to what entrepreneurs look for in a local business climate.
“Governments should make it as easy as possible for aspiring small business owners to pursue their dreams by streamlining the bureaucratic process to start a business,” says Lieber in an interview:
You’ve described entrepreneurship in America as being in a state of “crisis.” What has contributed to the decline in self-employment?
The thing about the decline in entrepreneurship is that no one really knows what is causing it — it is one of the great mysteries in economic data today. Two theories I’m interested in are:
1. The proliferation of franchises and large, scalable corporations moving into spaces they weren’t in 30 years ago; and
2. The combination of regulatory burdens and the preferences of real estate developers that give larger, established companies an edge that crowd out upstart younger businesses.
Well-intentioned regulations impose a fixed cost that larger companies can more easily afford. Knowing this, larger firms often condone new regulations since they prevent people from striking out on their own.
What themes do you see emerging from states that ranked highest in the survey, such as Texas and Utah?
There are basically two key things that states could really focus on coming out of our survey: offer proactive help for very small business owners and make regulatory compliance simple and consistently enforced.
A lot of the small businesses who use our platform feel pretty isolated — they aren’t part of professional networking associations, and they spend their time traveling and building their customer base.
The opportunity to connect with people in their industry and learn from government officials and civic organizations how to better run their business and comply with the rules is highly valued.
Many of the rules put in place by local governments are opaque, confusing or sometimes contradictory. Developing a simple system that works in harmony with neighboring jurisdictions — and making sure to crack down on scofflaws who operate without following the rules — would make a big difference to the small businesses in our survey.
What else would improve the environment for starting a business — at a national or local level?
The more government-imposed hurdles there are to getting off the ground, the less likely it is that a business will actually get up and running. The first thing I would do is examine any and all professional licensing requirements for as many industries as possible, and see if it made sense to either eliminate these altogether or transition them to less-burdensome certification programs. Certification programs provide consumers with information about who is qualified without stifling entry into a field.
One of the most surprising — and consistent — findings in our study is that smaller businesses generally don’t mind the money coming out of their pockets to pay for local services in the form of taxes, but the time cost of figuring out and complying with a complicated regulatory regime is a killer.
Making it easy to start a business doesn’t just entail cutting red tape, though: it’s often just as important to provide the resources that small businesses need to navigate this inevitably tricky process. That means hosting helpful training and networking programs and developing websites that provide much needed information quickly and easily.
Our view is that more data is always better for improving the business environment — it’s why we’ve done this survey for four years in a row. Kudos to cities like Seattle and Boulder for embracing this movement — let’s hope others follow their lead.
(Top image: Courtesy of Thinkstock)
Jon Lieber is Chief Economist of Thumbtack.com.