Explainer Episode 34 – Institute for Justice’s “Barriers to Business” Report
“To better understand the challenges small businesses face and to offer recommendations,” Institute for Justice’s Andrew Meleta and Alex Montgomery “analyzed the codes of 20 large to mid-sized cities, interviewed entrepreneurs from across the country, and mapped out the real-world process of starting five common business types from the entrepreneur’s perspective.” They then compiled their findings in IJ’s “Barriers to Business” report, which is available here.
In this episode, Meleta and Montgomery join the Goldwater Institute’s Jon Riches to discuss the major takeaways from their report and how cities can better attract and support entrepreneurs.
Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.
Introduction: Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.
Jack Derwin: Welcome to the Regulatory Transparency Project’s Explainer Podcast, part of RTP’s Fourth Branch Podcast Series. My name is Jack Derwin, and I’m Assistant Director of RTP at The Federalist Society. Today, I’m very excited to be joined by Alex Montgomery, Andrew Meleta, and moderator Jon Riches to discuss the Institute for Justice’s new “Barriers to Business” report.
Alex, one of the report’s authors, is City Policy Associate at the Institute for Justice and co-leader of IJ’s Cities Work Initiative. His work has a particular focus on how regulations affect small business owners. Andrew, the report’s other author, is Activism Associate at the Institute for Justice and also co-leader of IJ’s Cities Work Initiative. Andrew’s work has a particular focus on municipal regulation and policy and its effects on entrepreneurship.
And our moderator today, Jon Riches, is Director of National Litigation at the Goldwater Institute’s Scharf-Norton Center for Constitutional Litigation and is also the institute’s General Counsel. Jon’s litigation most often centers around economic liberty, taxpayer rights, public union and pension reform, and government transparency. Without further ado, Jon, I’ll turn things over to you.
Jon Riches: Well, thanks so much, Jack, appreciate it, and great to be with you, Andrew, and Alex. I really love what you did here. I think there’s oftentimes so much focus on the federal government being either the source of the problems or the solution to all of our problems and too little focus on what local governments are doing. Alex, I wonder if you could just briefly summarize what you did with this report and give us sort of the high-level findings.
Alex Montgomery: Absolutely. Thanks for having us on. So this report, “Barriers to Business,” basically looks at the cost, the delays, and the complexity of starting a small business in cities. Jon, as you said, a lot of attention especially in the policy world is oftentimes given to federal policy or state policy when it comes to the ease of doing business. And there’s been a lot of emphasis on this, of course, in the wake of the pandemic as cities and state leaders want to make it easier for small business to contribute to their communities and start jobs.
This report wants to bring local policy, municipal policy, city leadership into the forefront of that conversation. And so, the report tabulates the costs, the delays, and the complexity for starting five common business types. And some of the high-level findings are that it’s too expensive to start brick-and-mortar businesses in cities. On average in the 20 cities that we studied for the report, it cost over $5,300 across 13 separate fees just to navigate all the regulations for starting a restaurant. Another example would be it costs over $3,200 in compliance costs and regulatory costs for starting a barbershop in cities.
We also find that entrepreneurs deal with significant delays. They have to figure out what the requirements actually are. They have to go in-person to government agency headquarters, and they have to get approvals oftentimes from a ton of different agencies that are involved in the process. And then we finally find that the process for starting up is too complicated. As an example, just to start a food truck in the 20 cities we surveyed, it takes 35 steps, 5 in-person activities, 7 agencies are involved, 11 forms have to be filled out. So the sort of big picture for “Barriers to Business” is that the cost delays and complexity create a death by a thousand cuts for entrepreneurs trying to contribute to their communities and earn an honest living.
Jon Riches: Thirty-five steps sounds like about thirty-four too many there. I want to get into some of those findings. But before we did that, I’d like to get your impression on sort of a broader question about local government. I think there’s a good deal of confusion even among people who might identify as conservative or libertarian leaning about the desirability of expansive local powers with sort of this notion that local control is somehow a superior form of control. It’s been our experience that local governments are often the worst abusers of constitutional rights. They can create the largest barriers to entrepreneurship because of special interests capture or NIMBYism. Andrew, I wonder if you could speak to that a little bit.
Andrew Meleta: Yeah, absolutely. It’s definitely true that local governments very often stand in the way of their citizens and their business owners from exercising their constitutional rights, from going about their lives in their own way and the way that they see fit. And I think that’s exactly why we wrote this report. Not only are they the ones standing in their own way, but local governments are the ones that are responsible for making it cheaper, faster, and simpler for entrepreneurs to be able to start businesses, making it easier and less difficult for citizens to go about their daily lives.
And that was a big inspiration for the report. Because there are a lot of problems at the local level and local governments, from property rights to housing affordability, do get a lot wrong. But what we want to showcase was what do cities get right when they are supporting their entrepreneurship communities and supporting small businesses, and where can they improve? And how can other cities learn from other businesses — excuse me. How can cities learn from other municipalities and see what they do well when it comes to business regulation?
And so, a lot of our takeaways in the report are really focused on looking at what cities can do better and what cities do things well and how they can learn from that. So overall, the purpose of the report is to tie this all together and to provide those recommendations to city officials where they can make it cheaper, faster, and simpler to start a business. And I think the solution to many of the problems at the local level starts at the local level as well.
Jon Riches: Yeah. I thought one of the really great things about the report is that it measured very, very specific criteria against very specific businesses. So you looked at the cost, delay, or complexity criteria and measured them for restaurants or bookstores or food trucks or whatever. Looking at all of those, what was the biggest impediment to entrepreneurship of the factors that you examined, so like a business just wasn’t opening or wasn’t expanding most often because of X, or was there one?
Andrew Meleta: Yeah, so there are definitely a lot of factors. And we don’t try to say that one is — we don’t explicitly say that one is the overriding factor. But if I had to choose from our key takeaways which one would be the worst, I would say that it would be something like just the number of steps. Most of our businesses take between 35 and 50 steps to start across all of our cities. And in our conversations with entrepreneurs, one of the biggest pieces of feedback that we’ve received from them is it’s just very unclear how you’re supposed to go about the process. And it takes way too long once you figure out what path you need to get on to get to the finish line and get to opening day. So the number of steps is a serious impediment, and any way that we could reduce the number of steps and reduce the number of components that an entrepreneur needs to do and needs to take in order to get to opening day for their business would be of benefit to them.
And then, if I had to pick a second thing, I would say that it’s just way too expensive. We have identified dozens and dozens of fees in each city that an entrepreneur needs to pay to start out their business. These can range from the hundreds of dollars to the tens of thousands of dollars in some of our cities. We think there’s a lot to learn from those more expensive cities to do it a better way and look to cities that have figured out how to charge less and how to make it less costly on an entrepreneur who’s already putting in lots of their own personal capital or has to take out a loan and spends inordinate number of hours just getting the business side of their venture started up. And so, any way we can make it easier on the government regulation side would be better off for them.
Jon Riches: I think there is an interesting point, both the number of steps that are involved in opening a business and the expense of doing so. And one of the things I took away—and you both certainly wrote about it—is that these costs fall hardest on small businesses that are least able to navigate more complex regulatory schemes. And of course, the result of that is that benefits large businesses or incumbent firms. Alex, did your research support that as a finding?
Alex Montgomery: Yes, it did. And also our conversations with entrepreneurs in some of the 20 cities that we surveyed in the report have confirmed that the small operators, the mom-and-pop shops, the people who want to start nontraditional business models like food trucks and home-based businesses, those are the kind of folks that don’t have the capital to hire attorneys and expeditors through the process.
To give you an example, one of the businesses that we talked to is a restaurant owner in Atlanta. And they did have access to capital. They had one of the members of the team was a lawyer. Another member had an MBA. And they had to hire two different teams of expeditors just to get all the permitting in place for the restaurant. They had to hire a team of expeditors to deal with the state alcohol permits, and they had to hire a team of expeditors to deal with the local building permit side of things.
And so, can you imagine somebody who doesn’t have a law degree or somebody who doesn’t have an MBA or doesn’t even have prior experience opening a business trying to navigate the regulations for starting up in a city without being able to hire help to get them through the process and to speed things up? And so, it’s really critical that local city officials see these issues as an opportunity to engage in economic development but also as an opportunity to help people who normally don’t have access to these kinds of resources to start their businesses up.
Jon Riches: Yeah. Yeah. That’s for sure. You didn’t—and I think for a good reason—didn’t rank the cities in terms of what the cities got right. Andrew, you mentioned that the reform, some reforms should start at the municipal level. Was there something that you found about the cities that maybe did get some of these things right sort of across the criteria that you all evaluated? Was it something about their structure, their municipal codes? Was there some commonality about “the good or the better cities”?
Alex Montgomery: Well, just for clarity’s purposes, I would say that no one city does everything well or even a majority of the things well. And that’s one of the main findings that we want to communicate in the report is that every single city has the opportunity to improve things and make it cheaper, faster, and simpler to start a business. And so, we didn’t — one of the reasons we didn’t want to rank the cities is because it’s very difficult to compare the rules that let’s say a San Francisco has with the rules that a Jacksonville has. They’re two completely different kinds of cities with different kinds of rules on the books. And so, what we wanted to do instead was to have a deeper analysis of each of those cities, sacrificing our ability to rank them cleanly, but nonetheless getting a lot more information. So we were looking at very specific kinds of regulations and as they apply to each of the five business types in each of the cities.
And so, what I can tell you, Jon, is that even though there’s no one city that does everything well, there are cities that do things that other cities should take into account. For example, Minneapolis and San Francisco, they both have a lot of rules on the books, a lot of steps to start businesses in those two cities, but they both do a really good job of providing technological resources to entrepreneurs and portals where entrepreneurs can learn what the requirements are, get step-by-step guides for completing legal procedures, and complete paperwork within that same online portal.
So cities like Des Moines and Birmingham, which score a zero out of five in our one-stop shop analysis—our one-stop shop analysis looks at how well cities consolidate requirements in a single portal online—Des Moines and Birmingham, cities that scored a zero on that analysis, they can learn from cities like Minneapolis and San Francisco that score higher by implementing step-by-step portals. On the other hand, cities like San Francisco and Minneapolis can learn from cities like Des Moines and Birmingham, which tend to have fewer steps for starting up, less regulations in play, and have a simpler process overall.
So there are definitely — there’s definitely room for cities to learn from each other with the report, and I would encourage listeners to go to our website, ij.org, “Barriers to Business,” and look at the areas specifically where we compare cities and note where a city that scores higher on a metric versus a city that scores lower on the metric and how city officials in those cities can learn from each other and improve the startup process for everybody.
Jon Riches: I’m wondering, Andrew, it’s hard to repeal laws. As you know, oftentimes, it’s just a one-way rachet. Once a regulation is on the books, they sort of just grow, and it’s very rare that they’re pared back. Do you think that there’s a rule for state governments, for state legislative preemption, when we’re talking about things like zoning as of right or permitting as of right or like a presumption to grant a permit under certain circumstances to pass preemption laws that prevent cities form imposing these sort of regulatory barriers before they have an opportunity to?
Andrew Meleta: Yeah. I think there is a rule for preemption in certain instances. For example, looking at zoning and zoning codes across the country, I think there’s a pretty strong role for reform at the state level that can preempt municipalities from being bad actors in these instances. And I think we’ve seen some success around the country with that, like in California for example. However, in our experience working in different states, we found that many times preemption bills at the state level are not the answer and many times are not tailored and specific enough to address the regulatory challenges that are happening at the municipal level and throughout different municipalities in the cities and state.
I think there is a rule for state preemption. But most of the time, we like to take the approach of working with legislatures at the city level and regulators in agencies and really going on a deep dive through the regulatory code and through other aspects of their business startup process to make those improvements. And we’ve had really great success doing this in D.C. over the last five years or so in our District Works initiative, where Alex has been working hand-in-hand with regulators at the Department of Consumer and Regulatory Affairs in D.C. and different council members on the D.C. Council to make it easier to start a business in the district.
And we’re pretty proud of that work because it is hand-in-hand, but we really do a deep analysis and ensure that the reforms we’re doing really have an impact on entrepreneurs and on business owners. So overall, I think there is a role for preemption, but we’d like to take the approach of going deep down and in the city’s code to make those real reforms.
Jon Riches: Well, glad to hear that maybe you weren’t fighting with city hall and winning, but you were working with city hall and winning. Maybe that’s just as rare. Just one last question and for both of you, I think sort of the big takeaway is that entrepreneurship is really central to the American dream. And, of course, every politician likes to talk about job creation as though the politicians are the ones creating the jobs in that industry. But the point is that the entrepreneurs are being killed by, as you characterized it, the thousand cuts from those very same politicians who like to discuss job creation. I know the report is geared much towards policy makers and public policy folks, but what can listeners do? What can everyday citizens do to take back the right to earn a living, the right to start a business?
Alex Montgomery: Well, one of the first things that we would say is that people should reemphasize the importance of local policy making. And so, people who are listening into this podcast, where do you live? What city do you live in? What county do you live in? What kinds of things are going on in that city and county level? Get more involved in what’s going on. And that’s one way to influence what we hope will happen as a result of this newfound emphasis on the rules for starting a business in the wake of COVID. We hope that more people will want to engage with local policy, and we hope that city officials will respond to that engagement by engaging their community and asking what kinds of things would make it easier for small businesses to open up. So that’s one thing is, I think listeners should ask themselves, how can they get involved in local politics, not just at the state level, not just what’s going on at the federal level, but how can everybody get involved in their local political scene?
And the second thing we would say to city officials is you have to go to your small business community, and you have to ask them what kinds of things would make their lives easier. You shouldn’t need a law degree to start a business in cities. So cities need to go to their small business communities and ask, “Other than regulatory workarounds, other than more technical assistance, what rules can we actually cut from the code? What things can we take away?” Too often there’s an influence at the city level of how can we add more steps, even if those steps are meant to help entrepreneurs. How can we add things to the process? How can we do these — how can we have a technical assistance program, like a person who can help small businesses navigate the rules on the books? How can we invest more in that?
But that just creates more red tape. What we would really like to see is cities have a commitment toward cutting back on what’s already on the books. And, of course, the Institute for Justice would love to be a partner in that work and really collaborate with city officials to help figure out how can they cut back on the rules that are already on the books to help their small business communities.
Jon Riches: Yeah, really speaking to my heart there, you are. Namesake Barry Goldwater of course said his aim was not to pass laws to but to repeal them. And I think oftentimes policy makers look to do the former rather than the latter. Andrew, any last thoughts on that, or anything else you wanted to sum up with?
Andrew Meleta: Yeah. I’d say something that people could do when they want to stay apprised of what’s going on with their cities with these types of issues, with business regulatory form, is really just showing up, showing up to that planning board meeting, showing up to that city council meeting where a piece of legislation might be up for debate on making it easier to start a home business in that city. Or it might be at a planning commission where approval has to go through the city for a new brewery or for a new restaurant to open. Going out to those meetings and speaking in support of those businesses and why it’s good for a city to encourage more businesses to open and showing that there should be — it should not be this hard, it should not be this difficult to get a business up and running, and to have that vocal support is really key.
In our experience, policy makers, when they are in support of businesses like this, they want to see the community show up. They want to see people be in support of it as well. And so, I’d encourage anyone who is interested in these issues to go out, to attend those meetings, and to speak in support. And it goes a long way. And I think, ultimately, policy makers will see that when the community is in support of this, we should be in support of this too. And ultimately, that will make it easier for people to start their businesses.
Jon Riches: Well, gentlemen, thank you very much for the time today, for the work on this report. I thought it was informational, practical, very comprehensive, and I think it’ll do a lot to contribute to the public’s understanding of barriers to the right to earn a living and start a business. And hopefully, you have all made it just a little bit easier as a result of your efforts. So very much appreciated and hope we’ll get to work with you.
Andrew Meleta: Thanks so much, Jon.
Alex Montgomery: Yeah. Thanks so much.
Jack Derwin: Thanks so much, Jon. And a big thank you for Alex and Andrew for joining us to break down their new report. We definitely encourage listeners to check out the full report. We’ll be sure to link to that in the description below. And thank you to our audience for tuning into this episode of RTP’s Explainer Podcast. You can subscribe on any major podcast platform or check out our website regproject.org or our social media accounts @fedsocrtp to stay up to date. Thank you.
Conclusion: On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcasts, Google Play, and Spreaker. For the latest from RTP, please visit our website at www.regproject.org.
This has been a FedSoc audio production.