Heavy regulation puts a dent in small businesses, but larger businesses are able to surmount regulatory burdens and might even thrive from them, a new American Action Forum (AAF) study
released first to Newsmax Finance indicates.
The survey was conducted by Ben Gitis, a policy analyst for AAF, which is a center-right policy institute, and Sam Batkins, its director of regulatory policy.
The study found that regulations cumulatively have a highly regressive effect on businesses. Specifically, a 10 percent increase in regulatory costs shrinks the number of businesses with one to four workers by 5 percent, with five to nine workers by 5.5 percent, with 10 to 19 workers by 5.8 percent, with 20 to 49 workers by 4 percent, with 50 to 99 workers by 3.6 percent, with 100 to 249 workers by 2.3 percent and with 250 to 499 workers by 0.7 percent.
But the number of businesses with 500 to 999 workers grows by 1.7 percent and the number of businesses with 1,000 or more workers increases 3.4 percent.
In 2012, an average industry had 4,848, 1,617, and 1,311 businesses with one to four workers, five to nine workers and 10 to 19 workers, respectively. If in the following years, an average industry faced a 10 percent increase in cumulative regulatory costs, it would lose 240.5 businesses with one to four workers, 88.9 with five to nine and 75.5 with 10 to 19.
But the main issue, of course, is why does regulation hurt smaller businesses more than larger ones? Or as the report puts it, "why would large businesses grow, despite facing regulatory costs?"
The answer could be that "the largest businesses are most able to absorb regulatory costs, giving them a competitive advantage over smaller companies," the report states. "Previous research has found that this regressive trend is particularly apparent in the financial services industry."
The study quotes an analysis from the Government Accountability Office: "Research suggests that one area in which large banks are able to take advantage of economies of scale is regulatory compliance, which contributes to their advantage in terms of operational efficiency."
The AAF report notes that regulatory costs are similar for all businesses, regardless of size. That means the costs will have a proportionately larger impact on small businesses.
"If all businesses are forced to deal with hundreds of hours of new paperwork, the costs of hiring an additional compliance officer will fall disproportionately on small institutions," the study points out.
Bottom line: "despite regulatory reform designed to protect small businesses, sheer economies of scale and unchecked regulators have made life for small employers incredibly burdensome."
As for bank regulation, it has mushroomed since the 2008-09 financial crisis, and that's not all for the good, says Hester Peirce, a senior research fellow at George Mason University.
"One of Dodd-Frank's aspirations was increased competition to dilute the power of large financial institutions. The status quo, however, plays right into impatient regulators' hands," she writes on Real Clear Markets
Dodd-Frank is the financial reform law passed by Congress in 2010.
"It's easy to force changes in the global financial industry by nudging--gently or otherwise--large banks to fall in line with regulators' wishes," Peirce explains.
"Bank regulators are not shy about exercising this kind of control. As convenient as such regulatory strong-arming might seem to be, it sidesteps the regulatory processes designed to ensure accountability, public input, and transparency."
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