Small business, big regulation, big problems?

Posted by: John Tozzi on February 5, 2009

I had a talk today with Steve King, researcher and blogger at Small Biz Labs. King got in touch after reading my post on the tension between regulating industry and putting up barriers to entry that shut out entrepreneurs. (The CPSIA kerfuffle over lead testing requirements for children’s products is a prime example.) As it happens, King’s research is increasingly focused on the role of government in small business.

We’re both interested in exploring how regulations written for large companies (operating on an industrial scale to serve mass markets) don’t necessarily fit small companies or independent workers (operating on an artisan scale to serve niche markets). The US has this whole legacy of rules and laws written for an industrial economy which mostly made sense for in the 20th century. But in the past decade, technology has made it possible to efficiently make and sell products on a small scale in a variety of industries—like local farms, hand-made goods, truly independent music. The laws haven’t kept up with these changes. Food regulations were largely written with agribusiness in mind, not small farms, the same way the lead testing requirements that may be appropriate for big toy manufacturers who ship thousands of identical units don’t fit crafters who make unique items.

It’s not just regulation. The employer-based health care system is probably the biggest barrier to entrepreneurship in the America. King identifies the tension in worker classification as well: it’s no longer safe to assume most workers would rather be classified as payroll employees than independent contractors.

“The regulatory environment simply isn’t set up for our current economy or the economy that we’re becoming,” King told me. The current system was shaped by “big government, big business, and big labor,” he says. That structure maybe worked in the last century. It won’t work in this one.

More and more we’re going to see small businesses and independent workers bump up against regulations written for large, industrial entities. I’d like to identify this tension in as many aspects of the economy as we can. While these conflicts are being hashed out in individual sectors, no one seems to be taking a holistic look at this. So let’s start. Help us identify industries where regulations appropriate for large players don’t fit small ones.

I’ll start with a few:

  • Agriculture. The safeguards to regulate agribusiness don’t always make sense for small farmers or artisan food producers.
  • Music. The copyright laws that record labels want strictly enforced don’t hold the same benefit for truly independent artists who want their fans to spread their music through filesharing. (Alternative forms of licensing have developed to address this.)
  • Finance. See the trouble peer-to-peer lenders have had with the SEC and state regulators.

This is an important trend. With our economy and government being transformed rapidly, there’s a huge opportunity to reshape all these structures in a way that works for entrepreneurs, reduces barriers to entry, encourages innovation and, ultimately, makes our economy more efficient. Where else is this tension playing out? Do you see examples of it in your industry? Tell us in comments, by email, or on Twitter.

Reader Comments

DeputyHeadmistress

February 5, 2009 6:37 PM

In our locale, you can raise chickens and sell the eggs, but you can't advertise the prices or use words that would indicate you're selling. You can put up a sign in your front yard that says, "Farm Fresh EGGS!" But you can't have a price on that sign.

You can give away home-made bread, or put it out and ask for donations, but you can't sell it unless it's been made in a licensed kitchen. I happen to have some inside knowledge about a couple licensed kitchens in our area, and believe me, my kitchen is cleaner and safer, and anyway, you have to be trying really hard to make somebody sick with bread.
Same with fudge- it cooks at insanely high temperatures, but it's illegal for me to put a plate of home-made fudge out at a booth in the antique mall in town and sell it because I did not make it in a licensed kitchen.

Manna Storehouse was raided and the family's food supply for a year taken because the government argues that they need a retail license, and they say they aren't a retail store, but a food co-op.

Have you read Joel Salatin's 'Everything I want to do is illegal?'
http://www.acresusa.com/toolbox/reprints/Salatin_Sept03.pdf

John Tozzi (BusinessWeek reporter)

February 5, 2009 6:51 PM

Thanks. It's worth noting that it's not just federal but state and local laws as well.

I've been trying to find something on the laws that govern small meat processors. My recollection from reading Omnivore's Dilemma is that meat processors of all sizes are required to have a separate room for a USDA inspector. I'm still trying to check this, but can anyone point me to a citation on it?

Daria Steigman

February 6, 2009 9:25 AM

Hi John,

Terrific post, with lots of food for thought. One very anticompetitive provision is double payroll taxation (employer, employee pieces) that hits solopreneurs and independent contractors. The financial burden makes it harder to amass income to invest in growing a business or starting another one, or to save either for retirement or a cushion against economic downturns.

I've said for years that some percentage of income at the bottom end shouldn't be subject to payroll taxes, but that the cap on payroll taxes could instead be raised significantly so that those who make more pay more into the social security system. Much more progressive, and it would certainly encourage both savings and small business growth.

Best,
Daria

AbidingJoy

February 6, 2009 2:16 PM

There was a lady in our urban town who wanted to open her personal home up for 3 elderly ladies to live with her--she would cook, clean, do laundry, and provide a family atmosphere to prevent them from going in an institution. She did not provide medical care herself but had home health nurses come. Families clamoured to give their loved ones such good attention and soon her home was full. The city then came and told her she had to provide industrial handicapped fire exits and ramps. She spent thousands in compliance. Then they came and cited her for not having industrial parking lots and access (this is a private home, mind you). She spent more tens of thousands of dollars. Then they came and said her interior was not "up to code" for industrial nursing home standards. They shut her down and FORCED the elderly ladies in nursing homes. The families were outraged. Such standards herd us into institutions and cut out the kind compassionate hearts of the common man and replace them with the hard plaster of white walls and empty hearts.

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About

What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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