Regulatory Suffocation

Taxes are usually the heart of the discussion when people talk about the bad business climate in California.  And certainly their taxes are just insanely high.  But for folks like me, an even bigger barrier is the regulatory environment. We are closing several operations in California at the end of this year mainly because we are just exhausted with the compliance costs and regulatory barriers to expansion.    In Ventura County, for example, we have  a camping operation that has never made money because it is under-scale. We have the capital and desire to expand it, but it has just proven impossible to do so.

A big reason for this is the regulation in California and in Ventura County.    We once had to get something like 7 permits just to remove a dangerous and dilapidated deck.  We added a 500 gallon fuel tank for fueling boats (to eliminate the unsafe practice of driving in and out of town with about 100 5-gallon fuel containers) and it took over 3-years of trekking to multiple county and state offices to get it permitted.  We thus despaired of trying to get a campground expansion approved.   Approximately the same expansion that cost us just under a million dollars in Alabama several years ago was going to cost over $5 million and Ventura County, and the County was still piling on requirements when we gave up.  And this is even before we fart with crazy California break laws and other nuttiness.

I have often told folks that I would love to see a liberal defender of all this regulatory overreach try to construct and open a restaurant in Ventura County.  It would be fascinating to watch.   (All this musing was touched off by this article on underground restaurants that try to sidestep this regulatory cost and mess).  We are a service business and California still has a lot of money, so we still operate in California.  But I continue to wonder why any company, like a manufacturer, remains in California.  Sell there yes, but produce anything you can out of state and ship it in.  Even as a service business we do a bit of this, no longer stick-building anything but having all our buildings, cabins, stores, etc built in Arizona as modular buildings and then shipped to California.  Even our labor force is partially "imported", as we hire folks who live in their RV's to come from all over the country to live and work at our campgrounds.

As I read the other day, if Silicon Valley were not already in California, would anyone in their right mind put it there?

Postscript:  One other story:  California's regulatory environment has caused a real shift in the culture as well.  At one location that we are closing this year, a local attorney has regular dinner meetings with groups of our employees to brainstorm among the group to see if they can come up with something to sue us over.

  • mlhouse

    "I have often told folks that I would love to see a liberal defender of all this regulatory overreach try to construct and open a restaurant in Ventura County."

    And that is where you are missing the point. The elite liberal defenders of this regulatory overreach assume that they have the political connections to cut through all of the red tape. If you are a rich liberal with capital to invest you call your political allies and they take care of you.

  • Sandman

    Totally agreed and well put. I've always felt that taxes were the less significant issue, and that complexity is the real problem. It's just such a hard argument to make because each individual regulation can often seem, on its face, to make some sense, but when they are taken together, they kill the will to overcome them. Taxes, at least insofar as they don't change dramatically, can at least be plugged into a spreadsheet and we can plan for them, but these kinds of regulations are so hard to track down that it's near impossible to put in a plan for them.

    The problem is, I just don't know how best to argue against them, because I don't think people understand the costs of complexity. I've taken to using the tax system, since it's a pretty good example that people understand, and I try to suggest they imagine having to do their taxes each month.

    The other thing that I really think needs to change is these regulations where small businesses are exempted. If you can't justify a regulation on a 10 person startup, you shouldn't put it in a billion dollar company.

  • JKBrown

    The last few days I've been pondering this interview with an economist. He had interesting things to say about the slowdown in the creation of young businesses, which are the source of the majority of job growth as well as facilitating economic movement to more productive sectors. He didn't address causes but given it's been going on for decades (seems to have started around 1983) but accelerated after 2000, I could see the increasingly discouraging regulatory environment having an impact since it shifts the already large failure rate to an even higher level. It might also be the risk-adverse education system that produces risk-adverse graduates.

    "We’ve always known that young businesses are the most volatile. They’re the ones experimenting, trying to figure out if they have what it takes to be the next Microsoft or Google or Starbucks. But now we’re seeing a decline in the entry rate and a pretty stark decline in the share of young businesses. ... But it’s also important to recognize that the decline in the share of young firms has occurred because the impact of entry is not just at the point of entry, it’s also over the next five or 10 years. A wave of entrants come in, and some of them grow very rapidly, and some of them fail. That dynamic has slowed down. Should we care? The evidence is we probably should, because we’ve gotten a lot of productivity growth and job creation out of that dynamic. A cohort comes in, and amongst that group, a relatively small group of them takes off in terms of both jobs and productivity. So the concern is, have we become less entrepreneurial? If you’re not rolling the dice as often, you’re not going to get those big wins as often. ..."

    click through the full interview for more, the last 4 questions are on point.

    http://conversableeconomist.blogspot.com/2013/09/john-haltiwanger-on-job-creation-and.html

  • http://devilish-details.blogspot.com/ mesaeconoguy

    Over on another blog, I was [futilely] engaged in an exchange with a leftist, who asserted that people don’t respond to taxes. As those who studied economics know and understand, regulation acts as a tax, and your example here Warren is direct refutation to his ignorant belief.

    But a larger point exists here – this fool is representative of how leftist elitists think (and is mostly how we got to our current dismal economic state), and their misconceptions have now become so dangerous that transacting business is next to impossible without an army of lawyers and compliance experts at your disposal, which limits participation to large firms only.

    Do not underestimate the stupidity of these people. They are extremely dangerous.

  • Daublin

    Strangely, if you talk to Sillicon Valley tech people, they are largely in favor of both the taxes and the heavy regulation.

    It reminds me of French young adults. They are largely unemployed, but they consistently vote for higher minimum wage and higher minimum benefits. For that matter, American young adults are following their footsteps these days.

  • steve

    Silicon Valley is largely unregulated. Sure their high wage employees are subject to labor laws, and the office buildings they use are regulated. But, their basic businesses of software and silicon chips are largely unregulated. The only thing that is a major pain is to build a factory there so they don't.

  • http://matthewjudebrown.com/ Morven

    Proof that regulations are worse than taxation, because regulations take your time and your sanity, not just your money.

  • Matthew Slyfield

    "a local attorney has regular dinner meetings with groups of our
    employees to brainstorm among the group to see if they can come up with
    something to sue us over."

    Expect to get sued for closing.

  • Dave Boz

    You will probably find that the locations you abandon in California are taken over by someone with better political connections, who won't have to deal with all the crap you do. Regulations are for little people and outsiders. For example, if you want to build a sports arena or stadium for billionaires, you'll find the state's envirnomental restrictions can be more... flexible.

  • Phillip

    I run a business in Australia and I am glad that I am free of much of this regulatory impost. My company and business name has to be registered, and I have to pay my taxes, and that is pretty much it. It helps that my employees are not members of a union.

  • Craig Loehle

    In the name of preventing any bad thing from ever happening, the regulations make it so only a rich person or corporation can open a business (retail, service, or manufacturing). But this of course ignores the opportunity costs of the regulation, which is that new businesses don't get started and old ones don't get expanded. This particularly hits the poor. 80 years ago, immigrants could open little shops and restaurants with very little capital, but now you need $1 Million to open a business and better be pretty savy (not a high school drop-out). Just like hiking the minimum wage, this chops out the lower rungs on the ladder.

  • rxc

    I just had a discussion with the owner of a new cafe in our town here in France. He is Dutch, but likes the area. He told me about the first requirement for starting a business here, which is to get a financial number from the government. For this, you need a check to the government with your business name and financial number printed on it. However, the banks will not open an account like this or give you a check with that information until you have the number. So, they have to do a dance and set up some sort of faux company to get the right piece of paper. Basically, they lie.

    This is where this sort of mindset ends up.

  • obloodyhell

    }}} At one location that we are closing this year, a local attorney has regular dinner meetings with groups of our employees to brainstorm among the group to see if they can come up with something to sue us over.

    Uh-oh... probably going to sue you for closing, now.

  • obloodyhell

    See above :-D

  • obloodyhell

    Postmodern liberalism is a societal cancer.

  • swift69

    is this really the cartoon picture of "liberals" that you have? and we wonder why public discourse in this country is dead.

  • swift69

    people can and do respond "to taxes," but this has to be taken with significant grains of salt. To put things in parallel with something that is well known in behavioral economics (and yes, I do have an MBA, 15 years ago, from a top 5 school as well as a masters in policy and economics (and also two in engineering), not just "have studied economics"), marginal compensation is at best very very weakly tied to worker output. Given that this is something that every red blooded "capitalist" boss instinctively has come to know quite well, why you bootstrappy self-starters can't apply equal amounts of nuance to your discussion of taxes is completely vexing until we realize that it's ideological with you.

    Hirschman had you guys nailed before you were born: futility, perversity, jeopardy. the same BS handwavy arguments permeate the article above and this comments section as have permeated every conservative discussion since there have been conservatives. what's missing from the article is any substantive discussion of exactly which regulations are so oenerous and unnecessary. without ths, it's just some old guy barking at those "libruls" and getting his chorus of followers to pile on, as "obloddyhell"'s empty post below me and mlhouse's empty post above me so brilliantly illustrate.

    So, you guys claim to be smarter. Fine. Then prove it. Instead of the same old name calling, why not analyze the actual regulations in some smart way to make a reasoned point that they are unnecessary? Only a fool thinks that all regulations are unnecessary and likewise no serious person wants unnecessary regulation. But likewise, one has to be thoroughly ignorant of economics to deny the reality of market failure, and until you "smart" conservatives are able to address issues of market failure head on with real solutions (invariably limited, targeted, testable regulatory policies) then you're just children barking at imaginary liberals that don't really exist (or rather, you conflate that toxic mix of rudderless politicians and rent-seeking 'capitalists', the combination of which can account for most bad law in the USA, with "liberals").

  • mlhouse

    LOL....seriously? The reason why you make your comments is that these are simply issues you do not confront. Your concept of regulations, to use language from your post below, is "tenuous at best". You seem to believe that most regulations are well thought out measures that have public good in mind. However, that is seldom the case. Instead, most regulations are designed by industry insiders to eliminate or reduce competition, or to create work for the regulators.

  • mlhouse

    No one disagrees, except perhaps some of the whacko Libertarians in this forum, that "all regulations" are unnecessary. Just like those you are mocking you are simply creating a strawman argument that is unreasonable.

    Further,

    1. Addressing the issue of "market failure", there really isn't market failure except were it overlaps with government. The weakness of market capitalism, and where the main failures arise, is in the banking/monetary foundations. The necessary fractional nature of such a banking/monetary system means that in certain situations even small disruptions in the systems can create major financial economic problems. Because of this, government has a necessary role in creating monetary policy and regulating the financial markets. Unfortunately this is just another task that government does not do very well.

    2. I disagree with you completely with the relationship between marginal compensation and "worker output" (although your terminology is lacking and probably left vague purposefully to create this lack of relationship). By definition, every worker in the economy with a paid job is being paid "what they are worth". If the employee believes that they are worth more than what they are being paid they would leave their job and seek other employment. If the employer believes that an employee is not worth at least what they are paid, then the employer would eliminate them from their job. Whatever "stickiness" there might be between these two sides of the coin probably wash each other out.

  • swift69

    "By definition, every worker in the economy with a paid job is being paid"

    ah, the "efficient market hypothesis." the phrase that christopher hitchens used to describe mary baker eddy's christian science would be equally appropriate to the EMH: chloroform in print.

    the EMH is the equivalent of "allah wills it." it basically says that whatever happens, that's how it should have been. it has no predictive powers. it's a homeopathic salve. at best, were i to point out that by EMH reasoning, that any regulation also is the best of possible worlds, you'll of course redefine the universe so that government is somehow special - a non-market player.

    as far as your take on #1 goes, it is pretty clear that you have no idea what "market failure" means the way that economists define it. it has nothing whatsoever to do with whatever you were on about. as far as #2 goes, the literature that evidences this general claim goes back decades and about as well established as something can be in behavioral economics. sorry, but i'm not going to do your homework for you.

  • mlhouse

    I know that you are someone who is desperately trying to pretend that they know a lot about economics but it is clear that you know very little. You like to throw out terms, but your understanding of them are surface deep at best. For example, in your reply above, you utilize the "Efficient Market Hypothesis" to discuss market wages and marginal productivity. But, the Efficient Market Hypothesis has nothing to do with these microeconomic concepts and rather describes a theory of asset valuation.

    Again, it returns us back to the concept of how a worker's wage is related to their productivity. If an employee was producing value at a level that was far above their wage in a free market it would be virtually impossible for such an employer to retain those workers. Competitors in the market would understand that they could offer a higher wage to the same employee, which would cause the labor and market share in that market would flow to them. This is macroeconomics theory 101. The "real" economy might have some instances of imperfection in the labor market, but in general this would be on both ends of the coin. Some employees might be paid more than their productivity and others might be paid less. It is also impossible to measure the precise "productivity" of many classes of employees (which makes any study of this suspect to begin with). For example, what is the productivity of the human resource manager of an auto plant? In the end, the best proxy for the value of an employee is the free market for labor. If you pay too little, no one will work (and produce) for you. If you pay too much, your profits will be lowered and you will either lose capital or go bankrupt.

  • swift69

    "But, the Efficient Market Hypothesis has nothing to do with these
    microeconomic concepts and rather describes a theory of asset valuation."

    You read wikipedia the good. Unfortunately, you lateral think not so good. What we absolutely agree upon is that your second paragraph is exactly macroeconomics theory 101. and that's all it is. for those of us who have taken macro 102 through whatever it goes up to, and have taken dedicated classes in behavior economics, regulatory economics, labor economics, and so forth, we have come to realize that the simple models of econ 101 are at best starting points.

    but i'm not here to teach you econ101, and your further posts are not worth reading. sorry i splashed this in a hurry but i dont have time on you. at least make an effort to read the wiki on market failures as well.

  • swift69

    actually, dumb shit (how's that for public discourse), i categorized regulations as coming from "that toxic mix of rudderless politicians and
    rent-seeking 'capitalists', the combination of which can account for
    most bad law in the USA". This is about as far as possble a characterization of my words as is imaginable. Since you're content to stick words in my mouth, I'm done with you, son. Honest discussion takes two, and since you can't, then piss off.

  • mlhouse

    Sorry, Swifty, but I have a PhD in economics. The fact is, you used an incorrect concept to argue against basic economic theory. The simple models of MICROeconomics (not MACRO) 101 are NOT starting points, but rather the foundation of all economics. All other levels of economics are just proofs and expansion of these basic concepts. For example, the fun "utility curve" concepts that some people (other than you) learn in microeconomics are expanded upon with "Revealed Preference Theory".

    Personally, I am still a "believer" in the Efficient Market Hypothesis in the so called "semi-strong form". The real issue of an efficient market is does the prices of assets factor in all of the known information about the asset market. That investors had incorrect information, for example assuming that AAA rated bonds were really AAA rated bonds, does not disprove the Efficient Market Hypothesis and in fact, more correctly proves it. That is, once the market found out NEW information it abruptly changes the valuation of those assets.

    And, the fact that you have "no time for me" is that you were caught, red handed, talking about something you do not understand. So, nice try, Swifty. Better luck next time.

  • mlhouse

    LOL..... Which is exactly what I stated above. The reason why liberal defenders of the regulatory system defend it is that they believe that more power should be centered on the rudderless politician that they now own so that they can avoid the regulations that they themselves propose for other people. The Affordable Health Care Act is just the most conspicuous example.

    And, I believe your comments are a better example of why public discourse in this country is dead.

  • dalefogden

    Forget business; it took me SIX YEARS (minus 3 days) to get a permit from the City of Los Angeles to enclose a second-story deck and make it into a game room. I hired two architects and two engineers over the years before I finally got a permit. I had to deal with the California Coastal Commission (I live within 1000 feet of the ocean), which took more than six months for them to say, "We don't care; he's not on the coast. There were bureaucrats who claimed I was building the roof too high even though it was the same height as the existing roof (that was OK in 1983 when the house was built). I had to retrofit my house for earthquakes (it was already very earthquake resistant, being supported by 4x12 wood beams and structural steel beams) and ended up replacing 100% of my siding (including sheer paneling) and reinforcing the foundation (dug down into the bedrock) to support the extra weight. Refusing to give up, it was surreal when I finally got the permit. Six years for a permit, six months to build. The final cost was 5-6 times what the contractor originally estimated because of the "enhancements" forced on me by government. Neither engineer believed these necessary but I'm ready for the next 9.5 earthquake. Eventually, I was told that my problem was that I never made the requisite political contributions prior to submitting my plans so I had no "advocate" with the building and safety department.

  • http://devilish-details.blogspot.com/ mesaeconoguy

    Dear pseudoacademic hubris,

    Since the evidence is strongly in our favor, it is not our job to “prove” that you are wrong.

    It is, however, your job to prove that this

    http://online.wsj.com/article/SB10001424052702303816504577311470997904292.html

    is not a result of this

    http://cei.org/sites/default/files/Wayne%20Crews%20-%2010,000%20Commandments%202013.pdf

    Square that circle, bitch.

    Signed,

    GFY

    PS, if you figure that out, please tell Ben Bernanke, so he can take his finger off the “print” button, thanks.

  • MNHawk

    For some strange reason, I also have a cartoon image of little swifty.

    Although reading his rambling, insulting postings I think the biggest problem is stupidity suffocation, which later leads to regulatory suffocation, as a people can't even do the basic things in life, without an office full of swifty's overseeing.

  • http://devilish-details.blogspot.com/ mesaeconoguy

    Spanked nicely, mlhouse. And patted on the head.

  • http://www.sdl.com/ Brian Crouch

    I hope the ex-employees sue the attorney, as his racketeering activities directly led to their unemployment.