The current government and activist movement to raise the minimum wage to $15 had me thinking. What would I do if I owned a business in New York or California and it was such a business that employed low wage workers and such a raise would adversely affect me to a point that it threatened the viability of my concern?
If it was a branch of a large business like a fast food company and I only looked at the numbers and they no longer worked, I would close, absorb my loss, and move on. If I was a local owner and I had roots there, it would be harder. If I were either and I was considering an investment requiring such workers, I would pick another state or cancel the plan.
When we speak of government disincentives to starting businesses we commonly limit the reference to taxes and regulations. These are relative easy to quantify and measure. But I prefer the catchphrase ‘friction costs’ because it includes considerations that are much harder to quantify. The likelihood that a local government would change the rules you assumed to create a profitable business is such a friction cost. The fear of any change in the tax code that undermines your business’s financial assumptions is another, This is not just the tax rates but qualifying deductions and changes in depreciation schedules that rarely garner any media attention. But just the fear of tax rate increases that every politician makes whenever a microphone is nearby and the tone deaf disrespect shown to capital creators when they hear “you didn’t build that” is enough to still the willingness to risk.
Business are closing faster than they are starting during a time of record low interest rates. We rarely speak of these friction costs but they often remain even after tax cuts and positive changes in regulations.