What Ronald Reagan Knows About Small Business

...could fill a book. The President's first annual report on small business shows a good grasp of problems Solutions will be more elusive.
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The President's first annual report on the state of small business says little we didn't know before, sets new records for understatement, and manages to avoid committing the Administration to any serious work on resolving issues. But the Administration is proud of it. "Ronald Reagan's message is the most definitive Presidential statement ever on small business," says Dan Smith, a White House senior policy adviser. And small business representatives in Washington are generally pleased. "Commendable," says William J. Dennis, director of research for the National Federation of Independent Business.

What they ae talking about is a 365-page document that summarizes for the first time most of what's known about the relationship between small business and the rest of the world.

The business community in the United States has evolved, the report finds in its opening chapter, into a "dual" economy: a small number of very large companies and a large number of small businesses. Out of almost 15 million U.S. companies, all but 13,000 employ fewer than 500 workers. And, the report finds, there are differences between these two economies, among them:

* The small business economy is more sensitive than the large companies are to downturns in the business cycle.

* Interest rates are more troublesome to small than to large companies because small companies tend to rely more heavily on debt capital.

* Small companies "operate under something of a handicap" in the capital markets, whether debt or equity.

* Small companies tend to be labor intensive, relying more upon people and less upon machinery.

* The size of the small business sector is shrinking relative to the big business economy.

These aren't just assertions that the President is making. They're backed up with scores of data tables, many of them assembled for the first time. And while virtually none of this is shocking news, the NFIB's Dennis notes that much of it was only "intuitively suspected before." Frank Swain, the Small Business Administration's chief counsel for advocacy, says the fact that the report exists at all should eliminate the "tendency of Congress and the Administration to avoid small business issues by pleading ignorance."

The Reagan Administration didn't volunteer on its own to prepare this report. It's one of the requirements of the Small Business Economic Policy Act of 1980. What the Employment Act of 1946 does for labor, the 1980 act is supposed to do for small business.

You could argue, of course, that the Employment Act has been a pretty miserable failure. Thirty-six years after it became the law of the land, some willing workers still can't find jobs, even in the best of economic times. But as a practical matter, the Employment Act has hd the important effect of making full employment a continuing national concern, right up there with national defense. The act created the President's Council of Economic Advisers, and the President's annual Economic Report to the Congress was initiated by it. That report is supposed to detail the Administration's progress in attaining full employment goals.

The Small Business Economic Policy Act is supposed to do roughly the same thing for the small business sector, and it's off to a respectable start.

But what does the Administration propose to do? The 1980 act requires that the President not only deliver a factual report on the state of small business. He's also supposed to recommend a program to improve the state of small business.

Here the President has a problem. Last year he gave us his cure-all economic program. This year he's got to apply that one-size-fits-all fix to this newly defined set of concerns. Sometimes the fit just isn't there.

Small companies are labor intensive, the President reports, but last year's business tax cuts are based on asset depreciation, not hiring. No new ideas here from the President, only two rationalizations: First, he suggests that big companies that benefit from the tax cuts will buy more from the small companies that don't, thereby improving the small businesses' profitability. Second, he suggests that because of the personal tax cuts, small company employees will accept smaller raises, and small business cash flow will improve.

Having acknowledged that small businesses are more sensitive to high interest rates, high inflation, and downturns in the business cycle, the President suggests nothing to make them less sensitive. He only promises relief from the current downturn and says he will "put us on the road to prosperity and stable growth by the latter half of this year."

Having established that small companies operate at a disadvantage in the debt and equity capital markets, the President suggests nothing to ease the disadvantage. The result of current changes in the country's financial institutions, by which the President means the increasing concentration in banking and on Wall Street, "may well be the creation of important new access points for small business to the flows of investment capital," the report says. And then again, it may not be.

Congress, probably the House and Senate Small Business Committees, will hold hearings on the report. Administration officials have promised follow-up with some specific legislative initiatives, although they aren't saying what these will be.

"The President has shown a remarkable understanding of the problems of small business," says Jere Glover, a Washington attorney who served in the SBA during the Carter Administration, "and a remarkable lack of understanding of what to do about it."

But even Glover readily concedes that it's better in the long run to have the President talking about small business even if you don't agree with everything he says.

"I only wish," says Glover, "that the guy who wrote this report had also written last year's tax bill."

Last updated: May 1, 1982




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