The responses to our first Small Business Outlook survey (see page 31) showed a lot less optimism than we'll need in the year ahead. That's why I made a string of calls across the country to see whether opinions had changed. They haven't. Here's summary of the telephone talk.
"Tell that guy Volcker enough is enough. My suppliers are hassling me with tougher credit terms, it takes longer to collect from my customers, and I'm tapped out at the bank. It's time to get those interest rates down. But this time they've got to stay down.
"Lay people off? Not until I absolutely have to. But I won't be replacing a couple of people who quit. We're going to run a tight ship until I can see how things are going.
"Maybe Reagan ought to slow up some, but at least he's on the right track. Carter couldn't beat the deficit because he wouldn't cut expenses. Reagan might have the opposite problem though. Looks to me like he let the big guys off too easy. Take that new sale-leaseback tax gimmick. My accountant's just been explaining the way it works. Why can't you or some of our other double-domes figure out one like that for us? We need the cash flow at least as much as the big boys do."
Conversations like this one don't send a very optimistic message. Nor do all of our survey results. Here are some of the not-so-buoyant highlights:
* 40% of the 2,000 small businesspeople who responded believe the Reagan program will have little effect on their businesses. (Another 14% were unsure.);
* 63% think the Reagan program will help large companies more than small ones;
* 86% think the present monetary policy hurts them more than it helps them;
* 73% say high interest rates are one of their top three concerns for 1982 -- 53% name it as number one. No other issue even comes close, as the table on page 32 makes plain.
Two other surveys of small business sentiment confirm these findings. The Quarterly Economic Survey of the National Federation of Independent Business says that for the first time in eight years, interest rates have replaced inflation as the chief concern for its members. The National Small Business Association reports that members will have to see a 12% interest rate generally available before they borrow for capital expenditures.
It's wrong to interpret our results as a rejection of President Reagan's policies. Three times (35%) as many small businesspeople think his program will help them as think it will hurt them (11%). Our respondents give high marks to the major provisions of his tax bill. As businesspeople they're for him; it's as small businesspeople that they're uncertain.
Uncertainty doesn't breed optimism, and we're certainly going to need more optimism to persuade small companies to do enough hiring in 1982. That's the magic indicator that'll tell you -- if you're smart enough -- whether small business is going to act as a brake or an accelerator on a downturn.
Small business can turn the economy around by hiring. In the past, small firms have done more than their share in creating jobs. In the process of collecting data for our lists of the fastest-growing companies, INC. ranked 700 businesses -- 200 publicly owned and 500 privately held corporations. Those 700 firms added more than 200,000 jobs to the labor force between 1976 and 1981, an increase of 519%. By contrast, the Fortune 500 companies, the nation's biggest industrial corporations, added just 7% to their employee rosters during the same five-year period.
But what can the government do to help build confidence in the small business community, confidence that will equal new jobs? Before you say "just leave us alone," remember that not everything the government tries to do about small business is stupid or wasteful. We might, for example, have a formal venture capital industry today without the 1958 Small Business Investment Company Act. But the act did create a wing of that industry which has helped thousands of new and small companies. And the latest estimates, I'm told, are that SBICs cost the taxpayers a total of $4 million a year for both administrative costs and loss reserves. That compares with $400 million in taxes paid by the SBICs and the companies they've helped build. These results did not come quickly. They took 20 years of hard work, skill, and patience -- almost all of it in the private sector.
And when the federal capital gains tax was first cut several years ago, about a billion dollars moved into the venture capital market for new and small companies.
These are government actions that helped the private sector do its job better. What actions like these do we still need, and which can we accomplish without upsetting the austerity budget?
One reason small business suffers disproportionately from high interest rates is that it has less equity than large companies have. More of its needs have to be met by short-term debt. That makes it less attractive to both long-term lenders and investors.
Anything that strengthens small business's ability to expand its equity will help. That and any other steps that enable small businesses to borrow at cheaper rates should be government goals.
At this writing, interest rates have started to come down. Maybe that -- along with the banks' seeming revival of interest in lending to small business -- will be enough. But it probably won't be.
None of this means that governmental action can substitute for small business's providing for its own needs. But government can take some useful steps.
What to do in '82? Here's my list.
Item 1: Shift tax reduction benefits. California has just cut the rate on capital gains made from longer-term investment in smaller companies (see INC., November 1981, page 14). That's the kind of change that strengthens the appeal of small firm equities against the more liquid securities of larger firms.
Item 2: Return to the general "job credit tax" the Carter Administration cut out several years ago. (See John Bishop's article on page 16, which also describes the targeted credit that remains.) If we limit the credit to genuine new hires above past levels and make a low number of hires eligible per company we can hold the cost down. We need this law on the books for at least five years to give it a fair try. It was killed in 1979 before most small businesspeople even knew about it.
Item 3: Make interest on loans for mergers or acquisitions above a certain size, say $100 million, nonductible. This would save some revenues to offset tax losses caused by the first two items. (More on this next month.)
Item 4: Limit to ending abuses the effort to "reform" tax-exempt, industrial development bonds. For example, require that 95% of the proceeds must be used by firms with fewer than 500 employees, whether the bonds were sold in separate issues or pooled. Some people want to go further, but small business simply cannot afford to lose this source of almost $8 billion of relatively low-interest financing. If there have been abuses, stop them. But let's not throw any more babies out with the bathwater.
Item 5: Strengthen grass-roots banking by allowing savings and loans and saving institutions to perform commercial functions for small businesses. This is a tough one, but important. If we're going to rescue these outfits, let's do it for a good national policy reason that helps the whole economy. Mustard plasters aren't going to help if the S & L's and savings banks remain as limited in their functions as they are now. Small business badly needs a stronger network of local full-function banks.
Item 6: Expand the credit and capital available to small business from pension funds and insurance companies. This will take both state and federal action. If it is done carefully and in a sharply limited way, it can be done prudently.
Item 7: Pass the Small Business Innovation Research Act. The President himself has said that the act would help "those small businesses which are the job-producing life-blood of our economy." This one is squarely in the laps of the Senate and House leaders, who have hardly shown a sense of urgency about passing it.
Item 8: Make the next appointment to the Federal Reserve Board a small businessperson or someone unequivocably committed to small business. Not only is this a good idea, but a small businessperson (and a caring, competent one, not just a ceremonial one) should be on the board of every Federal Reserve Bank.
I think these are good suggestions, but my list is only a starting point. There are plenty of other possible items. What's important is that government enact a program specifically to help small business, instead of telling us how much it loves us. Big business gets action. It's time we did, too.
Small business represents a major political opportunity for both the Republicans and the Democrats in 1982. It would be nice if they could approach a consensus on long-range economic policy. That's probably not in the cards, although it would surely be great.
If we can't get there right now on the big picture, let's try to accomplish something in this limited, but essential, small business area.
A freshman congressman quipped some years ago that small business had it made. The Republicans couldn't be against it because it was business, and the Democrats couldn't be against it because it was small.
He was only half-right, unfortunately. It's true that nobody admits to being against small business. But nobody's been for it enough to keep its needs on the front burner long enough for them to be met. With the Democrats, small business plays second fiddle because it's business, not labor or the consumer.With the Republicans, it plays second fiddle because it's small, not big.
Time for a change on both sides of the aisle -- and 1982 would be a great year for it.
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