I think most people are clear that in a robust, healthy economy entrepreneurs are able to quickly turn their ideas into reality, in the process creating jobs and occasionally having an enormous impact on the way we live, as in the case of Apple, Amazon, and for the ladies out there, Spanx. My two homes, Italy and California both appear to be hell bent on becoming Sisyphean nightmares for not only the budding entrepreneur, but even for well-established, international corporations.
Yesterday the Wall Street Journal ran a piece entitled, “Can Italy Find it’s Way Back?” The article opens with an example of just how difficult it is to get a business going in the country. We are told of an entrepreneur who bought a tract of land when he was 45 with the intention of building a supermarket on it. At 88 years old, he’s finally received the necessary permits! Seriously!? Colleagues of mine in Italy have shared similar insane tales of government bureaucracy, their frustration mounting and gesticulations increasingly animated as the bottles of vino empty. It is Italy after all and intense conversation requires a good bottle of champagne or a rich bottle of red.
California is moving rapidly in the same direction, making it more and more difficult for entrepreneurs to translate a passion into reality, while for existing companies the regulator and tax burden is pushing them to locate elsewhere. The headlines for years have told of one company after another deciding to leave the state. Carl’s Junior announced that it would not open one more restaurant in the state because it takes too long and is too expensive to get through all the red tape. Just this week Toyota announced it is moving a facility it has had in Torrance, California for over 30 years to Texas.
This is what I like to call, for obvious reasons, Elle’s Law of Unintended Consequences whereby bureaucrats’ attempts to protect invariably end up harming the very thing their legislation intended to protect.
Entrepreneurs, being adventurous types by definition, rationally choose to go where there are fewer barriers to success. Large corporations may find that over time, the benefits of being in a specific locale are falling further and further below the associated costs. When bureaucrats enact legislation that creates barriers, any reasonable businessperson will have to compare the associated costs with the potential benefits of operating under such conditions.
In Italy, labor laws have become so onerous that the economy is bizarrely bifurcated into two distinct types of businesses: very small, family-run, mom-and-pop shops and large multi-national corporations that were already large by the time they entered the Italian market. Why is this? The labor laws that were enacted in Italy with the intention of protecting workers have made it inconceivably risky to hire anyone, because if it doesn’t work out, firing them is almost prohibitively costly. If you have a small shop, with just you and your partner, it is insanely risky bring on additional help, so you simply don’t grow. The economy is deprived of the potential success you could have had if the risks of expanding weren’t so great! Think of how many jobs wouldn’t exist today if Google had never made it out of the basement. Large multinationals that come into the country face a slightly easier mountain as for them, the likelihood of a high portion of hires not working out is fairly low. Due to their size, they can survive having some level of deadweight, unlike the small firms.
Unfortunately, the damage doesn’t stop here. The culture of protecting labor in this manner comes from a history of communism and socialism that emerged as a violent reaction to the hell experienced under fascism. This mentality applies subtle negative attributes to those who attempt to be special, to do something unique and worthy of attention. Thus there is a disincentive for putting in the extra effort, for taking the risks associated with overachieving and given this cultural climate, overachievers aren’t compensated much more than their colleagues who do the bare minimum. Couple this with the reality that it is really difficult to fire someone, so imagine the incentives! Shockingly enough, human beings, like all animals, respond strongly to incentives. If I won’t get compensated much more for working my tail off, why would I put in the effort and take the risks to be outstanding? If I can’t be fired, the floor for the level of performance I consider reasonable is going to be a lot lower than if I know there’s a line of people just waiting to take my place! Now while we’ve all had days when this situation would sound awful comfortable, think about what it means for the performance level of the society as a whole. How often have you heard envious tales of Italian efficiency and professionalism?
Is it any wonder that Italy’s economy is essentially stagnant? How can it possibly grow when entrepreneurs are so heavily hamstrung and when workers have very little incentive to do more than the bare minimum where their is neither a carrot, nor a stick.
Sadly, every time I leave Italy and return to California I am struck more by the similarities than the differences. The U.S. would be wise to look across the pond and understand what it is that is keeping so many countries in the eurozone economically stagnant and fight like hell to move in the opposite direction.