The number of new businesses has been on the decline since 2008, with more businesses closing than opening. The US Census Bureau confirmed the statistics, which was reported on by Gallup earlier this year. This startling trend also reaffirms a study released last year by the Brookings Institute, which noted that 2009, 2010, and 2011 saw the collapse of businesses faster than their creation.
The annoying thing about the Brookings Institute’s study is that they do not attribute the decline to anything in particular, saying that they need “a more complete knowledge about what drives dynamism, and especially entrepreneurship, than currently exists.” This is utter nonsense, and reinforces why I typically don’t pay attention to what the Brookings Institute says. They are providing political cover for the Obama Administration with their non-conclusive conclusion about the decline of new business.
The most suffocating factor is the sharp rise of federal regulations, which now cost the American economy nearly $1.9 trillion every year — more than 10% of our nation’s GDP. Add in state and local regulations, and that total is even higher.
Not surprisingly, the rates of business start-ups and deaths have changed for the worse as regulatory costs have grown. No wonder: Anyone who wants to stay in business has to keep finding more money to pay for higher costs, while anyone who wants to start a new business has to clear financial and legal barriers that get taller every year. The founder of Subway recently remarked that his company “would not exist” if today’s regulatory burden had existed when he started it in the 1960s.
Simply look at the past few years to see how the regulatory state has grown. Between 2009 and 2013, the federal government added $494 billion in regulatory costs to the American economy. The highlight was 2012, when President Obama and his executive agencies published over $236 billion in new costs. As for 2014, the federal government announced over 79,000 pages of new regulations, costing a total of $181.5 billion.
That’s equivalent to 3.5 million median family incomes. But it isn’t flowing to families through new jobs and higher wages — it’s lost on lawyers, paperwork and other compliance costs.
I was curious what some of the largest wealth managers had to say about the economy. Was anyone talking about the recovery (or lack thereof)? High taxes? Regulation? I took a sampling of the CEOs of Citigroup, JP Morgan Chase, Goldman Sachs, and Morgan Stanley to see what, if anything, they’ve publicly discussed in the last 6 months to a year. The only one that has spoken on the subject is Jamie Dimon of Chase, who stated earlier this year that “the U.S. economy is doing well” but he blamed poor government and regulatory policies for hurting growth. “We’re growing at 2.5 percent. We should be doing better. “I blame them all,” Dimon said of politicians. “To me, they waste a lot of time pointing fingers and not collaborating.”
But they do spend time regulating. This is the canary in the coalmine which impacts new and potential entrepreneurs. Many see the start up costs and the regulatory headaches as too burdensome a barrier to even begin, thus deciding it’s not worth it. Small businesses have been the backbone of America, the pathway to our greatness, and this recent, rapid decline in American business is most alarming.