And I would also imagine that permit reform and deregulation would make small businesses more productive in the future. I’m not a small business owner, but it seems like the somewhat “fixed costs” of excessive regulations (at least from a waste of time perspective) would negatively affect small businesses even more as there is less business to spread it over.
This seems unlikely to be a big effect. The paper that Noah referenced says that big businesses had better productivity because they have the capital, internal skills, and managerial competence to take advantage of new technologies in ways that small businesses don't and probably never will.
"Widespread adoption of electronic scanners has meant that managers are able to change prices relatively costlessly (as in high-low pricing, where a price alternates between its regular level and its sale level) and to more easily track the success of their pricing strategies for individual items (Nakamura, 1998)."
As a category, small business owners just aren't going to have the bandwidth to optimise their businesses like this -- it requires enough scale that you can hire a layer of workers that are able to spend time looking at data and thinking about these things.
I used to live in Vietnam which has convenience stores that are owned and run by individual small business owners. They are all being displaced by (Japanese) chains because despite the small businesses having structural cost advantages on some ways (run out of the ground floor of your house so effectively zero rent) they don't have the capital to try new product lines or to invest in air conditioning or other innovations.
Quite correct (as both economist [financial] and small business owner)
And less bandwidth and skill (all things being equal).
Even if one is quite sophisticated, the amount of time you have as a small business versus a large / corporate is significant different. Even ability to source an outsourcing.
Heavy regulation tends to favor (a) incumbents, (b) larger firms - this not to say this means all regulation is bad, but the trade-offs and effects are real and need better attention.
Another benefit is simply the optionality it gives people for earning a living. Increasingly, whatever your educational background or profession, the two overwhelming career options today seem to be working for a large tech company or becoming an independent content creator (with some obvious exceptions like lawyers and doctors). Running a good ol' small business is a breath of fresh air in the age of digital economy.
"Why work forty hours a week for a corporation, when you can work eighty hours a week for yourself?"
But seriously, as a small business owner m'self, the push by Mamdani to support small business entrepreneurs--who generate something like 80% of all economic growth in the US--truly warms my heart.
Well while it is warming to my heart as well, the economic growth stat is not correct - most small business represents "churn" (creation, death) and is fairly weak (excepting Venture type start-up small biz) on net growth creation.
Not to condemn small biz as a small biz owner myself - but needs nuance. Even Churn of course has a role and I think an ecosystem of entreprneurship is an added positive.
(of course yes, 40 hours as a salary... 80+ as entrepreneur biz owner...)
For sure, some people genuinely don't like being told what to do, and having another economic path toward self sufficiency is pretty good. It's smart politics and also generally just smart in general for people and frees up city resources.
Supporting small business directly via grants, cheap loans, regulatory forbearance, etc. is a reasonable political choice. Supporting small business indirectly by distorting antitrust law to try and make competitive acts by a large business illegal (this is the essence of Lina Khan’s worldview and is basically what her famous paper about Amazon says) is *terrible* policy.
Those are the sorts of details which make me hesitant to trust Mamdani on this. It's similar to him publicly walking back his old defund remarks, then bringing Alex Vitale onto his team.
The general progressive worldview is if something or some group is being successful it is because they are cheating or have some unfair advantage. Government needs to step in an fix the problem.
Capitalism = the best idea's grow by getting more resources.
Progressivism = the worst idea's grow by getting more resources.
Sometimes small businesses are an aesthetic preference that I am willing to pay extra for. The local sandwhich shop doesn't have to be competitive with Subway. The guy making homemade gelato doesn't have to price like he is Baskin-Robbins. When I travel somewhere new, just see what the local grocer has on offer is more interesting than Walmart's largely homgonized offerings are.
If your local sandwich guy can’t make a sufficiently better sandwich than Subway’s to make a profit while charging higher unit prices, he should get out of the sandwich game and find himself a new vocation. Are you happy? This is clearly what I meant, now hush, geez.
I think cities deregulating small businesses and housing would be a huge step forward.
All economies need a healthy blend of locally-owned small businesses and large globally-competitive corporations. The large companies bring in the wealth and the small businesses provide the services, amenities, and entry level employment.
I’m not so worried about the wal mart competition. Retail is a tough business and the internet killed more than Walmart ever did. Should we ban internet shopping? Ban UPS and Amazon trucks from city limits? Would be better for retail than banning Walmart, though I think the ship for small retail (ex convenience) has already sailed.
Restaurants are a sector that can survive. In CA I see chains dominating as they have good lawyers, know how to navigate the permit and approval process and stick with a cookie cutter model that may already been approved in that town or county.
In my CA county it takes at least 18 months for a new independent owner to renovate and reopen a pre-existing restaurant space. That’s 18 months with zero revenue. Unless you are independently wealthy- forget it. Construction and permits will be outrageously expensive and time consuming. And then figure in at least another $100k+ on top for mandated upgrades (only the best of the best for the permiteers): new exhaust fans, wiring and plumbing, etc. It’s not about the nickel and diming for signage and outdoor tables. The only model that works for the non-wealthy, non-chain restaurateurs is to buy or lease an Arby’s, tell the county you are changing nothing inside (except what you’ll do in the kitchen illegally later) and reopen it as a taqueria.
I’m not sure I’d be quick to congratulate the types who put a victim on the rack and cranked it up to 11 who have now have decided to ease up a notch or two.
The victim is still on the rack. Sure, 8 or 9 is better than 11, though.
This is very insightful! How do we get to the point where there are so many onerous restrictions that exclude so many from the marketplace? I don't want to turn this into a political discussion, but it does seem there are less restrictions in red states like Texas that are friendlier to the business environment. The number of enforcers on the local government payroll is ridiculous and continues to grow each year...at least in my area. It seems simple cost/benefit analysis could alleviate many of these requirements. So many of the restrictions are built to counter risks that are so low it doesn't make sense to enforce.
See my comment below as to how in Tokyo you can open a small bar in under a month with expenses less than $2000, which is several orders of magnitude faster and cheaper than in California.
Joe McReynolds (Emergent Tokyo) was on EconTalk podcast (https://www.econtalk.org/the-magic-of-tokyo-with-joe-mcreynolds/) and discussed how much it costs to open a 6 seat bar in Tokyo, which explains (with multi-use zoning) how the city supports small business:
To answer your question of how they do it--bottom line, up front--I have a friend. She used to work in New York finance, Japanese American. Moved to Tokyo and decided she was going to quit finance and open a small bar; and she's going to bartend at it. So, she's got a small bar. Her all-in cost to open the bar was, I believe, about $1,500, $1,600 US. That's everything from permitting, to getting the décor the way she wanted it--she did some DIY [do it yourself]; then, of course, liquor and supplies. But, fundamentally, opening a bar--and it's a nice, six- or seven-seat bar in a nice part of town--$1,600.00 US. That is unbelievable to anyone who has any knowledge of the American bar and restaurant industry.
And, that comes down to things like liquor licenses are $50 bucks and filling out a form. They're not the ordeal that they are in the United States. Health and safety inspections are once every five to seven years. Sales tax: if you're running a mom-and-pop small business and you're not making a gajillion dollars--to use the technical term--you can keep the sales tax you collect up until a certain number. Minimum lot sizes, minimum unit sizes--there are not minimum lot sizes and minimum unit sizes in the same way. And so, you have all of these flexible micro-spaces.
I think good government should be the overarching theme for Democrats going forward. The theme allows one to explain the benefits of governance, countering the instinctive Reaganite dismissal of government's purpose. Also, good government is the opposite of Trumpism.
I think they were trying to appease various camps with focused initiatives. Good government requires a step back and the acknowledgement of trade-offs.
Republicans, of course, deny that government can work at all, and instead have a cult of personality focused on maintaining power and grifting.
There are economies of scale but there are also diseconomies of scale. According to the work of Geoffrey West, companies get more productive to a point as they get operational efficiencies but then their organizational inefficiencies start to hurt them until at some scale they're completely mired in bureaucracy and no longer competitive.
Economies of scale are more visible because of survivorship bias - business with economies of scale grow, business with diseconomies of scale remain small, and we usually don't see the diseconomies of scale.
Sorry to digress, but I wanted to comment on something related. I spent last week in Florida, and coming from a blue state, was amazed at how different things are down there. Up in Maryland it feels like post-pandemic, nothing works right anymore. This isn't just prices. Supermarkets and stores are severely understaffed. There are tons of long-term unrented spaces on the street. Down in FL (on the Gulf side) supermarkets had many checkout lanes open, with people even bagging groceries. You could expect help from staff at CVS, instead of half the shelves being empty. And relevant to this article, small businesses and new restaurants all seemed to be healthy, and popping up everywhere. The whole experience was like taking a time machine back to 2018.
I know people will put this down to "blue" vs. "red" governance and other political stuff, but I don't think things are particularly well-governed in FL. Obviously part of the difference is an abundance of elderly people working. But equally, I have to imagine it's cost of living, and primarily things like the cost of housing and rent for workers (since grocery prices weren't wildly lower down there.) What I worry about is that we're going to put this down to politics, when actually it's an economic disease that just hasn't reached these southern states yet.
Median household income in MD is $98,000 vs $73,000 in FL and FL's foreign born population is 30% larger. The market for low skill low wage labor is a lot different which would certainly affect staffing levels as you noticed.
All of this may be true, but whatever malaise is affecting us in Maryland was not obvious to me as recently as early 2020. It’s now become so normal to me that every commercial experience while visiting Florida was surprising.
Another anecdote: bike tire blew out, visited an independent bike shop (in a fancy tourist area) and they charged me $28.80 to replace it with a thorn-resistant version. Took an hour and they offered me a loaner bike. In Maryland that would have been $60 and a day.
It remains to be seen if socialists support small business through the reduction of regulations and taxes or are they just mouthing "abundance" platitudes. Freedom is a violation of their DNA. Control is far more likely
I hope Mamdani follows through, but be prepared for the caveats. I'd expect any progressive support for small business to be identity based or rationed. Hope they prove me wrong.
Just like a prog to go on the internet and complain that people are saying mean things about them. Hey Charles, just pretend we're screaming mentally ill people on the subway, you're good at pretending those don't exist.
Such an attitude destroys the competitiveness of the Democratic party on the federal level and most states. Any party that cannot look at itself in the mirror and reform itself does not deserve to run the government.
As a small business founder-owner (actually several) I generally agree, and the potential for Ds to adopt pro small biz as excuse for streamlining, and win back a fraction of votes (percentages on the margins) seems a real potential given the Trump II.
Now a mitigating item is going over-favor on Small Biz (and equally definition of small biz*) but the overall win for political and economic support to market economics, and improved business climate is an overall benefit.
It's also of utility to reflect on longer-term efficiency factor - as economies of scale are fundamentally important but one needs to avoid falling into large firm ineffeciency (and have sufficient space for competitors to bring dynamic competition) - so small-biz promo as an overall economic risk mitigation strategy is an efficiency argument from a perspective of ensuring systematic flex for change.
(*: as mom and pop is a slogan but what's the operational definition on equity ownership)
I am glad people on the further left, like Mamdani, are taking these steps to support small businesses. So maybe it’s me being too ready to punch left, but I can’t help be note an ideological issue brewing.
Ok, so as a leftist person, you want small businesses to be successful…but only kinda. They can’t become so successful that they become a larger business. Because that’s bad and evil?
I realize the real world application of this is scarce. John’s Corner Deli is going to benefit from the changes mentioned here but is very unlikely to become the next Acme or Kroger or whatever.
But it is true that the villainous big businesses we have today did, in fact, start as smaller ones! So I think my point mostly stands.
Great article. I love the independent eateries and shops in walkable cities like SF. I agree that cities must make regs sensible and easy to comply with.
And I would also imagine that permit reform and deregulation would make small businesses more productive in the future. I’m not a small business owner, but it seems like the somewhat “fixed costs” of excessive regulations (at least from a waste of time perspective) would negatively affect small businesses even more as there is less business to spread it over.
This seems unlikely to be a big effect. The paper that Noah referenced says that big businesses had better productivity because they have the capital, internal skills, and managerial competence to take advantage of new technologies in ways that small businesses don't and probably never will.
"Widespread adoption of electronic scanners has meant that managers are able to change prices relatively costlessly (as in high-low pricing, where a price alternates between its regular level and its sale level) and to more easily track the success of their pricing strategies for individual items (Nakamura, 1998)."
As a category, small business owners just aren't going to have the bandwidth to optimise their businesses like this -- it requires enough scale that you can hire a layer of workers that are able to spend time looking at data and thinking about these things.
I used to live in Vietnam which has convenience stores that are owned and run by individual small business owners. They are all being displaced by (Japanese) chains because despite the small businesses having structural cost advantages on some ways (run out of the ground floor of your house so effectively zero rent) they don't have the capital to try new product lines or to invest in air conditioning or other innovations.
Quite correct (as both economist [financial] and small business owner)
And less bandwidth and skill (all things being equal).
Even if one is quite sophisticated, the amount of time you have as a small business versus a large / corporate is significant different. Even ability to source an outsourcing.
Heavy regulation tends to favor (a) incumbents, (b) larger firms - this not to say this means all regulation is bad, but the trade-offs and effects are real and need better attention.
Another benefit is simply the optionality it gives people for earning a living. Increasingly, whatever your educational background or profession, the two overwhelming career options today seem to be working for a large tech company or becoming an independent content creator (with some obvious exceptions like lawyers and doctors). Running a good ol' small business is a breath of fresh air in the age of digital economy.
"Why work forty hours a week for a corporation, when you can work eighty hours a week for yourself?"
But seriously, as a small business owner m'self, the push by Mamdani to support small business entrepreneurs--who generate something like 80% of all economic growth in the US--truly warms my heart.
Well while it is warming to my heart as well, the economic growth stat is not correct - most small business represents "churn" (creation, death) and is fairly weak (excepting Venture type start-up small biz) on net growth creation.
Not to condemn small biz as a small biz owner myself - but needs nuance. Even Churn of course has a role and I think an ecosystem of entreprneurship is an added positive.
(of course yes, 40 hours as a salary... 80+ as entrepreneur biz owner...)
For sure, some people genuinely don't like being told what to do, and having another economic path toward self sufficiency is pretty good. It's smart politics and also generally just smart in general for people and frees up city resources.
Supporting small business directly via grants, cheap loans, regulatory forbearance, etc. is a reasonable political choice. Supporting small business indirectly by distorting antitrust law to try and make competitive acts by a large business illegal (this is the essence of Lina Khan’s worldview and is basically what her famous paper about Amazon says) is *terrible* policy.
Those are the sorts of details which make me hesitant to trust Mamdani on this. It's similar to him publicly walking back his old defund remarks, then bringing Alex Vitale onto his team.
The general progressive worldview is if something or some group is being successful it is because they are cheating or have some unfair advantage. Government needs to step in an fix the problem.
Capitalism = the best idea's grow by getting more resources.
Progressivism = the worst idea's grow by getting more resources.
And she is now a senior member of Mamdani’s transition team, so we’ll find out what side he lands on.
Sometimes small businesses are an aesthetic preference that I am willing to pay extra for. The local sandwhich shop doesn't have to be competitive with Subway. The guy making homemade gelato doesn't have to price like he is Baskin-Robbins. When I travel somewhere new, just see what the local grocer has on offer is more interesting than Walmart's largely homgonized offerings are.
If the local sandwich guy can’t compete with *Subway*, he should go into a different line of work. That’s a low bar!!!
He doesn't have to be price-competitive, i.e. he can charge 2-3x what Subway does, because he provides better quality and a better environment.
No one said anything about price-competitiveness.
Higher price for better was literally the subject of the first sentence of Jason's comment.
If your local sandwich guy can’t make a sufficiently better sandwich than Subway’s to make a profit while charging higher unit prices, he should get out of the sandwich game and find himself a new vocation. Are you happy? This is clearly what I meant, now hush, geez.
And that's clearly what Jason meant.
This comment made me hungry for gelato and immediately makes me want to go visit little Italy tonight. Thank you kind sir.
Great article.
I think cities deregulating small businesses and housing would be a huge step forward.
All economies need a healthy blend of locally-owned small businesses and large globally-competitive corporations. The large companies bring in the wealth and the small businesses provide the services, amenities, and entry level employment.
I’m not so worried about the wal mart competition. Retail is a tough business and the internet killed more than Walmart ever did. Should we ban internet shopping? Ban UPS and Amazon trucks from city limits? Would be better for retail than banning Walmart, though I think the ship for small retail (ex convenience) has already sailed.
Restaurants are a sector that can survive. In CA I see chains dominating as they have good lawyers, know how to navigate the permit and approval process and stick with a cookie cutter model that may already been approved in that town or county.
In my CA county it takes at least 18 months for a new independent owner to renovate and reopen a pre-existing restaurant space. That’s 18 months with zero revenue. Unless you are independently wealthy- forget it. Construction and permits will be outrageously expensive and time consuming. And then figure in at least another $100k+ on top for mandated upgrades (only the best of the best for the permiteers): new exhaust fans, wiring and plumbing, etc. It’s not about the nickel and diming for signage and outdoor tables. The only model that works for the non-wealthy, non-chain restaurateurs is to buy or lease an Arby’s, tell the county you are changing nothing inside (except what you’ll do in the kitchen illegally later) and reopen it as a taqueria.
I’m not sure I’d be quick to congratulate the types who put a victim on the rack and cranked it up to 11 who have now have decided to ease up a notch or two.
The victim is still on the rack. Sure, 8 or 9 is better than 11, though.
This is very insightful! How do we get to the point where there are so many onerous restrictions that exclude so many from the marketplace? I don't want to turn this into a political discussion, but it does seem there are less restrictions in red states like Texas that are friendlier to the business environment. The number of enforcers on the local government payroll is ridiculous and continues to grow each year...at least in my area. It seems simple cost/benefit analysis could alleviate many of these requirements. So many of the restrictions are built to counter risks that are so low it doesn't make sense to enforce.
See my comment below as to how in Tokyo you can open a small bar in under a month with expenses less than $2000, which is several orders of magnitude faster and cheaper than in California.
Joe McReynolds (Emergent Tokyo) was on EconTalk podcast (https://www.econtalk.org/the-magic-of-tokyo-with-joe-mcreynolds/) and discussed how much it costs to open a 6 seat bar in Tokyo, which explains (with multi-use zoning) how the city supports small business:
To answer your question of how they do it--bottom line, up front--I have a friend. She used to work in New York finance, Japanese American. Moved to Tokyo and decided she was going to quit finance and open a small bar; and she's going to bartend at it. So, she's got a small bar. Her all-in cost to open the bar was, I believe, about $1,500, $1,600 US. That's everything from permitting, to getting the décor the way she wanted it--she did some DIY [do it yourself]; then, of course, liquor and supplies. But, fundamentally, opening a bar--and it's a nice, six- or seven-seat bar in a nice part of town--$1,600.00 US. That is unbelievable to anyone who has any knowledge of the American bar and restaurant industry.
And, that comes down to things like liquor licenses are $50 bucks and filling out a form. They're not the ordeal that they are in the United States. Health and safety inspections are once every five to seven years. Sales tax: if you're running a mom-and-pop small business and you're not making a gajillion dollars--to use the technical term--you can keep the sales tax you collect up until a certain number. Minimum lot sizes, minimum unit sizes--there are not minimum lot sizes and minimum unit sizes in the same way. And so, you have all of these flexible micro-spaces.
I think good government should be the overarching theme for Democrats going forward. The theme allows one to explain the benefits of governance, countering the instinctive Reaganite dismissal of government's purpose. Also, good government is the opposite of Trumpism.
What where the Democrats trying to do before they realized good governance is good?
I think they were trying to appease various camps with focused initiatives. Good government requires a step back and the acknowledgement of trade-offs.
Republicans, of course, deny that government can work at all, and instead have a cult of personality focused on maintaining power and grifting.
The Dems lost the NYC election just like the Republicans lost the last two elections to Trump.
There are economies of scale but there are also diseconomies of scale. According to the work of Geoffrey West, companies get more productive to a point as they get operational efficiencies but then their organizational inefficiencies start to hurt them until at some scale they're completely mired in bureaucracy and no longer competitive.
Economies of scale are more visible because of survivorship bias - business with economies of scale grow, business with diseconomies of scale remain small, and we usually don't see the diseconomies of scale.
Sorry to digress, but I wanted to comment on something related. I spent last week in Florida, and coming from a blue state, was amazed at how different things are down there. Up in Maryland it feels like post-pandemic, nothing works right anymore. This isn't just prices. Supermarkets and stores are severely understaffed. There are tons of long-term unrented spaces on the street. Down in FL (on the Gulf side) supermarkets had many checkout lanes open, with people even bagging groceries. You could expect help from staff at CVS, instead of half the shelves being empty. And relevant to this article, small businesses and new restaurants all seemed to be healthy, and popping up everywhere. The whole experience was like taking a time machine back to 2018.
I know people will put this down to "blue" vs. "red" governance and other political stuff, but I don't think things are particularly well-governed in FL. Obviously part of the difference is an abundance of elderly people working. But equally, I have to imagine it's cost of living, and primarily things like the cost of housing and rent for workers (since grocery prices weren't wildly lower down there.) What I worry about is that we're going to put this down to politics, when actually it's an economic disease that just hasn't reached these southern states yet.
Median household income in MD is $98,000 vs $73,000 in FL and FL's foreign born population is 30% larger. The market for low skill low wage labor is a lot different which would certainly affect staffing levels as you noticed.
All of this may be true, but whatever malaise is affecting us in Maryland was not obvious to me as recently as early 2020. It’s now become so normal to me that every commercial experience while visiting Florida was surprising.
Another anecdote: bike tire blew out, visited an independent bike shop (in a fancy tourist area) and they charged me $28.80 to replace it with a thorn-resistant version. Took an hour and they offered me a loaner bike. In Maryland that would have been $60 and a day.
"In Maryland that would have been $60 and a day."
FL has a lot more poor people and illegals willing to work for low wages.
+1 (we just moved from SF to Miami Beach) we see the same thing.
It remains to be seen if socialists support small business through the reduction of regulations and taxes or are they just mouthing "abundance" platitudes. Freedom is a violation of their DNA. Control is far more likely
I hope Mamdani follows through, but be prepared for the caveats. I'd expect any progressive support for small business to be identity based or rationed. Hope they prove me wrong.
I’m becoming allergic to Noah Smith. I don’t care much about labeling people. Using progressive as a pejorative is a signal.
Well if progressives didn't double down on wildly ineffective policy (practically and politically), it wouldn't be a pejorative.
Just like a prog to go on the internet and complain that people are saying mean things about them. Hey Charles, just pretend we're screaming mentally ill people on the subway, you're good at pretending those don't exist.
Such an attitude destroys the competitiveness of the Democratic party on the federal level and most states. Any party that cannot look at itself in the mirror and reform itself does not deserve to run the government.
A signal of intelligence
As a small business founder-owner (actually several) I generally agree, and the potential for Ds to adopt pro small biz as excuse for streamlining, and win back a fraction of votes (percentages on the margins) seems a real potential given the Trump II.
Now a mitigating item is going over-favor on Small Biz (and equally definition of small biz*) but the overall win for political and economic support to market economics, and improved business climate is an overall benefit.
It's also of utility to reflect on longer-term efficiency factor - as economies of scale are fundamentally important but one needs to avoid falling into large firm ineffeciency (and have sufficient space for competitors to bring dynamic competition) - so small-biz promo as an overall economic risk mitigation strategy is an efficiency argument from a perspective of ensuring systematic flex for change.
(*: as mom and pop is a slogan but what's the operational definition on equity ownership)
I am glad people on the further left, like Mamdani, are taking these steps to support small businesses. So maybe it’s me being too ready to punch left, but I can’t help be note an ideological issue brewing.
Ok, so as a leftist person, you want small businesses to be successful…but only kinda. They can’t become so successful that they become a larger business. Because that’s bad and evil?
I realize the real world application of this is scarce. John’s Corner Deli is going to benefit from the changes mentioned here but is very unlikely to become the next Acme or Kroger or whatever.
But it is true that the villainous big businesses we have today did, in fact, start as smaller ones! So I think my point mostly stands.
Great article. I love the independent eateries and shops in walkable cities like SF. I agree that cities must make regs sensible and easy to comply with.