Deregulation key to business expansion and economic growth

Though it rarely makes it to the top of today’s 24 hour news cycle, new Gallup polling shows that the economy is still the most important problem facing Americans. For good reason. Since the end of the Great Recession, average annual economic growth has been about 50 percent lower than its historic norm. Voters tuning in to the presidential campaign conventions this month will look to the candidates to hear what their plans are to address this problem.

So what is holding the economy back? Experts are flummoxed. A lack of demand, outsourcing, and “secular stagnation” are all pointed to as possible culprits. But a more direct cause is the regulatory onslaught of recent years that outlaws certain types of economic activity and job opportunities.

According to a Competitive Enterprise Institute analysis, of the seven all-time-high page counts in the Federal Register, where regulations are recorded each year, six have occurred since 2009. Eliminating the most burdensome restrictions to economic activity is the fastest and easiest way to improve economic growth.
Last week, I testified before Congress’s Joint Economic Committee about the impact of two particularly burdensome regulations – the Affordable Care Act’s employer mandate and the Department of Labor’s new overtime pay requirement — on small profit margin businesses like White Castle. Like other regulations, they have caused us to limit expansion and jobs.

The ACA requires employers provide their full-time employees – defined as those who work 30 hours or more per week – with health insurance. At an annual cost of over $5,000 per employee – often more than the entire profit they generate – this is not feasible for many small margin businesses like restaurants.

To avoid being subject to the regulation, some employers limit employee hours to 29 or fewer each week. According to an analysis of Census Data, the number of employees working slightly fewer than 30 hours a week has markedly increased since the law’s implementation; whereas, the number working slightly more has markedly decreased. Major American companies like Jimmy John’s and Regal movie theaters are on the record taking this step.

This means lost income for employees and less economic activity for the economy as a whole. It also means that some employees must find additional part time jobs to try to make ends meet. It’s no surprise then that the number of part-time employees who would like to work full-time has increased by more than one-third since 2007.

Businesses with employees who work more than 40 hours a week as a salaried manager face another hurdle: The Department of Labor’s new overtime rule that doubles the income threshold under which they must be paid overtime. Starting this December, salaried employees who make less than $47,500 must be given overtime pay if they work more than 40 hours in a week.

In order to comply, small margin businesses have two options: Raise the salary of employees to the new threshold, or reclassify salaried employees as hourly ones and cap their hours at 40 per week. For many small businesses, the first alternative is not feasible. The average salaried crew and shift supervisor in the restaurant industry, for instance, earns $38,000 annually, meaning a 25 percent raise would be required to reach the new exempt threshold.

But moving salaried employees to hourly ones is not an attractive choice either because it means that businesses lose out on economic output and employees lose out on the valuable career opportunities, flexibility, and perks that come with being a salaried employee. According to a recent survey, nearly half of retail and restaurant managers said that such a change in employment status would make them feel they are working a job rather than pursuing a career.

Largely because of such regulations, White Castle’s total store count has fallen from 408 in 2012 to 390 today despite positive customer feedback and attractive expansion opportunities. The regulatory costs simply tip the scales in the direction of not expanding. Amplify our decision across the economy and the economic growth riddle doesn’t look so complicated.

Of course not all regulations are bad. White Castle supports sensible, government-imposed health and overtime regulations. But these must be balanced against the negative impacts they have on economic growth. At the moment, this scale needs to be recalibrated.

Jamie T. Richardson is vice president of White Castle and a member of the Job Creators Network.