Apr 8, 2020

Regulatory Exemptions Could Be the Key to Helping Small Businesses During and After COVID-19

States could form regulatory review commissions to exempt small businesses from rules intended for big players anyway
Tyler Richards Staff Writer

In the midst of the COVID-19 outbreak, only about half of US small businesses are operating, and only about a third of hourly small business employees are working. Many small businesses will not survive the outbreak, and the prospects for new ones in the almost-certain upcoming recession will be dim.

Recognizing the current and impending hardship for small business owners and employees, as well as the troubling macroeconomic implications of these trends, the United States has set aside $349 billion for immediate loans to small businesses. This is a costly approach, and depending on the length of the outbreak, it may not be enough to prevent many of these businesses from permanently shutting their doors.

There is another, less expensive approach that could work regardless of how long the crisis lasts: the United States could reduce the regulatory burden on small businesses. Policymakers can use expert committees to identify and exempt small businesses from large swathes of regulations that are mostly aimed at big businesses anyway. Focusing on these regulations could reduce costs and remove barriers for small businesses without imposing any substantial costs on society.

For many small businesses, this simple proposal could have a huge and lasting impact. Most immediately, regulatory relief will help some small business owners keep their businesses operating and their staffs employed as the crisis persists. But for many more, this relief will create the conducive environment necessary to revive their temporarily shuttered businesses or create new ones once the outbreak ends and the recovery begins. With small businesses accounting for 99.7 percent of all businesses in the United States and nearly half of all employment, this conducive environment is crucial not only for the individual owners and employees, but for the US economic recovery as a whole.

Even in times of economic prosperity, regulations can place a significant burden on small businesses. A 2016 survey found that, after the cost of health insurance, “unreasonable government regulations” was the most severe problem facing small businesses. And in a 2018 paper, my coauthors and I found that regulations not only decrease the number of small businesses, but they also have a compounding effect as the consecutive years of regulatory growth increase; we found no such effect for large businesses. Other research has shown that regulations create barriers to entry that hurt small businesses more than large ones.

Regulatory costs are not the only burden disproportionately borne by small businesses. Economic downturns take an uneven toll as well. The Great Recession underscores this disproportionate impact. Though small businesses employed only 45 percent of workers leading up to the recession, they accounted for 62 percent of job losses. In just the year between 2008 and 2009, the total number of small businesses in the United States declined by 160,000. It does not look like small businesses will fare much better in the current economic downturn. Swift relief is crucial to avoid a potentially greater crisis than small businesses faced a decade ago.

Luckily, a road map for modifying regulations in a short time frame already exists. The regulatory review commission model (based on the BRAC Commission) would allow a legislative body or the head of an executive branch (at the state or federal level) to leverage expert opinions and quickly exempt small businesses from large, well-defined groups of regulations for which these businesses are not a significant source of the underlying problems.

One example of such a group is all regulations created under Dodd-Frank. Dodd-Frank was enacted after the Great Recession and was intended to regulate the large institutions that were engaged in widespread subprime lending and securitization. But the law’s regulations applied broadly and had substantial negative effects on smaller banks. Exempting banks below a certain size threshold would allow the regulations to continue covering the targeted, larger banks without imposing unnecessary costs on their smaller competitors.

Exempting small businesses from well-defined groups of regulations will make it easy for owners to determine which exemptions are relevant to their businesses. Doing so will also minimize the costs to society since small businesses were not the problem to begin with (i.e., most of the regulatory benefits come from restricting large businesses).

The regulatory review commission model also insulates the process from bias and special-interest interference. Expert committees created through a bipartisan process determine the groups of regulations for exemption, which makes it difficult for special interests to lobby for or against the choices of regulations. Elected officials in the legislative or executive branch must then accept or reject all recommendations as a package, which makes it difficult for special interests to sway decisions based on only a minor element of the package.  

The pandemic-induced economic downturn is wreaking havoc on the US economy: stocks have fallen dramatically, businesses are shutting their doors or curtailing operations, and 6.6 million Americans just filed for unemployment insurance in a single week. How small businesses fare over the coming months and how they bounce back will be of critical importance for the nation as a whole.

There may not be a silver bullet that will instantly return us to where we were before the COVID-19 outbreak, but there is a way to lend a helping hand to those most essential in revitalizing the US economy—and it requires negligible sacrifice from anyone else. But policymakers must act swiftly and in solidarity if they are to remove the regulatory barriers that would otherwise condemn us to a long, painful recovery.

Photo by Andrew Lichtenstein/Corbis via Getty Image

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