The Making Of The President 1988
When Richard Katz arrived n Sacramento back in 1981, he wanted to hitch his wagon to a new kind of political star. The 30-year-old, first-term assemblyman (now in his second term), who previously had run his own small San Fernando Valley graphics firm, knew he needed to find a "market niche" hitherto unoccupied by other legislators. The niche he found turned out to be himself.
"It was a tremendous opportunity, because I realized no one was bothering with guys like me," Katz recalls." I had myself experienced all the hassles -- the regulations, the unfair taxes -- being in small business I felt there for years, but someday would be a powerful force."
Since then, Katz has emerged as the leading legislative spokesperson for California's 2 million small businesses. As chairman of the Assembly Select Committee on Small Business, he has gathered around him a 50-member Small Business Resource Group that has helped bring into existence more than two dozen laws directly benefiting entrepreneurs and small business, including funding for small business development centers, regulatory reform, and legislation allowing start-up companies to carry over net losses of up to $100,000 for their first two years.
Despite his early successes, Katz has few illusions about the clout of this new constituency. Even compared to the gay rights or the state employees' lobbies, not to mention such powerful forces as the California Business Roundtable or the California State Labor Council, small business's presence in Sacramento can only be described as puny. But Katz believes that time -- and history -- are on his side.
"This is a constituency that's still young and largely unorganized," he says. It gets lip service from the Ronald Reagans and the Walter Mondales, but they don't understand what small business is all about. But this election will be a catharsis. Mondale and Reagan each represent the past, the stagnant debate, the things that have dominated politics for years. But while they fight, small business is going to keep on growing and getting strong. In the long run, it could leave the other players light-years behind."
Richard Katz is just one of a growing number of young politicians in both parties, many still in their early thirties, who have decided to cast their lot with small business. What makes them different is that they see entrepreneurs not just as a special-interest group or a collection of special-interest groups, but as the heart of a new American political economy.
This approach contrasts markedly with that of politicians -- including some supporters of specific pro-business legislation -- whose economic attitudes were shaped during the 1950s and '60s. In 1960, for example, America's Fortune 500 corporations controlled about 75% of sales in the world market.
But over the past 10 years, that picture has changed drastically. Such giant-dominated industries as steel, autos, plastic, and railway equipment all suffered huge reductions in their world market share. Fortune 500 employment began to drop; since 1974, the companies have trimmed their payrolls by an estimated 1.5 million workers.
At the same time, small business emerged as the great engine of job and economic growth. Increasing their share of the total work force, businesses with fewer than 500 employees now account for nearly half of all the jobs in the U.S. economy. Entrepreneurial companies -- from hightechnology superstars like Apple Computer Inc. and successful steel minimills like Nucor Corp. to hundreds of thousands of small service-oriented businesses -- have became the new paragons of the economic system. And suddenly, small businesspeople are being wooed by some of the brightest young politicians around.
"Right now, it's small business that really runs things and makes things happen," argues Rep. James Cooper, a 30-year-old freshman Democrat from a conservative district in rural Tennessee. "When I ran for office, I used the Yellow Pages. The fancy political consultants probably wouldn't like it, but it was the way I tapped into small business, found out what they wanted. And I'm here because I was lucky enough to appeal to them."
"It's been a dramatic change in the last few years," says Jack Rennie, outgoing president of Small Business United (SBU), a key coalition of some 15 small-business groups from across the country. "It's stronger on the district level than in the executive, but we're finally getting attension, particularly from the comers, the young people coming up. We're finding new boosters all the time from both sides of the aisle." But political effectiveness involves more than a corps of boosters -- you have to decide what to boost, and how. And while they are united in their strategic and emotional commitment to small business, the new entrepreneur-oriented politicians cannot yet agree on a common economic agenda.
Some, such as Reps. Ed Zschau of California and Jack Kemp of New York, both Republicans, embrace a program emphasizing a minor government role and the maximum use of incentives to spur entrepreneurial growth. Pro-small business Democrats, such as New York's Rep. Charles Schumer, are working to ensure small business access to such things as capital and government procurement contracts. For others, such as Tennessee's Cooper, the first priority is a combination of defense and other spending cuts to lower he deficit, thereby reducing interest rates.
Just one term in Congress convinced Ed Zschau that representing small business is no easy task. A former electronics entrepreneur from Silicon Valley and onetime chairman of the American Electronics Association, Zschau came out of the 1980 White House Conference on Small Business convinced that the entrepreneurs' political star was on the fast track. Now, wiser to the ways of Washington, he sees a difficult struggle ahead.
"The enthusiasm we felt at the White House Conference may well turn out to be a blip on the screen," Zschau maintained over coffee at the swank Los Angeles offices of Brentwood Associates, a venture capital firm headed by political backer Kip Hagopian. "There was a lot of hope that small business would become a great force, but it's not there yet. Sure, there's a lot of respect for entrepreneurism in the halls of Congress -- if you want to be nice to someone, you call them an entrepreneur -- but translating that into political muscle is another story."
Zschau thinks small business is as yet too disorganized and lacking in a clear agenda to compete with narrower special interests that have well-defined sets of objectives. "People in small business are too busy running their businesses, and they disagree too much among themselves," he says. "You have differences between growth companies that need risk-equity capital, for instance, and more traditional businesses in need of debt. It's not a homogeneous class -- size is not the only issue. Small and big electronics firms, for instance, have more in common [with one another than the small firm does with] a small tool-and-die maker. I don't think it's possible to bring [all small business] together."
Not all observers share Zschau's pessimism. Nashville small-business activist Bill Nourse, for one, argues that political confrontation will stiffen the backbone of the untested political movement. Small business will be forced to "get its act together" -- from organizing at the local level to forging a common agenda among various, often bickering organizations.
"We are going to have to pay our dues as a movement," Nourse says, "and find out the hard way who s carrying water for us and who isn't. We are ready to move beyond the 'I'm for Motherhood, Apple Pie, and Small business' to a much tougher position. We are going to have to be the ones who challenge the forces threatening our economic future. We are going to have to be the constituency to take on the whole set of monetary and fiscal policies. . . . We have to prove that small business really speaks for the overall interests of this country." A major test may come very soon: SBU's Rennie, for one, predicts a "cataclysm" following the November elections. Given the massive federal deficit, most observers expect that the next Congress will be forced to raise an additional $100 billion--plus with a combination of tax increases and spending cuts. In that struggle, Rennie and other knowledgeable activists fear, small business will still find itself outmuscled by more entrenched political forces.
"Regardless of who wins in November, we are about to see the bloodiest small business battle in recent years," says Jere Glover, legislative advocate for the Small Business Administration under the Carter Administration and now a Washington lawyer representing numerous small business clients. "And unless small business gets its act together, we'll get our teeth kicked in. Everybody will be scrambling to protect themselves, and you've got maybe a dozen people from the NEIB [National Federation of Independent Business] and SBU and the others -- AT&T's Washington lobby is bigger than that." Kip Hagopian, who now heads the National Venture Capital Association, fears that even the 1978 capital-gains reduction -- which has been so crucial to the expansion of the venture capital industry over the past five years -- could be lost. Given small business's current lack of clout, the idea that it could shape the nation's basic economic policies may seem rather farfetched. Yet from the beginning, the entrepreneurial impulse played a pivotal role in American history. The urge for economic self-determination, of course, helped drive the small farmers, merchants, and tradesmen of colonial America to rebel against the central authority of England. Following independence, these groups formed the basic coalition supporting Thomas Jefferson -- a man claimed as a political forebear by politicians as diverse as Ronald Reagan and George McGovern.
In the 1830s, looking to expand their opportunities along the unsettled frontier, small proprietors rallied behind Andrew Jackson against the commercial establishment of the Eastern Seaboard. After the Civil War, a new movement called Populism arose to protect what one broadside described as "the farmers, laborers, merchants, and all people who produce wealth and bear the burdens of taxation" from the power of the great industrial trusts. The populists -- purveyors of what historian Richard Hofstadter has called "entrepreneurial radicalism" -- took over the Democratic party at that time and, despite their defeat in two Presidential campaigns, left a legacy of laws designed to protect small businesses from their oversize brethren.
The Republicans, too, have a proud, if often overlooked, tradition of entrepreneurial activism. Pressed by the monopolistic power of such corporate giants as Southern Pacific Co., professionals and leaders of medium-size companies rallied to the cause of political reform. Largely Republican, and known as Progressives, they pushed through many of the anti-trust laws and other legislation spurring competition that remain on the books.
But after World War I, as the trend toward corporate giantism accelerated, Memocrats and Republicans alike seemed to abandon their entrepreneurial ideals. It seemed logical in the booming '20s that leadership should fall to the new breed of "economic statesmen" running such great corporations as General Electric, U.S. Steel, and General Motors.
When the Depression hit, small business watched helplessly as New Deal programs turned out to benefit mainly big business and labor. The Democrats -- once the vanguard of "entrepreneurial radicalism" -- presided over a rapid consolidation of the economy, with the share of industrial assets owned by the 316 largest manufacturing companies increasing from 35% in 1926 to 47% in 1938.
"Ever since Roosevelt, the Democrats have fostered the big corporate state," observes Walter Stults, president of the National Association of Small Business Investment Companies and for three decades a leading Washington advocate for small business. "They always see themselves getting together with a few labor leaders, a few guys from the Fortune 500, and making economic policy."
Yet when the Republicans came back into power, small business advocates found themselves, if anything, even farther out in the cold. Defense Secretary Charles Wilson, the former president of General Motors Corp., summed up the Eisenhower Administration's attitude in his immortal phrase, "I thought what was good for the country was good for General Motors, and vice versa." And from Roosevelt to Carter, there seemed to be a bipartisan consensus: Small business no longer played an important role in American economic life. The entrepreneur, as Kennedy adviser John Kenneth Galbraith baldly stated, was "a diminishing figure in the industrial system."
To many small business activists, Ronald Reagan seemed a political Messiah. Since the mid-1960s, Reagan has been preaching the gospel of old-fashioned individual initiative and economic self-determination. Never the favorite of the corporate establishment -- which preferred more conventional conservatives such as Gerald Ford or George Bush -- Reagan drew his most loyal backers from the ranks of such rough-hewn California entrepreneurs as independent oilman Henry Salvatori and car dealer Holmes Tuttle.
As a candidate, Reagan enjoyed wide support throughout the small business community, and he has kept much of it through his first term. One key reason is the personal tax cuts passed in 1981 that boosted the bottom line of many small proprietors. Another is the improved climate for small business investment. Perhaps even more important, the President seems to have kindled a genuine improvement in business confidence (according to a Heller International Corp. survey in May, for example, almost three-quarters of small business owners expected sales to jump during the next few months), and this confidence persists even as Wall Street shows increasing concern over long-range trends.
"I think Reagan's small business position is one of the best kept secrets in the country -- his tax cuts really spurred businesses like mine," claims Dale Nelson, founder of BMS Corp. in Des Moines and a member of Mid-Continent Small Business United. "Big handout projects get the headlines, but you don't have a ribbon-cutting ceremony when I add 10 employees. He's cut taxes, and confidence in the small business community is soaring all across the country."
Other small business activists, however, see the Reaganite appeal to the "little guys" as little more than hype. Certainly the President's cabinet, stocked with such former executives as Defense Secretary Caspar Weinberger and Secretary of State George Schultz of Bechtel Corp. and Treasury Secretary Donald Regan of Merrill Lynch, seems to reflect a basic Fortune 500 mentality. And the same 1981 tax bill that included the "populist" Kemp-Roth legislation also gave away billions in special tax breaks -- including new depreciation schedules and the infamous "safe harbor leasing" provision, which allowed companies to sell unneeded tax write-offs -- benefiting almost exclusively the largest, most capital-intense corporations.
Indeed, even some traditional Republican allies have expressed deep disappointment with Reagan's seeming tilt toward the corporate giants. "We have no particular access to the White House now," complains one top official at the NFIB. "In my opinion, we had better contacts with the Carter Administration. I find it absolutely incredible, because small business is [Reagan's] natural constituency."
Despite this festering resentment against Reagan -- exacerbated by continued high interest rates and a record 56,000 business failures in 1982 and '83 -- there is little indication that Walter Mondale stands to gain by it. Like many traditional Democrats, Mondale tends to treat small business as yet another special-interest group, and he appeals for its support through such pork-barrel programs as those administered by the Small Business Administration. But there is nothing in his long public career, which includes a stint on the Senate Small Business Committee, to suggest that he comprehends the entrepreneurial economy's central importance to the nation as a whole.
Lewis A. Shattuck, executive vice-president of the Smaller Business Association of New England and a longtime small business activist, puts it this way: "During all of [Mondale's] years in the Senate, I cannot recall anything that he started, or spearheaded, or put into action. I'm not saying he didn't do anything, he might have been doing some very fine things, but I can't think of any."
To the entrepreneur, then -- with both Reagan and Mondale reflecting their parties' traditional lip-service approach to small business -- the current campaign may seem to offer no hope at all. But the new wave of entrepreneur-oriented politicians -- the Kernps and Zschaus and Schurners and Coopers -- could change the political climate dramatically before 1988 rolls around.
Take Kemp, for example. Along with Vice-President George Bush, he is an early favorite to lead the Republicans into the post-Reagan era. And while he is a fervent admirer of the President's, Kemp has been critical of the Administration's leanings toward big business and has stated that, in the future, the true political battle will be between "elitists and populists," not between liberals and conservatives.
In Kemp's world view, entrepreneurs are more than just another special-interest group -- they hold the keys to the nation's industrial renaissance. Kemp argues for the creation of an "American opportunity society" whose basic premise is that only by further stimulating entrepreneurial opportunities and economic growth can the United States solve its main economic problems. Among the major elements of the Kemp "supply side" program to stimulate new business are reducing the top income tax rate to 25%, doubling the personal tax exemption, and cutting some of the big business tax loopholes contained in the earlier Reagan depreciation schedules .
But as much as an economic strategy, Kemp's "opportunity society" is a conscious shift away from the country-club norms of Republican politics. By creating enterprise zones to spur business activities in ghetto areas, Kemp -- whose father ran a small trucking business in Los Angeles--hopes to turn inner-city residents into workers in, and owners of, small businesses, thus expanding the base of an entrepreneur-dominated Republican party.
"Kemp's the leader of a bunch of younger conservatives who perceive what small business is and why it's so important to us," observes Tim Wittig, until recently the minority counsel on the House Small Business Committee. "They realize Reagan has been so successful because he understands the things -- like cutting personal income taxes -- that the little guys want."
Zschau can't match Kemp for name recognition, but he, too, is a Republican on the rise. Elected to the House in 1982, Zschau is drawing attention as a possible candidate for Alan Cranston's Senate seat in '86. If he does run, fund-raising should be no problem; a list of his supporters reads like a Who's Who of Silicon Valley.
Zschau shares many of Kemp's basic objectives, but the two differ profoundly on fiscal issues. More concerned about budget deficits than supply-side economics, Zschau steadfastly opposes the KempRoth tax cut and maintains that cutting the deficit remains the number one priority for the entrepreneurial community.
Like Kemp, however, Zschau's basic economic approach is heavily weighted toward entrepreneurial incentives. As chairiman of the Republican Task Force on High Technology Initiatives, Zschau last spring produced a sweeping series of policy recommendations -- including increases in tax benefits for research and development, extended patent protection against foreign imitators, and greater tax credits--to spur innovation while leaving investment decisions in the hands of individual businesses. The recommendations were put together with direct input from some 150 executives, many of them from small entrepreneurial companies. Explains Zschau aide Jim LeMunyon: "We have no monopoly on wisdom. . . . We wanted to be in touch with the real world."
Getting the Democrats in touch with the real world of small business may be a more difficult proposition, but Rep. Charles Schumer believes it is crucial to the party's survival. "The Republicans were nght in making growth the centerpiece of their political message," says Schumer aide Alfred Watkins. "Now the Democrats have to come up with something that deals with entrepreneurship. It's a populist issue -- getting money from entrenched institutions and giving it to people who can do something with it."
As an example of Democratic distance from actual small business concerns, Schumer cites the leadership's support for "industrial policy" proposals, such as the establishment of an $8.5-billion national development bank. Armed with the power to target such key industries as computers or steel for special low-interest loans, the bank is exactly the kind of idea that appeals to organized labor and to public-policy gurus at such places as Harvard UniverGovernment. But, according to a poll conducted earlier this year by Price Waterhouse, even a program to target "winners" is favored by a paltry 3% of the high-tech executives it would supposedly benefit.
Schumer differs radically from the so-called Atari Democrats, who in the early 1980s talked boldly about targeting the high-tech sector of the economy. His key policy proposal, known as the National Entrepreneurship Act, while certainly applicable to small high-tech companies, addresses the needs of the more mundane--and more numerous -- service and traditional non-high-tech manufacturing companies as well. According to Department of Labor estimates, these companies will create at least 21.5 million of the 25.8 million new jobs developed between 1982 and 1995.
Schumer's proposed legislation, for instance, would assist small businesses of all kinds by setting up a secondary market for industrial mortgages, by loosening regulations on pension funds to spur investments in small companies, and by establishing a special loan loss reserve fund to encourage bank loans to new companies.
Bill Nourse thinks Schumer's broad-based approach could help the Democrats win the hearts of what he calls "neighborhood businesses." "The Republican view of small business is not Main Street, USA, but medium-size manufacturing companies," he argues. "But most small business is just not Silicon Valley, it's the barbershop in Shelbyville, Tennessee." Small companies, he believes, could also play a major role in helping local Democrats overcome the party's image as a collection of narrow, grasping constituencies. Cutting across sex and race lines in large numbers, they could serve as a counterbalance to the more traditional Democratic interest groups.
"These are people who are forces on the local level," Nourse explains. "It gives the Democrats in a district like Jim Cooper's an opportunity to stop being identified with throwing money around to people who don't produce anything."
Now a distinct minority within the party, small business-oriented politicians like Schumer are likely to gain strength as members of Congress elected in the 1980s rise to prominence. One revealing sign of things to come may be an informal alliance of 50 of the 56 freshman Democrats elected in 1982, known as the House Democratic Budget Study Group.
Like Jack Kemp, these young Democrats are eager to identify themselves as populists." But unlike Kemp, they favor cuts in defense spending as well as in traditional Democratic social programs -- rejecting, as Jim Cooper puts it, the Republicans' "borrow, borrow, spend, spend" approach along with its traditional Democratic "tax, tax, spend, spend" equivalent. They also take a hard line against business tax breaks that benefit only corporate leviathans. Says Cooper: "The Democrats must make the point that the real enemy of small business is big business -- they get all the breaks a small business can never get.
"We're the largest single-interest group in the Congress," Cooper adds. "We're 50 votes solid. The House Democratic leadership, if it can do anything, it can count votes." As proof of the young Democrats' influence, he notes that in 1984, for the first time, the House proposed "a lower deficit than the President. That's a historic shift."
Cooper admits that he and his colleagues have not totally thought out their alternative to Kemp's small-business populism. But entrepreneurs can only benefit as Democrats gear up to battle for what may be the key constituency of the 1980s.
"There's a generational shift that's only beginning to be played out," says the young Tennessean, whose father, Prentice Cooper, was a three-time governor of that state. "The Democrats have to go back to their roots, to the populism that characterized the party in the early days. We have to, by our actions, make our party one that small business can support."