The relentless growth of government bureaucracy in rich countries is fueling the black market economy and increasing inequality and unemployment. Even in the United States, which is supposed to be the land of the free, legitimate businesses are encountering more regulation than ever before.
Image credit: itpro.co.uk
Both Democrats and Republicans are guilty of creating an over-regulated America, with endless licensing requirements and other burdensome regulations making entrepreneurship incredibly challenging. The general public is well-aware of this growing problem. According to a Gallup poll taken last fall, half of Americans feel our economy is too regulated.
As big business flexes its lobbyist strength in Washington and writes regulations in its favor, small business is encountering more difficult times. The National Federation of Independent Businesses’ index indicates the small business sector is treading water. Bloomberg reports that small businesses are not the job creation machines they used to be.
Conducting legitimate business dealings without your own personal lobbyist in Washington has become increasingly impossible. For many small-business owners, in order to turn a buck and avoid cumbersome and costly rules, they’re taking their businesses underground. This is not only illegal but has serious consequences for the national treasury. A growing underground economy can set off a vicious cycle where more and more transactions take place in the shadow economy and permanently depress tax revenues.
It’s worth noting that the tsunami of regulation choking private sector growth was largely well-intended. It is public policy formulated around improving the quality of life of regular working Americans. Affordable healthcare, higher minimum wage, and stricter overtime rules are all good ideas on paper, but they have long-term consequences that are poorly understood.
Take minimum wage, for example. This week, California reached a historic deal to raise the minimum wage statewide to $15 an hour by 2022. Many more localities and states have already enacted such laws or have them in the works. What they may not understand is how these new rules will grow the shadow economy by leaps and bounds.
In Germany, the new federal minimum wage enacted last year fueled the growth of the underground economy. A study by Tübingen’s Institute for Applied Economic Research found that “the surge in people seeking unreported employment has been propelled by the nationwide minimum wage, and further fueled by the rising costs of nursing care insurance.” Sounds quite similar to what higher minimum wages coupled with the cost of Obamacare is doing here in America.
We can debate endlessly about the effects of minimum wage on the formal economy, because economists heavily disagree. A study by the nonpartisan Congressional Budget Office’s claims that “the share of low-wage workers we employed would probably fall slightly.” Others say there’s no effect at all. Many will agree that a higher minimum will spur more demand for off-the-books labor, especially when there’s so many undocumented immigrants living in the shadows.
Scott Winship, a fellow at the Manhattan Institute for Policy Research points out that research literature on the minimum wage’s effects on employment is a mess. “I think it’s probably clearer that other business regulation–by creating barriers to entry, compliance costs, and such–has increased inequality,” Winship said.
Courtesy of the US Chamber of Commerce
Americans are painfully aware that the economy isn’t as good as it used to be and that the middle class is disappearing. Feel-good legislation like minimum-wage hikes, guaranteed healthcare, and other onerous regulations make for great political talking points and seem like moral public policy.
However, in the real world, they have unintended consequences that create a system of defined winners and losers. If you’re losing in the new economy, you might be apt to blame a world of regulation gone wild.
David is the Editor of Bold. He's especially passionate about millennial economic empowerment. A former local news reporter, David is originally from the Little Havana area in Miami, and later became a pioneer resident of the Disney-inspired town of Celebration, Florida. David holds a Master’s in Public Policy from the Harvard Kennedy School.