How Risk Regulation Is Killing Risk Takers
One of the more fascinating, yet largely ignored, characteristics of human psyche is something called "loss aversion." This blip in human psychological development means that, generally, people are more afraid to lose something they have than they are motivated to gain something they don't have.
An example; wager (legally) $5 on a hand of blackjack. Now, five dollars might be nothing more than pocket change. Try $100. That feeling you get in the back of your neck is anxiety and for most people their anxiety at losing $100 is greater than the anticipation of potentially doubling their money.
Another, more sobering real-world example: Quit your job. Turn in your letter of resignation to your boss and start that small business you have long dreamed about. Scary isn't it? You have no idea if your business idea may turn into the next Google, FedEx or Starbucks and bring you financial security.
It is a risk and risks are scary, even if the potential payoff is big. Simply put, in life, there are no guarantees.
Entrepreneurs are people who see a gap in a service or a need for a product and are willing to risk their financial and personal well being to fulfill that need.
But most entrepreneurs and their small businesses fail. Sixty-six percent of these endeavors fold within the first five years. There are a number of reasons why this happens. Much of the time business failure comes from mis-timing the market, ineptitude on the part of the owner/operator, or just plain bad luck.
But sometimes, there are external forces that deal a deathblow to a small business that have nothing to do with the market or competitors.
Much has been made the last couple of years of tax burdens throughout the nation and the amount small businesses have to pay. This is an important topic, but an equally important issue that has been largely ignored until lately is the regulatory burden government places on these same businesses.
The cost of federal, state and local regulations is not insignificant. The U.S. Small Business Administration recently reported that compliance costs for federal regulations exceeds $1.75 trillion per year. That is the size of the entire federal budget at the end of the 20th century.
And small businesses bear the brunt of that cost. Small businesses, those with fewer than 500 employees (the federal government's definition), usually pay about 35% higher compliance costs than larger businesses. Large businesses can spread the cost of regulations among a broader base of employees or products. The marginal cost is less and large firms can also benefit from a greater economy of scale. Smaller firms do not have the same resources at their disposal to help mitigate similar costs. This puts small businesses, especially those under 50 employees, at a competitive disadvantage.
Regulations are also off the books and the rulemaking process is opaque. When was the last time you saw a newspaper headline praising or excoriating a new regulation coming from a state or federal agency?
The fact is that our nation of laws is quickly morphing into a nation of codes. A recent report from the Competitive Enterprise Institute, titled 10,000 Commandments, shows that federal regulations alone continue to proliferate at a rapid pace. Nearly 60,000 federal rules have been issued in the last fifteen years alone. This number does not include the number of new state regulations.
The fact is that many regulations are proposed and adopted to mitigate some sort of risk - regulations are often bureaucrats engaging in their own "risk aversion" behavior.
A smarter regulatory process is needed. Costs and benefits must both be taken into account when agencies seek to regulate. Alternatives to regulation must also be considered. For instance, when was the last time an agency simply declined to regulate? Rulemakers should adopt a "one-in, one-out" policy or be required to review existing regulations every few years to ensure the original policy goals are being met. Outdated regulations should be repealed.
Our nation continues to recover from the worst economic downturn in decades. We need small and medium-sized businesses to expand their payrolls. We need entrepreneurs to continue to innovate.
We need risk-takers.
But onerous regulations represent a bureaucratic war on risk, and unintentionally, on risk-takers themselves. As policymakers rush to squeeze risk out of the market, they are squeezing the life out of the risk-takers - something no dynamic economy can do without.