Democrats in Washington treat entrepreneurship the way they treat the weather: They talk about it, but almost no one in our party does anything about it. We have endorsed policies that aid big business and policies that aid small business. We have supported laws allowing unprofitable corporations to sell their excess tax credits to profitable ones, and occasionally we support loan guarantees to bankrupt businesses. But we have never made an effort to devise policies that promote innovation and entrepreneurship.

Since Democrats in Congress and around the nation are looking for new ideas and economic policies, they should take a new look at entrepreneurs. When they do, what they ought to see is that these people aren't part of the problem -- another special-interest group looking for a handout -- but part of the solution. Fostering entrepreneurship is a way of solving many of our most pressing problems -- unemployment, international competitiveness, inflation, and poverty.

A well-crafted program to stimulate and nurture entrepreneurship will help make the United States more competitive in international markets. Democrats have invested a lot of political capital defending vested economic interests -- corporations and unions that act as if they have everything to lose and nothing to gain by taking risks.

Instead of continuing this way, we must realize that national economies adjust to change and retain their ability to compete by developing new enterprises and new products to replace the old. Entrepreneurship fosters this process. Entrepreneurial companies adapt more easily to the shifting trends and fashions of the marketplace. Their agility allows them to bring new products to market and to exploit market niches more quickly than larger companies can. In short, they are on the cutting edge of what the great Harvard University economist Joseph Schumpeter called the "process of creative destruction." By accelerating this process, Democrats can help to ensure that the United States remains the world's premier economic power.

Entrepreneurship is the country's best defense against rising unemployment. During the last recession, Fortune 500 companies lost 3 million jobs while entrepreneurial businesses less than 10 years old added slightly more than 1 million new employees. Even more important, newly formed companies provided at least 750,000 of the jobs created during the current recovery. As the expansion gained strength, the importance of newly formed businesses increased. Without entrepreneurs, unemployment might have peaked at close to 12% instead of 10.7%; and even after nearly two years of rapid expansion, it might still lie hovering in the double-digit range.

Of course, Democrats who know their history also know that there is nothing really new about this idea of relying on entrepreneurship; it has its roots in the party's oldest and most cherished ideals. Thomas Jefferson, Andrew Jackson, and Woodrow Wilson founded and nourished the party on the principle that economic progress and social renewal come from the bottom up, not from the top down. They also understood that the wealth of a nation resides in the inventiveness and ingenuity of its people. To unleash this ingenuity, they sought a more equitable distribution of economic opportunity, arguing that giving people a chance to go into business for themselves would help combat an unwholesome concentration of economic power. Today's entrepreneur is merely Jefferson's yeoman farmer updated to the age of robots and silicon chips.

With so much potential economic progress resting on the success of the entrepreneurial sector, Democrats should want to make it easier for entrepreneurs to start new companies and develop new products. Unfortunately, the federal government has been erecting obstacles, not tearing them down. Consider these examples:

* The corporate income tax subsidizes the borrowing costs of profitable, already established companies and, in effect, penalizes entrepreneurs, especially during the unprofitable start-up phase, who must pay higher aftertax interest rates.

* Federal banking regulations, in effect, tell entrepreneurs that they cannot qualify for a loan unless they have collateral, giving rise to the sad but accurate observation that bankers will lend entrepreneurs money only if they can first prove that they don't need it.

* When it tightens credit in an attempt to reduce the growth of the money supply, the Federal Reserve Board never distinguishes between loans that promote paper entrepreneurs and loans that support real entrepreneurs. The large volume of loans used to finance mergers and "greenmail" suggests that even when credit is tight, more than enough money is available to entrepreneurs interested only in redistributing shares of the existing pie. Real entrepreneurs, on the other hand, often can't get the capital they need to create new products, provide more jobs, boost productivity, and otherwise make the pie bigger.

Many promising entrepreneurial ventures never see the light of day, not because they don't have merit, but because financial markets can't provide entrepreneurs with adequate financing at affordable prices on reasonable repayment terms. Democrats could help their own cause, and the country's, by supporting legislation that would help the financial community to provide better service to entrepreneurs.

The National Entrepreneurship Act (H.R. 4718), introduced into the present Congress, relies exclusively on the market-oriented decisions of entrepreneurs and financiers -- with a minimum of government supervision, interference, and red tape -- to ensure that existing finanial institutions can provide adequate financing for new entrepreneurial ventures. It has four major provisions:

* A government-sponsored secondary market for industrial mortgages will enable insurance companies, pension funds, and other institutions with long-term capital supplies to purchase industrial mortgages from banks. A similar government-sponsored secondary-mortgage market program has helped to stimulate the housing industry.

* A special loan-loss reserve fund, receiving payments from borrowers, lenders, and the federal government, will enable banks to make slightly more risky, but still prudent, economic development loans. This fund will provide banks with a safety net to guarantee repayment of any particular loan, although not their entire portfolio. The program will thus help banks lend to entrepreneurs who have productive ideas but insufficient collateral for loans.

* State-financed pension fund clearinghouses, funded in part by matching grants from the federal government, will help pension funds identify prudent and innovative investment opportunities. They will also help devise new financial instruments allowing pension funds to participate more imaginatively in industrial mortgages, small equities, venture capital, direct debt placements, and many other innovative investment options.

* Matching grants from state venture capital corporations will help states develop new sources of long-term "patient" capital. New businesses often have poor cash flow during their start-up phase. Only later, when the business is safely down the road to financial solvency, is its cash flow sufficient to meet debt service obligations. We need to devise financial instruments that allow more entrepreneurs to undertake long-term investments, safe in the knowledge that they won't have to start repaying investors until the business is a commercial success.

This legislation can't solve all the problems faced by entrepreneurs, but some well-crafted changes in the financial system can help it encourage, not stifle, entrepreneurial efforts. If Democrats throw their enthusiastic support to this legislation, they can finally claim to be doing something, not just talking, about entrepreneurship.

Published on: Oct 1, 1984