Government Regulation is Good for Business

Last Updated Oct 25, 2010 11:04 AM EDT

Yes, you read that right. Government regulation is good for business...depending on how you define the term "business" and on how the regulations are written.

Many people (and especially the "business" press) tend to use the umbrella term "business" to mean any organization that tries to make a profit. But that usage is, like most generalizations, misleading.

There is very little commonality of self-interest between, say, a mega-billion dollar company like Walmart, and a locally-owned boutique.

Quite the contrary. Business conditions that help Walmart to be successful are almost always going to make it more difficult for that boutique to survive.

It's much more accurate to say that there are two broad segments of profit-making organizations: big businesses and small businesses.

This is an important distinction to make because majority of business activity in the United States takes place in small business. According to the U.S. Department of State:
Fully 99 percent of all independent enterprises in the country employ fewer than 500 people. These small enterprises account for 52 percent of all U.S. workers, according to the U.S. Small Business Administration (SBA). Some 19.6 million Americans work for companies employing fewer than 20 workers, 18.4 million work for firms employing between 20 and 99 workers, and 14.6 million work for firms with 100 to 499 workers. By contrast, 47.7 million Americans work for firms with 500 or more employees.
What does this have to do with government regulation? Everything.

A lack of government regulation is almost always to the advantage of big businesses and to the disadvantage of small businesses. Such a condition always results in the formation of monopolies and the suppression of smaller firms, even if those firms might be highly innovative.

As the great Adam Smith pointed out: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Does this mean that all government regulation is favorable to small business? Of course not.

In fact, government regulations are often intentionally written so that they favor big businesses over small ones. This always happens because legislators and regulators are usually "owned" by big businesses, either through campaign contribution bribery or the promise of future employment.

A perfect example of this is Sarbanes-Oxley, the financial regulation enacted after the Enron debacle.

Even though the culprits of the debacle were very much from the world of big business, the net effect of Sarbox on small businesses was to add a fixed cost (massive accounting fees) to going public, an expense that large companies could easily afford, but which was (and is) burdensome on smaller firms.

The problem is that the elected government of the United States has become like the elected government of Imperial Rome. All the forms of the republic remain in place, but the actual decisions are made elsewhere.

In this case, though, it's not an emperor that is pulling the strings, but the forces of big business. Those forces would prefer to have no regulations, but if that's not possible (for political reasons) will tolerate regulations that favor big business.

So here's the reality of today's situation: if you work for or own a small business, when it comes to government regulation, it's a classic "heads they win, tails we lose" situations. To a greater or lesser degree, it's the small businesses who are going to get screwed, no matter what.

On the other hand, there have been times in the history of the United States, where the government has enacted regulations (and laws) that help small businesses. The anti-monopoly regulations, for example, help small businesses at the expense of large ones, which is exactly why they're so seldom invoked any longer.

Trade tariffs are also useful to small businesses that don't have the resources to globalize. Big businesses, of course, love free trade because it gives them license to move their manufacturing overseas. However, such movement often means the collapse of local small business.

To summarize, here are the rules of the game:
  • No government regulation = good for big business, bad for small business.
  • Most government regulation = good for big business, bad for small business.
  • Some government regulation = bad for big business, good for small business.
As you can see, there's no situation under which some segment of the business world doesn't prosper. Government regulation either favors big business or (very rarely) favors small business. Therefore, government regulation is good for business.

Now, if politicians and regulators really wanted to help the most number of businesses and employees, they'd enact regulations that would favor small businesses, since that's where the majority of the economic activity takes place.

However, since both parties are "owned" by big business, that will never happen, so the choice will be between the Republican idea of deregulation (which will vastly favor big business) and the Democratic idea of regulation (which will also favor big business, as shown by the laughably impotent attempt to "regulate" Wall Street).

What we won't see -- barring Teddy Roosevelt rising from the grave -- is government regulation that favors small businesses. And that's a shame, because that's probably the only kind of government activity that's likely to rebuild the middle class and create substantial numbers of jobs in the United States.

READERS: Comments welcome, of course.

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