Last month, I wrote about over-regulations impact on business development and job creation. The U.S. Small Business Administration estimates that regulation costs our economy approximately $1.75 trillion annually or about twice as much as the total personal income receipts of the government. One can argue that this is all necessary if we are to keep our citizens safe and our environment as pristine as we can make it.
A November 16 article in the Wall Street Journal written by John Mackey, the co-founder and CEO of Whole Foods spoke about the need for economic freedom to promote business development and job growth. He went on to equate the decline of business development and job growth to the rise in our business regulatory policy growth. It has been reported that this past year the various regulatory agencies in the federal government have issued over 80,000 pages of new regulations. It does not take a rocket scientist to determine that the time and cost of compliance would strangle most economic growth - particularly in the small business sector which traditionally has been the engine of job growth in the American economy.
A Nov. 4 Gallup Poll showed that 79 percent trusted small business owners most to create job growth while major corporations, politicians and national government polled at less than 50 percent.
On Nov. 8 the National Federation of Independent Business showed their Optimism Index is still looking pessimistic - remaining below 90 when in more normal times it runs well above 100. Yet in spite of this and confirming the publics perception, a survey by Automatic Data Processing (aka ADP the payroll processing firm) showed that businesses with fewer than 50 employees added 58,000 jobs in October with the balance of the 110,000 job growth from companies with 50 to 500 employees. Companies larger than 500 eliminated jobs.
Since 2001 employment at small companies has grown by 6.5 percent to almost 50 million while employment at the larger firms has declined from 21 million to 17.5 million. Most of the large firm job loss comes from moving processes and manufacturing overseas while the small business sector is not prone to use that tactic.
We need to find ways to encourage more new business development if we are ever going to regain the job growth that we need. The Kauffman Foundation shows that our current start-up rate is off by 23 percent in spite of the fact that their surveys show that 54 percent of the young people between the ages of 18 and 34 want to start their own business. Discouragement comes in the form of lack of access to capital, excessive regulatory hurdles, lack of specific tax incentives, etc. In 2007 the U.S. was ranked by the World Bank as the fourth best country to start a business and today we have slipped to 13th.
Yet our small business sector is still limping along and providing essentially all of the job growth in our economy, and young people are finding ways to get businesses started. Let me give you a couple of examples.
In the Nov. 21 Wall Street Journal, Justin Lahart writes about a Rhode Island small business called Pilgrim Screw Corp. that recognized early in the recession that a talented work force was essential to long term success. They met with their 65 employees and worked out a 4-day work week until things improved. They were able to replace part of the wages with a subsidy from the states unemployment compensation plan, much like Minnesota has. This has helped the company crawl back and slowly add back the full 40 hour work week.
The Wall Street Journal on Nov. 14 reported on the winner of their small business innovation award. The company was Quadlogic Controls of New York. Their sales declined 70 percent at the start of the recession. They make energy tracking systems that allow tenants in a building to manage and pay for their own usage, but with the housing market decline they were in trouble. They had done some work on a product that would help prevent electrical metering systems from being breached and the energy essentially stolen. This was a big problem for third world countries so they immediately completed the product development and were able to gain a sale from a large utility in Jamaica. Within months of this sale they were adding employees and by the end of the year setting sales records.
One of finalists for the WSJ award was a Duluth-based company, Laughingstock Design. This graphic design business, started by Shane Bauer, specializes in high-end custom greeting cards. As the recession impacted his business he began to look around at where else he might apply his design talents. He chooses T-shirts with positive slogans. He called the new venture Happy Space PositiveWear. His business is up and he has opened a retail store and hired three employees, two part time and one full time.
A woman friend of mine has a consulting business that is focused on helping medical tech companies do the required clinical trials for FDA approval. When the new health care bill was proposed the medical device companies essentially ran scared and backed off new product development. She looked to Europe where the device industry was thriving with easier pathways for companies to gain approval to market their products. She worked on developing personal expertise in the new market and hiring natives with specific knowledge of the European regulatory process. This helped her get sales back into a growth pattern and gave her company a hedge against the country to country regulatory vagaries that can impede new medical product development.