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In San Francisco, where many of the world's ills are blamed on conservatives, I recently dined with a few acquaintances who bemoaned the spread of Starbucks in their city. They offered the usual complaint: big corporate chains like Starbucks drive independent coffee shops out of business, transforming unique enclaves into soulless, cookie-cutter communities.
As a resident of suburban Orange County, where every strip mall seems to contain a Starbucks, a Subway, or a Barnes & Noble, I sympathized with their frustration. I too like distinct little coffee shops, restaurants, and bookstores. But when they began to blame conservatives for the spread of chains, including businesses from Ace Hardware to Wal-Mart, I told my liberal friends that they had it exactly backwards.
Conservative policies aren't behind the spread of chains in America. On the contrary, the liberal impulse to regulate business has helped companies like Starbucks to spread faster than they would in a less regulated economy.
As the ordinances and laws that affect businesses grow, larger companies that are much better equipped to handle the complexities of these regulations have a decided advantage over smaller, single-store operators. And government leaders at every level-through ever-expanding regulatory, tort, and tax laws-continue to unwittingly shift the advantage to the big players.
Any small business owner could explain why.
Even a lemonade stand in Anytown, CA technically requires a business license, a visit from health inspectors, and a permit from the planning commission before it opens. A coffee shop presents a more daunting challenge-there will need to be bathrooms accessible to the handicapped, workplace safety rules posted on the wall, and liability insurance should a customer scald herself on a chai mocha.
"Reducing regulatory costs would help the independent business more than the chain, because it's a bigger percentage of their costs," Southern California economist John Husing said. "Chains can more easily bear high startup costs and short term losses given the staying power their financial resources afford."
Put more simply, Starbucks can afford to pay $10,000 upfront for a business license, a traffic study, and an environmental impact report. But those same costs prove prohibitive for some independent entrepreneurs. The result: a society with more chains like Starbucks and fewer independent stores.
Of course, chains do enjoy inevitable market advantages unconnected to government. A McDonald's franchisee brings a worldwide marketing campaign, a streamlined supply network, and extensive market research to the table as he or she battles the independent operator next door.
"Wal-Mart will go to China, buy a million TV sets, ship them to a local warehouse and hold them until right before a sale," Husing said. "An independent store can't compete with that." And developers often prefer to build chain stores, both because they draw customers into their shopping centers and because lenders are loathe to lend money for shopping centers that don't include known tenants.
But regulatory policies add to the advantages enjoyed by chains-and the big corporations know it. That's why corporate lobbyists, who one might expect to advocate laissez- faire capitalism, often end up backing new regulatory burdens that choke off half their industry.
As Robert Bartley famously wrote in a Wall Street Journal editorial:
Self-interest finds a way to get itself expressed, and the business giants have rather equivocal interests in free enterprise. They always have the option of doing everything left-handed and backwards if that's what the government wants; indeed, that kind of regulation gives them an advantage over less durable competitors....So don't look to big business for unequivocal defenses of capitalism. We guess that's up to the folks at XYZ Bumperlight Lens.
In California, the defenders of free market capitalism include small Italian bistro owners who want to serve wine but can't afford a state issued liquor license, and aspiring beauticians who can't afford the health department certification process required to cut hair. The result: the Olive Garden and Supercuts get richer. And Californians have fewer choices when they go to wine and dine or get their hair cut.
Tax and labor laws hurt small businesses too.
The Small Business Administration estimates that small businesses spend 60 percent more per employee than their larger counterparts to comply with federal regulations. A small business owner doesn't have time to keep current on tax and employment laws like the accountants and human resource managers at bigger enterprises.
In California, the workers' compensation system advantages larger businesses that can afford to set aside funds for payoffs; smaller businesses-which can't spare enough cash to meet the reserve requirements for opting out of the state system-pay higher premiums each year.
At the local level, state tax laws that limit property tax revenues have caused local governments to compete for big box retailers that bring in sales tax to city coffers. Redevelopment agencies, which cities use to recruit such companies, have also tipped the balance in favor of bigger operators, which get incentives when they come to town, and spawn zoning laws catered to big retailers.
Even the courts can hurt small businesses, as frivolous lawsuits-made possible by poorly written consumer protection laws-cripple small entrepreneurs who can't afford costly court battles even when they are in the right.
A Beverly Hills law firm recently proved a damning example. In less than a year, The Trevor Law Group sued thousands of small businesses for alleged violations of the now infamous Section 17200 of California's Business and Professions Code. The law allows any citizen to file suit against any business for any unfair business practice. According to the Riverside Press-Enterprise, the firm sought $5,000 from one business owner for the high crime of abbreviating the words "on approved credit" to "O.A.C." in a print advertisement.
Many businesses settled such shakedowns out of court to avoid a costly battle. But even when the firm's tactics were exposed-and its attorneys disbarred-Democratic lawmakers in California's legislature refused to repeal Section 17200, arguing that it served a valuable role protecting consumers.
In fact, the law did remedy unfair practices at times, helping some consumers. But it drove numerous innocent entrepreneurs from business, and raised the risks of private enterprise so that other entrepreneurs never even opened shop.
When Al's Auto Shop went out of business, consumers who preferred it to AAMCO or Midas were out of luck.
In sum, big government in any form almost inevitably hurts small business.There is hardly an end to the phenomenon, and new liberal policies currently favored by Democrats-a higher minimum wage, expanded family leave programs, employer provided health care for part-time workers- promise to exacerbate the advantages enjoyed by chains.
As government meddles more in business, campaign contributions and lobbying also become business costs, touching off a cycle that further hurts smaller players.
Of course, some laws that hurt small businesses bring benefits. It's surely desirable, for example, that people with handicaps have access to the local sandwich shop. But liberals who decide which goods to impose on business never seem to acknowledge that there's no such thing as a free lunch.
Every good comes with an attendant cost-in this case, the preponderance of chains that liberals frequently bemoan, sometimes over lattes at Starbucks.
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Conor Friedersdorf is a southern California journalist.
Return to the Fall, 2004 edition of Local Liberty
