A Fundamental Shift in the Economy, At Least for Entrepreneurs and Small Business

When politicians argue about small business growth, they argue about stuff like taxes and access to capital and, god help me, completely irreverent (to small business) stuff like the ExIm Bank.

I would argue that there has been a fundamental shift in the economy relative to small business over the last four years, but it has nothing to do with any of that stuff.  I would summarize this shift as follows:

Ten years ago, most of my company's free capacity was used to pursue growth opportunities and refine operations.  Over the last four years or so, all of our free capacity has been spent solely on compliance.

Let me step back and define some terms.  What do I mean by "free capacity?"  In a small, privately-held company, almost all the improvement initiatives spring from the head of, or must heavily involve, the owner.  That would be me.  I have some very capable staff, but when we do something new, it generally starts with me.

So OK, our free capacity is somewhat limited by my personal capacity as owner and President.   But actually, I have a head full of ideas for improving the company.  I'd like to do some new things with training that takes advantage of streaming video.  I'd like to add some customer service screening to our application process.  But my time turns out not to be the only limit -- and this is one of those things that HBS definitely did not teach me.

In the real world, there are only so many new things I can introduce and train my line managers to do, and that they can then pass down to their folks.  An organization can only accept a limited amount of new things (while still doing the old things well).  This is what I mean by "free capacity"  -- the ability to digest new things.

Over the last four years or so we have spent all of this capacity on complying with government rules.  No capacity has been left over to do other new things.  Here are just a few of the things we have been spending time on:

  • Because no insurance company has been willing to write coverage for our employees (older people working seasonally) we were forced to try to shift scores of employees from full-time to part-time work to avoid Obamacare penalties that would have been larger than our annual profits.  This took a lot of new processes and retraining and new hiring to make work.  And we are still not done, because we have to get down another 30 or so full-time workers for next year
  • The local minimum wage movement has forced us to rethink our whole labor system to deal with rising minimum wages.  Also, since we must go through a time-consuming process to get the government agencies we work with to approve pricing and fee changes, we have had to spend an inordinate amount of time justifying price increases to cover these mandated increases in our labor costs.  This will just accelerate in the future, as the President's contractor minimum wage order is, in some places, forcing us to raise camping prices by an astounding 20%.
  • Several states have mandated we use e-Verify on all new employees, which is an incredibly time-consuming addition to our hiring process
  • In fact, the proliferation of employee hiring documentation requirements has forced us through two separate iterations of a hiring document tracking and management system
  • The California legislature can be thought of as an incredibly efficient machine for creating huge masses of compliance work.    We have to have a whole system to make sure our employees don't work over their meal breaks.  We have to have detailed processes in place for hot days.  We have to have exactly the right kinds of chairs for our employees.  We have to put together complicated shifts to meet California's much tougher overtime rules.  Just this past year, we had to put in a system for keeping track of paid sick days earned by employees.  We have two employee manuals:  one for most of the country and one just for California and all its requirements (it has something like 27 flavors of mandatory leave employers must grant).  The list goes on and on.  So much so that in addition to all the compliance work, we also spent a lot of work shutting down every operation of ours in California, narrowing down to just 3 contracts today.  There has been one time savings though -- we never look at any new business opportunities in CA because we have no desire to add exposure to that state.

Does any of this add value?  Well, I suppose if you are one who considers it more important that companies make absolutely sure they offer time off to stalking victims in California than focus on productivity, you are going to be very happy with what we have been working on.  Otherwise....

I fully understand the dangers of extrapolating from one data point**, but for folks who are scratching their head over recent plateauing of productivity gains and reduced small business origination numbers, you might look in this direction.

By the way, it strikes me that regulatory compliance issues set a minimum size for business viability.  You have to be large enough to cover those compliance issues and still make money.  What I see happening is that as new compliance issues are layered on, that minimum size rises, like a rising tide slowly drowning companies not large enough to keep their head above water.  We are keeping up, but at times it feels like the water is lapping at our chin.


**Unrelated Postscript:  I have found that in the current media/political world, people love to have only one data point.  Why?  Well, with two data points you are are stuck with the line those points define.  With just one, you can draw any line you want in any direction with any slope.


  1. DirtyJobsGuy:

    Coyote you are on target! I'm a partner in a small engineering consultancy and OSHA compliance is our bugaboo. California of course has it's own set of OSHA rules.. They are virtually identical to the federal ones except to add some key gotcha terms to support lawsuits. So my highly trained and experienced engineers have to have Cal-OSHA training and our policies must call out that our workers can have shade and potable water.

  2. kidmugsy:

    Chin up! If California is going to die by drought you may end up grateful for being driven out by the legislature.

  3. STW:

    California used to be a pretty nice place. I moved there as a teenager in the 60s and, apart from atrocious air in and near LA, there was little not to like. I think the biggest mistake the state made was to have a year around legislature with the added inducement of paying the politicians per diem for everyday in session. That's a lot of time to fill and it's usually filled by doing something unnecessary. Just because you can doesn't mean that you should. A lesson I never was taught in California schools.
    I saw the writing on the wall, repented, and returned to Montana ten years ago. Our legislature meets only 3 months every other year. Most of the legislators, therefore, also have a real job and have to spend 7 months facing their neighbors for every month they spend in Helena. It helps keep them from getting too frisky.

  4. J_W_W:

    Traditionally small business growth has led the way out of recessions. This last recession that was not the case (and everyone wonders why the recovery was so slow, hmmm).

    There is definitely more that one data point for how horrendous the regulatory state has been on business opportunities.

    Uber is the proxy battle of the regulatory state against business. If Uber ever completely folds as a company, it will be regulations that will kill it. Frankly, I'm shocked they haven't pulled completely out of California yet. I really love what they did to De Blasio in New York.

  5. Matthew Slyfield:

    "Several states have mandated we use e-Verify on all new employees, which
    is an incredibly time-consuming addition to our hiring process"

    I thought e-Verify was supposed to be quick.


    Of course it's time consuming and inefficient, the government built it.

  6. Tom Murin:

    Read what George McGovern said about running a business after leaving the Senate. It has only gotten worse since then. What company is going to hire that 51st employee given the marginal cost of Obamacare compliance?

  7. jdgalt:

    I would amend your last paragraph: what the regulations do is to create a "notch filter", where a business, to be viable, either needs to be above some medium size (you would know that point better than I) or much smaller (say, fewer than 20 employees, because many labor laws only kick in once you hire #20).

    I suspect that this result is deliberate, and derives from the Left's hatred of chains like McDonald's and Wal-Mart. New stores in those fields will need to find a new way to imitate the economic model of franchising while not allowing the DoL to suspect that they are franchising. Thus consumers lose the benefits of knowing what they'll find when they walk into a "Brand X" store.

  8. andy:

    I perform everify checks for employers and the process takes several minutes for most employees. Unless you are hiring a lot of resident aliens and other non-citizens, the process is no where close to an incredible time-consuming additon. The biggest issue I see is people that failed to change their name w/ SSA after marrying and the use their new name on the I-9.

  9. herdgadfly:

    Then there are the liberals who stretch the truth about concessionaire jobs in our parks.


  10. itsatax:

    I now spend at least 65% of my time on compliance. Used to be about 15%. Local zoning process, land development process, building permits, road bonds, contractor registrations/COIs etc (Get this, munis are now often requiring contractor workers comp COI before issuing a zoning permit. who bids projects before they even have a zoning approval?) Anyway, County storm water management (plans, agreements, bonds), permitting, county assessors office "building permits" (yes, this is catching on as a mechanism to track and tax improvements). State historic preservation office studies/approvals, sometimes agreements rqd. State Highway occupancy permits (driveway permit). Tribal historic preservation. Need to notify and get responses of no interest from all 500+ Native American tribes for FCC related projects. State aviation bureau approvals. FAA determination for projects of height. National EPA studies/approvals. And another newer one, Clean Water Act, the National Pollutant Discharge Elimination System (NPDES) process for projects over 1 acre This is expensive, takes alot of time, requires ongoing inspections per required agreement etc). and if you are improving an older structure, the lead based paint and asbestos lead to another raft of paperwork and requirements.

    I'm sure I'm forgetting some things, but time consumed by this stuff has increased at least 5-fold over the past 15 years, and at least half of the thing listed about didn't even exist

    You can tell who the old timers are because they still sometimes say crazy stuff like "pull the building permit". Like you can just go down to the municipality, apply and get a building permit over the counter. More like 12-18 months of unproductive work first.

    And in the end, the projects are build almost exactly as they would have been without all this compliance work. Some of the new storm water controls now mandated are different from how things were done years ago, but that's about it.

  11. TMallory:

    I run a small consulting firm with only two people. The amazing thing to me is how much time and money we spend with attorneys and accountants to sift through all of the regulations just for two of us. I ran larger companies for most of my career and it's far more disruptive when all of these management activities are also absorbing your whole labor force.

  12. NL7:

    You'll never run out of compliance to do. There's just always more to do, to document, to change, to monitor. Get comfortable with it being incomplete. Get zen about compliance: easy to learn, impossible to master.

    Most of the states that mandate e-verify have not-great compliance rates. I think they average around half of hires are made in compliance.

  13. NL7:

    Except it's even more complicated than that because of the full-time-equivalent calculation. So employers with part-timers and seasonal workers might not know exactly where they are on the scale. You could easily have a hundred workers in your payroll system before you trip over 50 total equivalent employees. Seasonals make it more complicated.

    And other rules kick in at an average of 50, no part-time calculation. And some at 20 employees.

    Lots of ACA rules apply regardless of employer size, like the age 26 rule or the preexisting conditions rule. Most small employers might not realize that their old health plans (especially if you reimburse premiums with cash) may be illegal.

  14. donald:

    but think of all those jobs you created. Government employees to deny your paperwork for being in the wrong ink color or pen type. Inspectors to make sure your private inspectors are inspecting properly, and of course my personal endeavors, professionals to "help" you navigate the onerous regulations.

  15. Matthew Slyfield:

    Jobs doing unproductive work are a net loss, not a gain for the economy. Such jobs destroy wealth, they don't create it.

  16. Mike Powers:

    The basic assumption by regulators is that You Should Be Doing This Stuff Already, and if you aren't, well, you should learn how instead of whining about how hard it is.

    The idea that not everyone in the world tracks things on a Microsoft Project schedule is completely incomprehensible to them. As is the idea that, e.g., a small jewelry business with two employees and a stockroom in someone's garage might not be tracking its inventory all the way back to the mine the produced the ore that got smelted into the brass used to make the chain links that go into the jewelry.

  17. J K Brown:

    A couple of observations from the past:

    But no one, I think, has ever called attention to the enormous differences in living, in business, in political temper between the days (which practically lasted until the last century) when a citizen, a merchant, an employer of labor, or a laboring man, still more a corporation or association and lastly, a man even in his most intimate relations, the husband and the father, well knew the law as familiar law, a law with which he had grown up, and to which he had adapted his life, his marriage, the education of his children, his business career and his entrance into public life -- and these days of to-day, when all those doing business under a corporate firm primarily, but also those doing business at all; all owners of property, all employers of labor, all bankers or manufacturers or consumers; all citizens, in their gravest and their least actions, also must look into their newspapers every morning to make sure that the whole law of life has not been changed for them by a statute passed overnight; when not only no lawyer may maintain an office without the most recent day-by-day bulletins on legislation, but may not advise on the simplest proposition of marriage or divorce, of a wife's share in a husband's property, of her freedom of contract, without sending not only to his own State legislature, but for the most recent statute of any other State which may have a bearing on the situation.

    --Popular Law-making: A Study of the Origin, History, and Present Tendencies of Law-making by Statute, Frederic J. Stimson (1910)

    The complexity is both described and exemplified by that sentence.

    Now from the 1950s, although today I would call it "government strangled" enterprise:

    Is the big and successful corporation its own master, then? Not quite.

    To begin with, it is severely circumscribed by the government. as Professor Sumner H. Slichter has said, one of the basic changes which have taken place in America during the last fifty years [1900-1950] is "the transformation of the economy form one of free enterprise to one of government guided enterprise....The new economy," says Dr. Slichter, "operates on the principle that fundamental decisions on who has what incomes, what is produced, and at what prices it s sold are determined by public policies." The government interferes with the course of prices by putting a floor under some, a ceiling over others; it regulates in numerous ways how goods may be advertised and sold, what businesses a corporation may be allowed to buy into, and how employees may be paid; in some states with Fair Employment laws it even has a say about who may be hired. "When a piece of business comes up,' writes Ed Tyng, "the first question is not likely to be 'Should we do it?' but 'Can we do it, under existing rules and regulations?' "He is writing about banking, but what he says hold good for many another business. Furthermore, in the collection of corporate income taxes, withholding taxes, social security taxes, and other levies the government imposes upon the corporation an intricate series of bookkeeping tasks which in some cases may be as onerous as those it must undertake on its own behalf. Thus the choices of enterprise are both hedged in and complicated by government.

    --'The Big Change: America Transforms Itself 1900-1950' (1952), Frederick Allen Lewis

  18. Not Sure:

    You should contact Coyote about performing these checks for him. If he thinks they are incredibly time consuming while you know they only take several minutes, you can probably work out an agreement that's financially beneficial for both of you.

  19. Phillip of Sydney:

    As a small business owner in Australia and an avid reader of the Coyote Blog, I am continually surprised by how little regulation I have to comply with here compared with the situation in the US. I am not in an industry requiring licensing, there are no employee health care contributions to worry about, and my employees are not in unions. The only major regulatory issue is complying with unfair dismissal laws (which have caught us out a few times).

  20. bannedforselfcensorship:

    Note that cuts both ways...no new ideas either because its too hard to get compliance approval.

  21. bannedforselfcensorship:

    Bigger countries can get away with more onerous stuff.

  22. bannedforselfcensorship:

    My solution: Congress meets only every other year.

    During the off year, each congressman is assigned a random business in their district, and the congressmen for that year is responsible for all regulatory issues, Sar-Ox style. No staff will be allowed to assist in this effort.

    Watch the regulations melt away.

  23. jdgalt:

    That would work, but I'd expect better results from just restoring the original meaning of "interstate commerce" (by overturning Wickard v. Filburn). This will only require electing a President who will put strict constructionists on the Supreme Court.

  24. mesocyclone:

    Remember that Coyote is a very strong open-borders fan, so E-verify is ideologically anathema to him. I suspect he may be exaggerating.

  25. slocum:

    One of the things that people outside the U.S. don't really appreciate is how much the legal and regulatory environment differs between states in the U.S. Some of the things folks are complaining about is new and national (e.g. Obamacare mandates and expanded EPA requirements, for example), but a large fraction are state, county, and city regulations which are much more onerous in some states and localities than others.

  26. LetsTryLibertyAgain:

    Government bureaucrats, and the private sector compliance specialists they spawn, are quite myopic. To them, the compliance is easy. It's their entire job, and they are natural born bureaucrats. When you do something over and over, you can fully understand it and learn the short cuts, develop time saving processes, etc. Now imagine that you instead own and operate a small business, and your focus is your business and supplying high value goods and services to your customers, and not some meaningless and time wasting government regulation. The compliance looks completely different. There are hundreds of different compliance issues forced upon you by government bureaucrats, and they're all different. Each demands a different chunk of your time and different booklets full of rules that change often while inexorably trending toward more complexity and more time spent on compliance. The more complex compliance issues become too much to take on as yet another unpaid government mandated job, so you are forced to hire another consultant, and that cost comes right out of the narrow profit margin you were hoping to achieve this year. The very fact that there is a consulting job for some form of compliance proves that government compliance IS a very big problem for small business. If E-verify compliance was so easy, it wouldn't be a job. Small businesses would do it themselves rather than pay someone else to do it.

    I guess there are two sides to the compliance issue. For every new regulation, there will be the vast majority of small businesses harmed by it, and the small number of consultants who profit from it by charging for government mandated work that doesn't produce anything of value to anyone, and it's obvious which group will complain about the regulations and which will defend government regulations. Tax accountants, tax lawyers, E-Verify compliance consultants, ex-FDA managers who become consultants who are highly paid by drug companies to grease the compliance wheels and get new drugs approved... all are added to the majority of big government voters in our doomed democracy that was once a thriving constitutional republic. All of the people doing useless government mandated work that does not contribute to the REAL gross domestic product are added to the corporate welfare cronies and the social welfare recipients, all of whom are reliable Big Government voters. Every year, we have fewer makers and more takers. It's a doomed system.

    Future economic growth starts with new businesses today. It's tough enough to start a new business in a healthy competitive market, but most new businesses are now being strangled to death in their cribs by red tape.

  27. HRIT:

    It's a reminder of that old small business adage about being careful not to spend too much time working in the business, and too little on it. Except that you don't really have a choice.

  28. Dwall:

    Feds Regulate Away Airboat Jobs in Florida. Legalinsurrection.com

  29. Milton_Hayek:

    The old idea of socialism was that the state owned the means of production. Socialists have evolved and realized this is too unwieldy a process, so they have commandeered the private sector in the name of employee and social rights.

    Making the rules of operation & taxing away the wealth without lifting a finger, or assuming any responsibility...

  30. Milton_Hayek:

    TX has a similar part-time legislature. OH has a full time legislature, Rep dominated, yet still full of mischief and profligate spending...

  31. bigmaq1980:

    And therein lies (in both senses of the word) the Keynesian notion of a government spending multiplier effect.

  32. bigmaq1980:


    Can recall the echos of "the do nothing Congress" from the media.

  33. bigmaq1980:

    Right. Think FDA and drug approval. How many beneficial meds or procedures are held back in the name of "safety"?

    We will probably see India or China eventually come to dominate the pharmaceutical industry.

    Been advocating a policy that requires FDA approval if three other western nations (of five, or seven) have given their approvals.

    No way the FDA has a monopoly on "smarts" and on "care" for its citizens.

  34. bigmaq1980:

    Wonder if Coyote has operations in TX and find compliance requirements substantially less than other states with full time legislatures.

  35. bigmaq1980:

    You are right...something of a notch filter.

    Probably varies by type of business though.

    Restaurant businesses are probably rather vulnerable, and while these regs are aimed at the McD's of the world, the ones suffering most are the M&P shops.

  36. bigmaq1980:

    Oh, you mean like the National Socialists a few generations ago?

    Excellent point!

    Many think that power used in a certain way is socialism, but if ownership by the state is not involved, then it somehow is different.

    Fact is fascism and socialism are two sides to the same coin, both intent on control of people and resources, both end in the same place.

  37. bigmaq1980:

    Big or small, there has also been "regime uncertainty" under Obama.

    This naturally tends to them "hesitant" to invest.

    Instead, we now clearly see that even the largest corporations have been borrowing largely to fund stock buybacks.

    Low interest rates have encouraged this, along with allowing the current regime to borrow heavily without consequence.

    The next POTUS or after will have to deal with those consequences, as rates eventually will rise.

  38. bigmaq1980:

    Oh, didn't you know that the Cal-OSHA has been recently updated to mandate that workers must also have a fire extinguisher! ;)

  39. J Calvert:

    Yes, regulatory compliance is a dressed up exercise in paying one man to dig a hole, and mandating another man fill it back in.

  40. jdgalt:

    People have a right to consume whatever substances or treatments someone is willing to provide them. Let's reduce the FDA's authority to labeling only.

  41. bigmaq1980:

    Yes, if we could do it in one leap.

    Reality is it might take several steps.

    Reducing their monopoly authority by a "three and agree" plan would go a long way towards that point, and might be more saleable.

  42. Jerry BoyBoy:

    Another point not mentioned above or below: The "regulations" can be so ambiguous that an entrepreneur does not even know how to comply. Or the "regulations" are clear but the bureaucrat interprets it differently leading to litigation where it is unwarranted.

  43. jdgalt:

    Or the President tells the NLRB or EPA to interpret them in totally bogus ways because he thinks the law is a game of Calvinball and he's Calvin.

  44. Clare Steen:

    From the forum in Atlanta a year ago: "Warren's big accomplishment of the year (2014) was turning a $1M ACA penalty into a $12k penalty by switching all but six employees to PT." https://instagram.com/p/uRhtM5rVSv/