Bryan Caplan  

Question for Left-Libertarians

How the Health Care Legislatio... Obamacare: What the Future Hol...
Obamacare penalizes firms that don't provide health insurance.  If a firm has fewer than 50 employees, however, it's exempt:
Requires employers with 50 or more employees who do not offer coverage to their employees to pay $2,000 annually for each full‐time employee over the first 30 as long as one of their employees receives a tax credit.
This is hardly an isolated example.  Countless other regulations exempt small business.  To take another random example, Title VII discrimination laws originally only applied to firms with 100+ employees.

Why do I bring this up?  To me, this looks like another important counter-example to the left-libertarian view that regulation, not free-market forces, explains the dominance of big corporations in the modern economy.  Left-libertarians, what say you?

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COMMENTS (17 to date)
Pareto writes:

I thought Mr. Long already gave a pretty complete to your types of examples at the link that you provided. As he points out what matters is the net burden of govt. regulation [and I would add subsidies/favoritism] " ... the net burden [net benefit] is greater for large than for small, given the greater ease with which more concentrated interests can affect governmental decisions."

Take an example from today's headlines. Not sure how many millions NYC had to offer in tax holidays and other effective subsidies but it was enough to beat what Orlando was offering:

Ted writes:

Uh, do big corporations "dominate" the economy? Hasn't small business' contribution to GDP stayed relatively stable at around 50% (the recession probably has thrown this off, but in general)? I wouldn't necessarily call that big business domination.

Also, if you look at the differentials most of the dominance from big business is in areas with entry is incredibly difficult and increasing returns play a massive role - and because of that, and sometimes with implicit government help like in the case of utilities, we get a monopolistic market where entry is even more difficult. It's not at all easy to start a small utility company, a small transport / trading company, a small information technology firm, a small mining company - and that's where the "dominance" of big business arises from. Those all require a lot of investment and the barriers to entry and market capture are quite large.

As a side note, I think it might make some sense to give small businesses some breaks. Welfare and productivity (via competition) are increased by greater product variety and with enormous investment costs (both in internalized "risk" and monetary costs) it might makes sense to help smaller firms enter more easily.

Dave writes:

Its even worse. Small family businesses necessarily discrimante on the basis of race and are allowed to get away with it, unlike larger businesses.

mattmc writes:

Maybe "government small" is too small. Once we hit the boundaries of small protection, the marginal cost of growth is high.

Obviously, there are efficiencies in large firms as well.

lukas writes:

At 100 employees, you're hardly "big business". It's true, small businesses (and especially those that are politically connected) are coddled too, but those regulations make it hard for them to cross over into big business territory.

Maybe an analogy can be drawn to the way that welfare keeps many poor people in poverty?

bil. A. writes:

The phase-out of exemptions to regulation acts as a high marginal tax to firm growth. As size increases and regulations kick in, what otherwise would be a decreasing LRAC curve becomes increasing over some midrange due to increasing regulatory costs.
Thus, small firms are kept small, leaving large established firms facing less competition from up-and-coming mid-sized firms.

Theoretically, well-functioning capital markets could help overcome this trap, but even in this case it is much more risky and costly to massively fund the leap from a small to a large sized firm, compared to incrementally funding a firm that has demonstrated competence and profitability as a mid-sized concern first.

In other words it seems analogous to the poverty trap on the individual level caused by high effective marginal tax rates as low-income benefits are phased-out with rising income.
The super-wealthy don't mind progressive income taxes as much as they otherwise would (compared to wealth taxes), as taxing income keeps poor people from becoming rich (and thus reducing the competition that the wealthy face for high-value positional goods).

Will Wilkinson writes:

Forgive my business law naivete, but is there a rule that prevents a single owner, or a single set of owners, from owning multiple 100 person businesses most of which do business only with the others?

Ted writes:

@ Will Wilkinson

No, there isn't any rule to theoretically prevent someone from owning multiple businesses. While it's not common, it actually does happen (though usually not more than 3).

In your scenario where the businesses are doing business with one another primarily, it could potentially be illegal if you got a particular judge to read laws regarding oligopolies and collusion in a very broad way.

Steve Waldman writes:

You can point to many size-specific exemptions in the skein of regulations that businesses must comply with, but the vast majority of regulations are not size specific, and there are often very large economies of scale in regulatory compliance.

Small businesses have no access to public debt or equity markets due to burdens of compliance that are de minimis for large firms and prohibitive for small firms. (These include both government regs and related public/private quasiregs, e.g. exchange listing criteria.) Access to capital is a pretty big deal, much bigger than a requirement to offer a portion of workers' compensation in the form of health insurance.

Choose any regulation at random, and the odds are there are compliance economies of scale. Size-specific exemptions are the exceptions that prove the rule.

Here's another way of looking at it: Group industries into a continuum from "lightly regulated -> heavily regulated". Compute the proportion of mkt share served by small biz, however defined. I'd bet (I know you like bets) that small-biz penetration decreases as a function of industry regulation. Obviously, correlation is not causality, "heavy" industries might be regulated and involve technological economies of scale, or small business might be causality might be more effective at preventing regulation, reversing causality.

Still. A natural interpretation is that compliance creates economies of scale, and favors large firms and incumbents.

I think he left-libertarian case is pretty good on this one.

Steve Waldman writes:

Oops! Shoulda taken the "preview" thing more seriously. Sorry about the typos in the previous comment!

Doc Merlin writes:

I'm a bit of a right-libertarian, but...
I have to disagree with you, Bryan, the examples of small business favoritism don't outweigh the sheer enormity of the effects of the fewer regs that favor large business.

A good example is, corporate accounting regs make it nearly impossible to be a publicly traded small business.

Market regs, take away access to capital markets.

Those are just two and those are massive by themselves.

But you also miss another effect, pro-small business regs make it so that small businesses have disincentive to grow and compete with large businesses. This keeps large businesses fewer in number and more prosperous. Look for example at most third world countries, the number of single owner businesses is astronomical, but the number of medium size and large businesses is very small. This is because large businesses can use regulation to keep small businesses small. By doing that, relative to the size of the economy, the businesses that are large, become /massive/ and instead of the large businesses being slightly smaller and the small and medium size businesses being slightly larger.

ed writes:

Well, sure, you can find lots of examples that favor very small businesses over those that are only moderately small.

But in the overall scheme of things compliance with regulations has enormous fixed costs. Hence a large volume of regulation causes increasing returns to scale. This effect can be large and important even if some very small businesses are exempt from some regulations.

Doc Merlin writes:

I think I agree with Lucas here.

John V writes:

There are a lot of good answers here to Bryan's question.

Come on, Bryan. I'm sure you could already figure (or already knew) these answers before you even posted your entry.

Why pretend you don't know?

David C writes:

So to summarize the general gist of arguments so far:

Regulations for businesses...
with more than 1000 employees: Great
100-1000 employes: Terrible
Less than 100: Okay to Good, depending on locale

By the way, I'd prefer it if you called this Roderick Long's view. I consider myself a left-libertarian, but that's not my view.

Miko writes:

David C:
Reading the above comments, I see nothing suggesting that regulations on large businesses are in any way better. Left-libertarians do claim that regulations are passed to favor large firms, but we don't inherently favor large firms, so this is not our way of arguing that the regulations are "great," just that they companies regulated by them think that they're "great."

You're free to call yourself whatever you want, but this is a common view among left-libertarians and certainly held by many other than Long. One way you can see this is by noting how many commenters here are defending it; the market has spoken.

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