Pandemic-Slammed Small Businesses Require Regulatory Relief

With the economy taking it in the teeth from mandatory social distancing and restrictions on “non-essential” businesses, the Congressional Budget Office (CBO) worries that small firms may be unable to step into their traditional roles as drivers of economic recovery and growth. While a recent surge in applications for employer identification numbers may be a positive sign, it also may indicate failed businesses changing hands rather than a reversal of four decades of declining entrepreneurship. And while the CBO dances around the role that government plays in discouraging start-ups, other sources are clear that regulatory reform is needed if small businesses are to exit the endangered species list and return to creating jobs and rebuilding prosperity.

“Several measures of entrepreneurship have declined since the early 1980s,” the CBO notes in a report published last week. “During that period, new firms’ share of employment fell by a third, from 14 percent to 9 percent.”

That’s important because entrepreneurs allocate resources more efficiently than established firms, introduce new products, and boost economic activity. “The decline in entrepreneurship is associated with a falloff in labor productivity from at least 3 percent to 4 percent in the mid-2010s,” the CBO estimates.

Unfortunately, small businesses that have launched are being devastated by pandemic lockdowns that limit or eliminate their ability to serve customers. “The economic contraction that initially chilled the formation of firms at the beginning of the pandemic also threatened the viability of businesses started in the past few years… from mid-February to late April, employment fell among them by more than it did among large firms,” according to the report.

Before the latest round of restrictions, Yelp, the review service, reported that business conditions had improved since the early days of the pandemic, but that “in the wake of COVID-19 cases increasing and local restrictions continuing to change in many states we’re seeing both permanent and temporary closures rise across the nation, with 60% of those closed businesses not reopening.”

If you suspect that an environment like this is a morale-killer for entrepreneurs, you’re right. Last month, Gallup reported its latest survey of small business optimism across multiple dimensions:

While up slightly from a score of 60 in the thi