With the Michigan government suspending all COVID-19 orders for public gatherings and masking duties, the state’s economy stands ready to bounce back from state-mandated public health restrictions.
It comes after Governor Gretchen Whitmer unilaterally issued nearly 200 executive orders suspending, revising, and amending important public policies that directly affected the behavior of the state’s 10 million citizens and businesses. However, this is just the beginning of the regulatory challenge for Michigan small and medium-sized business owners and entrepreneurs planning to fully reopen or initiate a new business venture.
Michigan is just one of eight states to see an economic decline of over 5% in 2020. Additionally, the state’s economic output declined 5.4%, from $ 471.6 billion in 2019 to $ 446.2 billion in 2020. In addition, Michigan’s unemployment rate remained unchanged at 27% higher for May 2021 than in February 2020 before the pandemic, and total employment has decreased by 5.6% over the same period.
While there is evidence that the Biden administration plans to increase regulation and taxes on American businesses, that does not mean that state and local governments are powerless to break down potentially negative federal regulatory barriers to entrepreneurship and economic growth at the state level .
And for Michigan, a recent study by Chris Edwards, director of tax policy studies at the Libertarian Cato Institute, provides insight into the challenges state entrepreneurs face in overcoming regulatory barriers at the state and local levels to starting a new business.
A useful finding from this study is the Entrepreneur Regulatory Barriers Index, an empirical calculation based on 17 variables in four general categories of regulatory restrictions. The variables (converted to a normalized score using a formula) measure constraints and costs imposed on new businesses in each state, while the four categories of small business views (three variables), professional permits (two variables), and other barriers to entry (five ) exist variables) and regulatory costs (seven variables).
How does Michigan compare to other states on this index? Sorry, but it is not good.
Michigan ranks 36th out of 50 states, at the lower end of the third quartile. What stands out are the results of the first category – the small business perspective on regulations. While the Michigan government (on a “F to A +” selection scale) scores relatively high (“B”) among respondents for the variable “Business start-up”, the state has a lot of room for improvement in the other two variables , “Labor and Employment Law” (“D +”) and “Admission Law” (“C-”). When it comes to the “other barriers to entry” category, Michigan requires a “health certificate of need” and is a state for alcohol licensing and controls.
“Whatever happens in Washington, state and local governments can do a lot to improve the business climate by repealing low-value and harmful regulations,” said Edwards of Cato.
A starting point for the Michigan state government could be to analyze state professional licensing laws to assess which professions need public regulation and, if so, what type (or “level”) of public regulation is necessary and effective. Such a regulatory review of the eligibility requirements could lower the cost of entry (an “entry barrier”) into a profession and potentially increase competition and lower consumer costs for the service.
A second initiative would be the establishment of a “regulatory sandbox” at the state level. In March 2021, Utah became the first state to pass bipartisan law creating an “all-inclusive” or cross-industry regulatory sandbox. A regulatory sandbox is a defined environment in which innovative companies can safely experiment under the supervision and guidance of regulatory authorities. By reducing the initial regulatory costs for entry-level entrepreneurs, these young companies have the opportunity to grow into competitors capable of handling normal compliance costs, and at that point “step out” of the regulatory sandbox. Post-pandemic, this all-encompassing regulatory sandbox initiative would be a proposal that Michigan lawmakers should seriously consider.
In September 2020, the Yelp Economic Impact Report estimated that 60% of businesses closed by states and municipalities due to COVID-19 regulations would be permanently closed. There’s no evidence that Michigan hasn’t suffered business closure rates similar to the rest of the country.
Now is the time for Michigan lawmakers and Governor Whitmer to come up with innovative bipartisan public policy initiatives to support the state’s small and medium-sized businesses and entrepreneurs hardest hit by the effects of COVID-19. In the longer term, Michigan needs to build its reputation as a destination state for entrepreneurs, and a more regulatory environment will go a long way towards achieving that goal.
Thomas A. Hemphill is the David M. French Distinguished Professor of Strategy, Innovation and Public Policy at the University of Michigan-Flint School of Management. He wrote this for InsideSources.com.
