San Francisco, Regime Uncertainty, and The Plight of Small Business

Back in the 1990′s, economic historian Robert Higgs, author of the popular Crisis and Leviathan, famously developed the concept of “regime uncertainty” as a tool to describe the type of business atmosphere which pervaded during The Great Depression and prolonged the deep contraction of investment.  Higgs described “regime uncertainty” as:

To narrow the concept of business confidence, I adopt the interpretation that businesspeople may be more or less “uncertain about the regime,” by which I mean, distressed that investors’ private property rights in their capital and the income it yields will be attenuated further by government action. Such attenuations can arise from many sources, ranging from simple tax-rate increases to the imposition of new kinds of taxes to outright confiscation of private property. Many intermediate threats can arise from various sorts of regulation, for instance, of securities markets, labor markets, and product markets. In any event, the security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights.

Though considered groundbreaking at the time, the idea of regime uncertainty should be an innate consideration for any market observer.  Investment in the midst of a market economy is always a risky endeavor.  Consumers aren’t cogs in a machine and react to stimuli in unpredictable patterns.  The 40-something year old putting his life savings into opening a laundromat has a myriad of factors to worry about when attempting to get his business off the ground; least of which is obtaining the initial funding.  Competition, price of inputs, hiring competent workers, and finding a suitable location to set up shop are all factors entrepreneurs must take into consideration.  There is never a guarantee of success.

But as government, infused with do-gooder politicians and bureaucrats, intervene in this process by setting up a plethora of regulatory obstacles, such serves as a further impediment to any aspiring businessman.  Investment, in addition to being inherently risky, is also time sensitive and requires a great deal of future forecasting.  Knowing whether or not you are going to make the bottom line come the end of the month or year is an incredibly difficult thing to do when you are limited in knowledge capacity and rely on attracting consumers who aren’t force to patronize your newly established business.  Throw a government into the mix which is continually adding and deliberating further private intervention and tax increases and what inevitably springs forth is a hostile business climate where entrepreneurs are at the whim of a political class which doesn’t rely on voluntarily payment for operation but on violent confiscation.

Case in point, the Worker’s Republic of San Francisco.  In a recent New York Times article, the journey of entrepreneur Juliet Pries to open up a small ice cream shop in the famously left-leaning city was documented:

The Ice Cream Bar opened Jan. 21 in the Cole Valley neighborhood — an homage to the classic parlors of the 1930s, complete with vintage soda fountain and lunch counter seating. It has become an immediate sensation, packed with both families and the foodie crowd, savoring upscale house-made ice creams and exotic sodas (flavorings include pink peppercorn and tobacco). The shop also employs 14 full- and part-time workers.

But getting it opened wasn’t easy.

“Many times it almost didn’t happen,” said Juliet Pries, the owner, with a cheerful laugh.

Ms. Pries said it took two years to open the restaurant, due largely to the city’s morass of permits, procedures and approvals required to start a small business. While waiting for permission to operate, she still had to pay rent and other costs, going deeper into debt each passing month without knowing for sure if she would ever be allowed to open.

“It’s just a huge risk,” she said, noting that the financing came from family and friends, not a bank. “At several points you wonder if you should just walk away and take the loss.”

Ms. Pries said she had to endure months of runaround and pay a lawyer to determine whether her location (a former grocery, vacant for years) was eligible to become a restaurant. There were permit fees of $20,000; a demand that she create a detailed map of all existing area businesses (the city didn’t have one); and an $11,000 charge just to turn on the water.

New York Times columnist and resident Keynesian Paul Krugman has been dismissive on the effects of regime uncertainty in recent years.  In a column written in 2010, Krugman declared there is no truth to the claims that the Obama administration has created an anti-business climate and those who consider such a possibility are merely “peddling scare stories.”  Krugman puts the cart in front of the horse and blames the weak economy for low business investment when a weak economy is a byproduct of low business investment.  As Mises showed, “the ultimate goal of human action is always the satisfaction of the acting man’s desire.”  Since man does not act less all desires are fulfilled, human demand can be thought of as infinite since action never ceases on the part of fulfilling various ends.

As Robert Higgs recently pointed out, private investment has failed to recover from the downturn of 2007-2008 while consumer expenditures have returned to their pre-recession level.  With broad and encompassing legislation like Obamacare and the Dodd-Frank financial regulatory bill still not in full effect, it should not come as a surprise to any observer why entrepreneurs are thinking twice about investing scarce capital.  The Obama administration’s newly proposed budget alone contains increases of the capital gains tax, estate tax, dividends tax, and elimination of state and local bond interest deductions.  It even introduces new fees for airline travel and security.  Though the budget has little chance in making it through the U.S. Congress, such policies emanating from Washington certainly aren’t a welcome sign for investors.

Combined with the Federal Reserve’s unprecedented intervention and interest rate suppression, policymakers are attempting to throw the future to the wind in order to speed up consumer spending now.  Entrepreneurs are being told that long term investment is a dangerous game where your return, which wasn’t guaranteed to begin with, may be subject to further thievery if Washington feels so inclined.  Put together with needlessly complex regulatory stipulations at the state and local level and you have the makings of Ayn Rand’s anti-capitalist dystopia of Atlas Shrugged.

While there has been evidence of regime uncertainty holding back entrepreneurial capital, economic logic tells us that if more barriers are erected between a man attempting to fulfill an end, he may divert his energies elsewhere.  As long as the trend of creeping statist intervention continues at all capacities of private life, sustained recovery and technological innovation will continue to stagnate as market signals are prevented from operating efficiently.

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