Why Small Business Always Loses in the US: A Two Stage Approach

I thought of what is perhaps a better way of explaining why small businesses are consistently betrayed by both parties in our political system.

Think of passing a bill as consisting of two stages.  Stage one is deciding whether or not we'll enact a policy and its overall cost.

Stage two is apportioning that cost, whether by linking it explicitly to taxes or by indirect factors such as compliance costs.

In stage one, there is a natural alliance among business interests, they want spending to be as low as possible because they know that costs will fall disproportionally on them, for the simple fact that the money is there.  Other welfare state beneficiaries will benefit more relative to the cost of an intervention than a business owner will so they are united in their opposition to spending.

In stage two however, big business has a number of advantages over small business.  Small business knows that historically they have consistently had more of the costs fall on them, they will try to force policy to stay at stage one as long as possible in hopes of lowering the total cost of welfare state policies.  There is also a substantial coordination problem in that small business is unlikely to be able to carve out specific exceptions for its interests, they're optimal outcome is evenly distributed costs.

Big business however is in a very different situation in stage two.  They know that they have consistently been able to shift costs away from them, once they know a welfare state policy will be instituted they have every incentive to accelerate its passage in return for shifting compliance costs away from themselves and onto either small business or consumers.  Having fewer individual corporations involved makes it easier to negotiate carve-outs with welfare state supporters.  They can consistently apportion costs to other actors, so they will always defect to side with welfare state supporters in stage two.

Our political institutions serve to create substantial opportunities for these behaviors.  Civilians tend to be quite committed at stage one, they'll write their Congressmen and tend to be moderately well informed about the basics of major legislation.  However, once a bill gets into committee and reconciliation between the two chambers we tend to see policy drift away from universal provisions, which would lower the relative costs for individuals and small businesses, in favor of more specific provisions that exempt certain favored entities though tax breaks or through moving away from general provisions such as a simple auction for cap and trade in favor of giving out limited numbers of permits to key industries.  At this stage the public is uninvolved and small business rarely is able to get away from calling for lower costs overall to instead shift to bargaining in favor of equal costs for all, resulting in small business getting nothing and bearing a disproportionate share of costs since big business got its carve outs.

For small business to become more competitive those that represent it in Washington will have to realize that they need to preempt big business by defecting first in favor of universal provision.  Small businesses don't have the political weight to seek business specific carve-outs, the best they can hope for is equal costs.  The incentives in favor of this are weaker on individual issues, however consistently losing in these bargains is very costly over time even if it is not in regards to specific policy losses.  This displays the limits of self-interest, however, since it is very difficult to act on long run systemic disadvantages when the relative gains/losses from individual interactions are so small.

But they add up.

[Edit: I realize this is very similar to a typical collective action problem.  The main difference I'm observing is that small business can overcome the collective action problem to oppose welfare state policies but it can't overcome the problem to negotiate welfare policies more favorable to their interests once the passage of these policies becomes inevitable.  Small business certainly does effectively organize itself to oppose laws such as the ACA and to pressure their legislators to oppose the passage of these bills, the government as a whole seems quite responsive to this particular income bracket and its interests.  However, once the horse-trading starts happening, costs are almost always shifted away from big business to fall most strongly on this group.  This corollary of the standard collective action problem is what I'm trying to tackle with these posts.]