Small Business, Big Government Intervention

Certain official proclamations in recent weeks have highlighted an unnerving shift in the federal government’s relationship with America’s small businesses. This novel stance undermines the autonomy, self-sufficiency, and independence from political influence that should define entrepreneurship. Additionally, there is a disregard for the regulatory burdens faced by small businesses.

The month of April brought Small Business Week, a decades-old tradition associated with the — also decades-old — U.S. Small Business Administration (SBA). The occasion came complete with a White House Proclamation, stating, in part:

“Small businesses are the engine of our economy and the heart and soul of our communities. They employ nearly half of all private sector workers and contribute to every industry. Getting them what they need to grow is one of the best investments our country can make. During National Small Business Week, we celebrate the grit and strength of every entrepreneur who has chased a dream and put in the hard work each day to see their business and our Nation thrive.”

Sounds reasonable, until the transformed meaning of “investments” in the modern political setting comes into focus.

Small business is being swept into today’s big-business/big-government “reset” vortex: Whether out of Biden’s own mouth or invoked by fashionable progressives like Mariana Mazzucato in Mission Economy: A Moonshot Guide to Changing Capitalism, national government investments in the wake of global COVID reset activities now translate into large scale infrastructure and climate projects, and disruptive subsidies and other wealth transfers aimed at reformatting the social contract.

These now-normalized projects “change capitalism” all right — by discarding it and replacing foundational property rights and supply/demand-driven exchange with public-private partnerships and state economic planning and steering. On hand for the ribbon-cuttings, those showering taxpayer largess will have long since scattered when stagnation sets in, reappearing only to blame exiled capitalism for the decreptude of tomorrow’s iteration of lead pipe fiascos.

Biden regularly describes these top-down governmental orchestrations as “bottom up, middle out” efforts to “grow the economy.”

This all introduces a significant development requiring the attention of Congress in its deliberations over spending and regulatory policy with respect to entrepreneurship: Small business is being tossed in the same big-government river as big business, forced to swim in this new unfavorable policy current.

A Fact Sheet that accompanied Biden’s Small Business Week proclamation boasted of 2023 procurement dollars aimed at small business surging to a record-high $179 billion, which amounts to 28 percent of all federal contracts. Fully $76 billion is earmarked for so-called Small Disadvantaged Businesses (SDBs), and $32 billion to Service-Disabled Veteran Owned Small Businesses (SDVOSB). By the end of the 2020s, the SBA intends to offer $250 billion in government-backed lending to small businesses, with over $120 billion of that already allocated.

Granted, the SBA has been making and guaranteeing loans and steering federal contracts toward small businesses, including disadvantaged ones, for 70 years. But today’s emphasis on taxpayer-funded moonshot campaigns that pull small business into their gravitational field is something new. It’s a stance untroubled by the implications of the failure to revisit the moon in over a half-century.

Fostering small business addiction to government contracts instead of easing regulations: Joe Biden’s SBA is not engaging in detached, arms-length funding of small businesses for their, and their customers’, own sake. Rather, Biden talks openly of flexing the “power of the Federal Government as both a lender and customer” to achieve regulatory aims. It’s the kind of language that, despite their lacking Biden’s power of coercion, would rain vicious antitrust scrutiny down upon private firms daring such utterances.

“[T]he Federal Government,” Biden boasts, “buys more goods and services than any entity in the world.” Even the SBA itself exalts that “the U.S. government is the largest customer in the world,” which would be regarded by Biden’s administration as adjacent to confession to illegal monopsony status for some firms despite their inability to leverage taxpayer funds as Biden and the SBA can.

This is the setting in which the White House’s April 2024 Building on the Biden-Harris Small Business Boom touts its four “pillars” of policymaking. The first, “Leveling the Playing Field for Small Business Owners by Reforming the Tax Code” could be a welcome move. The others, though, disregard basic principles of supply and demand that should govern small business activity and seek expansion of the federal domain. These include those hundreds of billons in “Loans and Equity Investments” through 2030; increasing “Access to Federal Small Business Programs;” and “Leveraging Federal Procurement, Infrastructure Spending, and Research and Development Funding to Support Small Businesses.” The latter is part of that aforementioned dunking of small business into the Federal Amazon with big business.

Combing the administration’s Small Business Boom report for an equally ambitious campaign to deliver regulatory relief to small businesses pleading for it comes up empty. The term “regulation” does appear twice, but only with respect to Bipartisan Infrastructure Law schemes to steer more funding to “Disadvantaged Business Enterprises” and with respect to a Department of Transportation rulemaking on airport concessions aimed at steering DOT-assisted contracts and airport concession opportunities to DBEs.

Regulation-by-procurement means market maniplation and boondoggles: In a limited government setting, the original SBA mission of fostering equal-footing status with larger businesses on limited constitutionally constrained endeavors is perfectly laudable. But rather than easing regulation and putting breathing room between business and government, the Biden administration sees business as subservient; tools for leveraging government’s own power.

Rather than focusing on impartiality and meeting consumer demand, which makes a small business independently successful, federal policy increasingly aims to create entities existing solely to interact with the government itself and to actualize left-wing progressive schemes and aspirations. While the administration frequently boasts of this approach with big businesses, Congress needs to recognize the similar exploitation of small businesses. These policies disrupt the fluidity of relative prices and the customary pursuit of market-clearing transactions, all in a widening framework corrosive to resource allocation and the supply chain health that policymakers allege to be a priority.

As an example, Biden’s small business proclamation repeated his claim that the “Inflation Reduction Act makes the most significant investment in fighting climate change ever in the world,” and in particular, that “it is creating new markets for small clean-energy companies.” These “markets” would not exist unless artificially propped up by the State.

Similarly, Kamala Harris proclaimed in May at a Detroit “Economic Opportunity for All” event that “the last administration invested in tax cuts to billionaires, while we are investing in access to capital for entrepreneurs.” But instead of that, she announced $100 million in multi-agency funding for small and medium sized auto parts makers and workers to navigate the unasked-for EV transition. With respect to these EV charging network elements of clean tech pursuits, the administration neglects to mention that two years and over $7 billion in outlays have birthed only seven charging stations as of March 29.

Undaunted, the administration doubled down last week, announcing new access to capital for “climate businesses” complete with a Climate Capital Guidebook.

A congressional deep dive into this chaotic scene is urgent. Climate businesses are not true businesses. Congress needs to understand the depredations of the non-market economic transformations underway in this and other areas and grasp the proportion of federally funded small businesses actually providing goods and services that consumers demand, in contrast to the proliferation of entities created in response to government grants that would not exist without artificial support from federal agencies.

We have emphasized the influence of the Biden administration. To be fair, while Biden’s Inflation Reduction Act was not supported by the GOP, the Republicans were on hand for the Infrastructure Investment and Jobs Act (IIJA) and the CHIPS and Science Act that perpetrate similar non-market ends.

Adding to concern over the artificial character of entities spawned by federal small-business policy is the revelation that more than half of April’s overall new jobs were in government, healthcare and social assistance. As the Wall Street Journal put it, “Most states and localities continue to burn through federal pandemic largesse, which is helping support the labor market.” “Government spending is conjuring job growth,” the Journal noted, “but they aren’t the kind that add to long-term productivity growth.” As the Journal concluded, “jobs that rely on transfer payments from government aren’t the kind of investment-based jobs that will create new products or productivity gains that add to national wealth.” That’s true overall, but the extent to which small business is increasingly defined by transfer payments is particularly ominous.

Social equity policy via small business, at taxpayer expense and risk: Social policy boondoggles accompany the economic policy ones. Biden sees the SBA as just one among many agencies to leverage in pursuit of a DEI agenda with new “swarms of officers,” a circumstance that will make unwinding his executive actions problematic for successors.

Granted, “equity” or the compulsory equalization of outcomes as distinct from equal opportunity and equality before the law has been a fixture in the progressive toolkit. Whether such policy amounts to discrimination or preferences might be in the eye of the beholder, but it takes place on a scale that warrants re-evaluation given the funding of progressive proclivities rather than actual consumer-demand-driven business plans.

For example, the Senate Small Business and Entrepreneurship Committee in May conducted a Bowie, Maryland Field Hearing on federal equity programs and racial discrimination in federal contracting. Meanwhile, the Small Business Investment Company Program, which dates from 1958 to “license and regulate” SBICs is being “modernized” at this very moment by SBA’s own new Investment Company Investment Diversification and Growth rule to increase private equity and debt funding to small businesses and startups in underserved communities and undercapitalized industries.

Apart from regulations issued by various agencies that impact small businesses, the SBA also has its own rulemaking agenda, often driven by equity considerations. This includes SBA’s Ban the Box Rule “to improve equitable access based on criminal background review of applicants seeking to participate in one or more” government programs. Amid this environment of special dispensation in federal contracts, the SBA also finds itself under investigation for potential electioneering activity and voter registration efforts.. A hearing set for the full House Committee on Small Business on June 4 is entitled “Weaponizing Federal Resources: Exposing the SBA’s Voter Registration Efforts.” It’s a phenomenon not unique to SBA.

Given its ambitions, the administration at least has the presence of mind to realize that House Republicans might elect to “defund the President’s agenda to advance racial and gender equity in federal contracts,” but it ought not be surprised.

Growing cracks in the small business foundation: Rather than misdirecting scarce resources and adding regulations of its own, the SBA should be an aggressive watchdog and red tape cutter. It could emphasize heading off threats to genuine entrepreneurs like the Corporate Transparency Act and its over-regulation of small LLCs, and over-reaching Treasury reporting requirements forcing small business to register ownership information with the Financial Crimes Enforcement Network.

The same House Small Business Committee investigating SBA electioneering conducted a May 22 hearing on “Burdensome Regulations: Examining the Biden Administration’s Failure to Consider Small Businesses.”

Witnesses noted the disproportionate effects of regulations on small firms, like those underscored in a recent National Association of Manufacturers report finding that per-employee regulatory costs for firms with fewer than 50 workers can be far greater than those for larger firms ($50,100 for smaller firms, compared with $24,800 for larger ones).

In particular, the hearing surveyed agencies’ failure to comply with the Regulatory Flexibility Act (RFA). That 1980 law, amended by the 1996 Small Business Regulatory Enforcement Fairness Act, directs federal agencies to consider their rules’ effects on small entities, and also requires that agencies publish semiannual regulatory agendas describing emergent regulatory actions that may have a significant economic impact on a substantial number of small entities.

A House Small Business Committee report on RFA non-compliance accompanying the hearing — the fruits of an investigation begun by Chairman Roger Williams (R-Texas) last year — concluded the following:

1. Agencies often improperly certify rules as having no significant impact on small entities to avoid RFA analysis.
2. Agencies frequently underestimate the costs and number of impacted small businesses, fail to consider less burdensome alternatives, and sometimes finalize more harmful rules without adequate justification.
3. Agencies often fail to assess if a rule duplicates or conflicts with other regulations, leading to overlapping regulations that burden small businesses.
4. Some agencies refuse to comply with congressional oversight by withholding requested information, violating the Constitution and the Administrative Procedure Act.

Testimony from the National Federation of Independent Business (NFIB) reinforced the conclusion that agencies often bypass RFA requirements by conducting inadequate cost analyses and exploiting loopholes to avoid conducting Regulatory Flexibility Analyses even when rules had significant small business effects. NFIB noted that the SBA itself identified 28 instances of RFA noncompliance during the 117th Congress, with repeat violations by agencies like the Environmental Protection Agency and Department of Labor. Separately, the NFIB’s Josh McLeod noted the appeal to small business of legislation called the Prove It Act marked up in the House Judiciary Committee. That bill would close RFA loopholes and enhance requirements for agencies to evaluate regulations’ effects on small businesses, plus boost small business participation in the regulatory process.

As it stands, hundreds of rules at the active, completed and long-term stages in the twice yearly Unified Agenda require regulatory flexibility analysis. In addition, hundreds of other rules that presumably do not rise to the level of meriting RFA scrutiny are nonetheless deemed by agencies (to their credit) to affect small businesses. The chart below shows that, of 690 pre-rule, proposed, final and recently completed actions affecting small business in the fall 2023 snapshot, 370 required an RFA (which was a six percent increase over 2022).

A caveat here is that early Obama years and even George W. Bush years sported higher numbers of small-business rules in the Unified Agenda pipeline than the years depicted (sometimes topping 800, with nearly 1,000 in 2001). But rules appear on the upswing. Very soon, the anticipated Spring 2024 edition of the Agenda will provide a more up-to-date snapshot that will merit the Small Business Committee’s and other policymakers’ attention.

It is not depicted in the chart, but the top five agencies with rules affecting small business are the Federal Communications Commission and the departments of Health and Human Services, Treasury, Commerce. The multiagency federal acquisition rules are the standouts, accounting for 351, or more than half of the 690 active, final and recently completed rules affecting small business in fall 2023. That matters a lot given all we covered earlier with respect to the leveraging of contracting and procurement to achieve regulatory ends. Unsurprisingly, those acquisition mandates include a doozy of a proposed rule on “Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk”

In addition to the snapshot of the small-business-rules pipeline just shown, the Federal Register and its depiction of completed rules affecting small business during recent calendar years is worth noting.

Overall counts of final rules affecting small business have returned to pre-Trump levels, while for the moment the “significant” subset stands below. However, rules costing between $100 million and $200 million are no longer regarded as officially significant by the dollar-cost criterion since Biden issued his April 2023 “Modernizing Regulatory Review” executive order. During 2024, the trajectory of completed small business rules bears close attention. We’re not quite at the midpoint of the year, but as of today (June 3), 311 final rules in the Federal Register affect small business, and 33 of them are significant at the newer more stringent threshold.

Conclusion: A better Small Business Boom agenda would be a regulatory liberalization program: The Biden administration’s celebration of Small Business Week decried 31 percent cuts to SBA funding proposed by Congressional Republicans, but its own adverse proclivities show why such cuts are necessary. The federal spending and regulatory moonshots enveloping the economy and society are also enveloping small business. While the solution is a constitutional amendment banning subsidies, grants and loan guarantees in economic endeavors as well as most research and educational ones, incremental steps to liberate small business from political and regulatory manipulations are within reach.

Rethinking is in order, particularly when much of what is now deemed small businesses are instead government artifices rather than manifestations of free enterprise meeting consumer demand. If in addition to fostering those counterproductive activities the SBA cannot even be counted upon to perform its basic watchdog function, then it deserves the same abolition that is the proper fate of many other collaborator departments and agencies. Congress could perhaps retain an arms-length statistics unit folded into the Department of Commerce or Department of Labor. The eroded watchdog function, mirroring decay in regulatory oversight at other agencies and at the Office of Management and Budget itself, may need to be re-chartered in a new entity by Congress, perhaps in part based on the streamlining-oriented regulatory reform Task Forces in place during the Trump administration.

Whatever the resolution, small business deserves smaller government.