City Studies
How Detroit Drives Out Motor City Entrepreneurs
By Dana Berliner [Economic Liberty]
Executive Summary
Introduction
Detroit has high unemployment, high poverty and empty buildings noticeable even to a casual observer. As of the last census, in fact, Detroit had the highest unemployment rate, poverty rate and rate of persons receiving public assistance in the country. Although Detroit's economy has begun to look up, the City government needs to do everything possible to get out of the way of entrepreneurs seeking to make an honest living.
Detroiters hoping to open a business face a multitude of required licenses, permits and inspections. Indeed, it seems that nothing can be done-no business can be started-without a permit. Another common barrier is the City bureaucracy's "information vacuum," which make it extremely difficult to get accurate information about what requirements must be fulfilled before a business is opened. And still other obstacles remain.
Ceilings
Some would-be entrepreneurs find the road to a more productive future blocked by artificial barriers to entry, such as ceilings on the number of entrants into a particular field. Detroit sharply limits the number of taxicabs and other forms of community transportation. The current barriers raise the cost of entering the industry and sustaining a business. Because many low-income Detroiters do not have their own cars, it also means that few consumers can afford legal transportation services in a city where they desperately need them. Phasing out the cap on the number of taxis, not creating caps on other transportation services, and simply relying on criminal background checks for drivers, safety inspections, and verification of insurance would go a long way to opening up opportunity in the transportation industry.
Vending should provide opportunities for those without the capital to open a retail establishment. But the City of Detroit caps the number of food vendors downtown to only 16 approved locations. In 1996, the City issued only 14 food pushcart licenses-none allowing sales in ethnic neighborhoods. In addition to limiting the number and location of pushcarts, Detroit also restricts the kinds of food they can sell. Only hot dogs and sausages are permitted; even the use of sauerkraut is forbidden. Any food that is sold must be pre-prepared in a licensed commissary. Preparing food at home, no matter how clean the kitchen, is prohibited. But perhaps the most significant problem for would-be food vendors is the requirement that the pushcart be stored in a licensed commissary. Vendors thus must rent space in a restaurant or catering establishment to store their cart at night. And although it supposedly has not capped other types of vendors, in practice, securing the appropriate permits for any vendor can be next to impossible.
The City may have some legitimate interest in keeping the sidewalks passable and maintaining proper sanitation at establishments that sell food. But Detroit's stringent regulations go far beyond such concerns. The current system benefits no one-not potential consumers and certainly not potential entrepreneurs.
Occupational Licensing
Occupational licenses are another means by which the City of Detroit blocks productive livelihoods. From African hairbraiding to child care, numerous occupations seemingly require little formal education or capital to enter. These are businesses that are also well-suited to people with children. But Detroit has made it as difficult as possible to pursue these professions. Extraordinary education requirements for hairbraider licensing, a prohibition on home businesses, and expensive license and permit requirements for child care, conspire to prevent entrance into these fields or to force such businesses to operate as outlaws.
In Detroit, it takes 1,500 hours to become a licensed hairbraider; 2,000 hours to become a licensed barber; and only 1,072 hours to become a licensed emergency medical technician. (It is also worth noting that not one hour of the required training for hairbraiding actually teaches one how to braid hair.)
Caring for children requires kindness and common sense, but not higher education. These qualities should make it one of the easier fields to enter. Yet, despite Michigan's shortage of child care (especially for infants, which is important as Michigan tries to move women from welfare to work), government-imposed stringent training and educational requirements, as well as zoning ordinances that suppress licensed centers, contribute to the high cost of child care and restrict entry into the occupation. Such regulations go far beyond legitimate public health and safety concerns.
For example, child-care center program directors must take 60 semester hours of course work from an accredited college. The State's physical requirements for family child-care facilities virtually prohibit child care in apartments. (Of course, this disqualifies almost anyone who does not have enough money to own a house from providing family child care.) Consequently, over-regulation results in no regulation at all: As many as 15,000 child-care providers in Michigan operate without a license.
Among other recommendations, this report calls for relaxing educational, training and zoning requirements for these professions.
Miles of Red Tape, Mountains of Fees
Other businesspeople discover that completing all the regulatory requirements usually takes so much time and money, they simply give up their business dreams or forge ahead and ignore the burdensome requirements. Detroit has created a stupefying bureaucracy, especially when it comes to regulations governing buildings and their uses. Multiple inspections and inspection fees, incomprehensible building requirements, expensive, mandatory public hearings, arbitrary discretion by officials, and lengthy processing delays combine to discourage entrepreneurs from undertaking business ventures or improving existing ones. From sign taxes to restrictions on planting trees, the bureaucratic shuffle has gotten so out of hand that one business owner explained, "We operate on the basis that we just do what we want to do and the permits will catch up with us sometime." Among the more devastating demands is Detroit's rule that any change in the structure of a building requires that the owner bring the entire building into compliance with the current code. But perhaps the most burdensome requirement is the City's insistence that any new business provide off-street parking. Such requirements serve to discourage owners from improving their buildings or businesses in any way.
Revision of the system of permits and requirements would encourage entrepreneurs to purchase and clean up some of the many abandoned buildings in the City's business districts. Zoning and other building requirements must be simplified and reduced. As discussed in this report, the purpose of the building requirements should be limited to true health and safety requirements.
Home-based Business Ban
Detroit's zoning prohibits home businesses in residential areas, even businesses that do not generate any kind of nuisance. Like many other legal rules in Detroit, the home-business prohibition is largely ignored by the government unless someone complains. Businesses, however, cannot secure loans when they are operating illegally, even if the law is unlikely to be enforced. Nor can they advertise to help their businesses expand. As limits on public assistance come into effect, former welfare recipients will need to become self-sufficient. Government can ease this process by removing pointless prohibitions on home businesses.
Conclusion
Detroit is plagued by an intimidating bureaucracy, stifling and expensive rules, and a lack of easily obtained information. It doesn't need to be this way. Despite its poverty, Detroit is an astonishingly vibrant city. It is full of entrepreneurs with ideas, energy and dreams. The future of Detroit rests as much with small businesses as large ones. But government will have to get out of the way to allow the residents of Detroit to reach their true potential.
Among other reforms, the City should review all regulations that affect small businesses and determine whether each regulation is narrowly tailored to fulfill a legitimate governmental objective without unduly hampering enterprise. If a regulation does not satisfy this standard, it should be reformed or repealed, and all new regulations should be measured against this standard. The City should also combine or eliminate all duplicative procedures. The number of licenses and permits required for businesses now is staggering.
