The Business That Government Built

President Obama thinks that government deserves the credit for small businesses' success.

Like most office seekers, President Obama has been relentless in professing his support for small businesses, which he calls the “backbone of America’s economy.” So it was revealing when the president went off-script in Roanoke, Va., recently and announced that to the extent that businesses succeeded in the marketplace, the credit belonged elsewhere.

“If you’ve got a business -- you didn’t build that," Obama explained. "Somebody else made that happen." He went on to lecture entrepreneurs that “you didn’t get there on your own ... somebody along the line gave you some help.” As to who that "somebody" was, the president's emphasis on government funding for roads, bridges and the Internet spoke volumes. Even as he confined himself to praising the “unbelievable American system that we have that allowed you to thrive,” it was patently clear that Obama’s conception of entrepreneurial success was predicated at least in part on the benevolent hand of government.

On one level, the president’s comment is unobjectionable. It is doubtless true that government funding for transportation infrastructure has made it easier to do business in America, though that ignores the obvious corollary that taxpayers, including business owners, financed it. But on another level, the president’s insight is remarkably tone-deaf, ignoring both the tremendous personal sacrifices of time and money that small business owners and entrepreneurs make to start and sustain their ventures, and the considerable hurdles that the government erects to their success.

Though it might surprise the president, many successful small business owners did "make that happen." To do so, they made an investment of time, financial resources and intellectual capital that was both tremendous and unaided by government assistance. They incurred massive amounts of debt. They took out second mortgages or borrowed money from their retirement accounts. They worked punishing hours to make their businesses profitable. They gave up paychecks in order to pay their employees. “We hear that narrative a lot from our members,” says Cynthia Magnuson, a spokesman for the National Federation of Independent Business (NFIB), which represents small businesses.

Their risk has not always brought reward. From January to June of this year, over 30,000 businesses filed for bankruptcy -- a stark reminder of what those who start businesses have to lose, especially when one bears in mind that the numbers represented a significant improvement on recent trends. At a time when capital is scarce – more than two of five small business owners have been unable to find funding in the last four years when they have needed it – starting a business amounts to a great gamble. One might suppose that the president would want to applaud those who brave the odds and the harsh economic climate to start a business. Instead the president wants to tout the government's alleged role in their success.

That role is in any case vastly overstated. Small businesses often succeed despite government, not because of it. A December 2011 survey by the by the NFIB found that 19 percent of respondents cited government “regulations and red tape” as their biggest business problem – trailing only “poor sales" and "high taxes." It's not hard to see why. If there is one task at which government is unrivaled, it’s creating cumbersome new regulations. Every year some 80,000 pages of new rules and regulations are added to the Federal Register. The Obama administration has been no slouch in this regard, imposing 106 new major regulations, at a cost of $46 billion annually.

Many of these are rules are mind-bogglingly stupid. Thus, if you want to open a lemonade stand in New York City, it will take you 65 days, including five weeks to complete a "Food Protection Certificate" and 15 hours for a “Food Protection Course.” If you are a farmer, you could be sanctioned by the Environmental Protection Agency for generating dust, which the agency calls “particulate matter,” even it occurs during a drought. Until recently, there was an EPA regulation that treated spilled milk as a “toxin,” putting milk spills on par with oil spills. The cost of complying with these regulations falls disproportionately on small businesses. By some estimates, small companies spend 364 percent more to comply with government regulations than their big-business counterparts. This amounts to a massive waste of potential prosperity.

Then there are the costs of new legislation. The most recent example is ObamaCare, which small businesses, represented by the FNIB, fought against. While the legislation has not yet gone into effect it is already taking a toll on small businesses. The NFIB says that its members report increases of 20 to 40 percent since the health care law was passed. That holds true for the businesses with 50 or fewer employees who are exempt from the provision to provide health care. Whatever the merits of the law, from a business standpoint it is yet another financial burden imposed by the government. Money that could have been reinvested in the business, for instance by hiring new workers or increasing productivity through new technology, will now be spent on health care compliance. Unlike the government-built roads and bridges that the president harps on, however, these regulatory costs remain largely unseen -- except to the small businesses they stifle.

Obama is right in one sense. Small businesses are a vital part of the economy, creating over 60 percent of new jobs. All the more unfortunate then president's response has been to saddle them with an expensive new health care bill, then to raise taxes on the 750,000 independent and small businesses that are taxed at individual income rates, and finally to diminish their own role in their success by exaggerating that of the government’s. Punishing job creators has costs, however. When voters consider them this November, the president’s preferred deflection – “somebody else made that happen” – may not sound terribly convincing.