To cure the economy, fix the business environment

By Chad Moutray
Monday, January 10, 2011

Small business owners have endured a lot over the past couple years, with a slow economy, lingering access to credit issues, and tax and regulatory uncertainties. If we are to grow this economy -- especially in light of the sluggish employment picture -- entrepreneurship will be a large part of that solution, and as a result, policymakers have devoted much attention to it of late.

As a nation, we must also adapt our policies to support both existing "Main Street" businesses and high-impact firms. For them, we need to maintain a strong economy for increased sales, and politicians should be keenly aware of the tax and regulatory effects of new laws. More than anything, these owners want a government that is as unintrusive as possible.

The U.S. Small Business Administration, where I previously served, estimated the annual burden from federal regulations to be $1.75 trillion, with very small businesses facing significantly higher costs per employee. State and local rules are not included in this analysis, and the cumulative burden of all existing regulations is much larger. It is time for us to start to rein these costs in.

Sen. Mark Warner (D-Va.) has suggested a regulatory budgeting approach, similar to that of Britain's, which would impose a "pay-go" style system to new rules. A new regulation could be imposed only if another one of equal value is lifted. This is definitely a step in the right direction. Short of that, I would suggest that the Congressional Budget Office score all major bills for their tax and regulatory impacts on businesses, both large and small. Even without a pay-go approach, the new data would make politicians more accountable for the burdens that they would be placing on business.

High-impact firms are a different story. Sales, taxesand the rulemaking process are important, but the largest challenges lie in scaling up their businesses. These firms are growing so rapidly that they struggle to keep up. Policies geared toward start-ups are not as helpful, and therefore, new initiatives might need to be undertaken to nurture this small but economically vibrant group of businesses.

Florida provides an excellent example and test case for this approach, as its legislature in 2009 created an Economic Gardening Institute at the University of Central Florida that providescounseling and other services to fast-growing businesses. Similarly, the Kauffman Laboratories for Enterprise Creation recruits and provides technical support to top entrepreneurs to help make their ventures successful.

In addition to services, though, high-impact firms have different funding needs. These businesses need additional capital as they ramp up to meet growing demand and hire additional workers. When these businesses begin to move to the second stage, they often seek external funding for the first time. Yet very few venture capital deals occur below $4 million, resulting in a serious funding gap. Angel capital can help somewhat, but few angel deals exceed $1 million. This is one area where the Small Business Administration has been making strides. It has sought to expand and improve its Small Business Investment Company (SBIC) and Small Business Innovation Research (SBIR) programs. The last Congress also increased the loan limits to $5 million for the SBA's 7(a) and 504 loan programs.

Federal policymakers need to establish the best mix of policies that will provide a ripe economic environment for start-ups, existing businesses and fast-growing gazelles to thrive. If entrepreneurship is the key to further economic growth, as I believe it is, then we must have a business climate that will sustain it.

Chad Moutray served as chief economist and director of economic research for the U.S. Small Business Administration's Office of Advocacy from 2002 to 2010.

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