I testified to the U.S. Senate Committee on Small Business and Entrepreneurship yesterday. The focus of the hearing was Small Business Administration (SBA) subsidies for entrepreneurial education. The agency spends more than $300 million a year on these efforts. The SBA pays contractors in each state to run programs aimed at helping people start businesses.

This is just a small part of the federal budget, but the hearing was the sort of oversight that congressional committees are supposed to perform. And this hearing included witnesses critical of the spending. So kudos to committee Chairman Ben Cardin and Ranking Member Rand Paul.

My written testimony is here. At the hearing, I discussed how, (1) these federal programs are not needed because the private sector fills the roles, and how, (2) slashing red tape is a better way to spur entrepreneurship.

1) Government Spending Not Needed

Many private efforts help startups and boost entrepreneurship:

  • America has 335,000 angel investors who are wealthy people that invest in startups. Angels are in every city and town in the nation and provide advice and guidance to entrepreneurs.
  • The Kauffman Foundation spends $100 million a year on education and training for entrepreneurs. The PNC Foundation recently gave $16 million to create the National Center for Entrepreneurship at Howard University. Many private foundations fund entrepreneurship programs aimed at disadvantaged communities.
  • The National Foundation for Teaching Entrepreneurship reaches 100,000 students a year.
  • Entrepreneurship degrees and certificates are offered at more than 500 U.S. colleges today, up from just 100 in the 1970s.
  • There is a large array of free entrepreneurship courses online.

2) Slash Red Tape

Governments spend money to subsidize entrepreneurship, but they also create barriers to entrepreneurship. Regulations can fall more heavily on small firms than large firms, and surveys of small business owners find that regulations are a major concern.

Here are some barriers to startups I discussed at the hearing:

  • Occupational Licensing. The share of U.S. jobs requiring an occupational license has increased from 5 percent in the 1950s to more than 20 percent today. Licenses cost time and money that young people with modest incomes may not have. Many licensed occupations are populated by small businesses, so licensing is a restriction on startups.
  • Alcohol Licensing. Eighteen states cap the number of liquor licenses in towns and cities, which can make restaurant startups very costly or block them entirely. In these 18 states, entrepreneurs may have to pay hundreds of thousands of dollars to get a liquor license. Those high costs favor corporate restaurant chains over independent and lower-income entrepreneurs, and they can stifle economic development in poorer neighborhoods.
  • Marijuana Licensing. A similar problem has developed in some states that have legalized marijuana. California has tightly restricted its pot licenses, so unless you have lots of money or political connections, it may be difficult to open a legal pot business. This recent piece in The Guardian describes the problem.
  • Home-Based Businesses. Millions of Americans run businesses out of their homes, such as daycare providers, small-scale food producers, and artists. But local governments impose zoning rules that ban, restrict, or raise costs for home businesses. This is a particular problem for lower-income entrepreneurs because home businesses allow them to save costs from having to rent commercial space, commuting, and paying for childcare.

The connection between deregulation and entrepreneurship can be seen with the success of the craft beer industry. President Jimmy Carter signed legislation in 1978 legalizing home brewing. That was followed in the states by deregulation that allowed for brewpubs and for some self-distribution of beer to retailers. The number of breweries in America exploded from less than 100 in 1980 to more than 8,000 today.

Craft beer is now a $22 billion industry thriving with entrepreneurship. This is a pro-entrepreneur deregulation success. A member of the Senate Small Business Committee, John Hickenlooper, was an industry pioneer opening his Wynkoop Brewing Company in Denver in 1988.

What should the SBA do to advance entrepreneurship? I suggested to the committee that the agency pursue its “advocacy” role to push back against excessive regulatory burdens imposed on startups and small businesses. Chairman Cardin said that sounded like a good idea, and he noted his long support of craft breweries.