Small businesses[1] are frequently said to be the “backbone” of the American economy. The prevailing sentiment concerning regulation on businesses of all sizes is that less is more. Minimum wages, corporate taxes, benefit guarantees, and other worker protections are anathemas to growth and should thus be minimized. This logic gets extended to the assertion that a strong social safety net will harm business and entrepreneurship because of the higher taxes that would inevitably fund such social programs. It makes sense, right? The less businesses spend on employees and taxes, the more they can focus on improving and growing.
Regardless of the veracity of claims to systemic importance, it is a fact that most small businesses fail over time. 20 percent do so in the first year, 50 percent do so within 5 years, and 65 percent do so within a decade. Averaged out, the odds are stacked against new entrepreneurs.
This is a discouraging revelation, but not because of the long odds themselves; rather, it is discouraging because of the steep cost of failure imposed by the United States’ relatively-weak social safety net.
In America today, someone who quits their day job to start their own business is making an asymmetric bet. They likely rely on their employer for healthcare, and do not have enough money saved to survive without income for an extended period. The consequences of turbulence or failure of new businesses are devastating for owners. Between long odds and little downside protection, this is a bet no rational person should make.
Rather than arguing for specific policy changes, this article advocates a shift in policymaking perspective. People should feel emboldened to pursue their professional goals by not having to fear failure. Today, regular people are effectively deterred from starting businesses, and that should be rectified not by increasing the odds of success, but by decreasing the cost of failure.
[1] Small businesses are generally characterized by annual revenues and quantity of employees, but there is no one-size-fits-all definition.