Reagan's squeeze on small business
Small businesses in the United States expected a warm welcome from the Reagan administration. Now, as the President's economic program takes shape, the small business community is beginning to rumble with surprise and discontent.
A program to put America back to work that ignores small business is a contradiction in terms. Small companies are the primary generators of new jobs: between 1969 and 1976 small firms were responsible for 86.7 percent of all new private sector jobs, while the Fortune 1,000 contributed less than 1 percent. And small businesses, of course, are far less likely than multinational corporations to divert tax savings to foreign investment.
But the administration has never felt comfortable with programs designed to lessen the disadvantages small firms face in today's concentrated economy, where small busi-nesses - 97 percent of the country's business enterprises - account for only a little more than a third of the GNP. The President's transition team on small business issues concluded last year that the ''administration's small business policy should not consist of more small business subsidies, loan programs, selective tax exemption and government contract favors.''
With that in mind, the administration has slashed the Small Business Administration's loan programs 32 percent. But some small business leaders say the administration is not only removing programs that help small businesses but also pursuing policies that discriminate against them.
When the administration cut the research and development budgets of most federal agencies, it particularly hurt small high-technology firms heavily dependent on federal seed money. The result could be detrimental not only to small business but to efforts to increase productivity as well.
Small businesses and independent entrepreneurs have historically been the country's innovative mainstay. The jet engine, automatic transmission, Xerography, penicillin, Kodachrome - even the ball point pen - were the inventions of either individuals working independently or small firms.
A 1979 National Science Foundation survey reported that for every federal R&D dollar spent, small companies produced four times more innovations than medium-sized companies and 24 times as many as large firms.
Those statistics are not surprising. Independent entrepreneurs prosper by taking risks. Many of them are driven by a vision that propelled them to set out on their own, often from better-paying, secure jobs in the corporate world. Unlike many large companies, they don't have a stake in maintaining the technological status quo; they don't have existing product lines to protect.
Despite their impressive innovation record, last year small businesses received only 3.5 percent of the total federal R&D budget. With the administration cutting precisely those programs where small firms had gained a foothold, that figure will probably drop.
Frederick Schmid is one victim of those reductions. His case demonstrates how the Reagan budget cuts may cost the public important technological advancements. Using about $2.3 million in DOE research money over five years, his New England firm, Crystal Systems, invented an efficient, low-cost method of producing silicon ingots for solar cells.
Observers familiar with Schmid's ''heat exchanger method'' agree that the process is an important step toward a cost-effective solar industry. But this June, just as Schmid was nearing the prototype phase, the DOE cut off his contract. ''In a time of restricting funds,'' said the DOE official, ''we've just got to make some difficult decisions.''
While Schmid and another small independent firm in Massachusetts were cut from the DOE money earmarked for developing a process to make silicon ingots, Solarex (owned 20 percent by Amoco), Westinghouse, and Mobil-Tyco retained their contracts.
Now Schmid is trying to pull together capital from other sources. But it won't be easy. Venture capital is tight, and the administration's anti-solar attitude is frightening many investors away from the industry.
DOE's solar program is just one example. The department's Office of Advanced Technology Projects, which funded promising technologies that were ''too risky'' for traditional offices, as the former director explained, was completely eliminated. More than half of that office's contracts went to small businesses.
Hoping to improve the federal government's R&D record to small firms, the Carter administration last year proposed tripling the budget of the National Science Foundation's Small Business Innovation Program, a highly successful project which funds entrepreneurial ideas until they can ''graduate'' into the private sector. Reagan, however, cut the program's $5 million budget to $4.5 million.
Reagan hopes instead that his tax cut will spark a burst of entrepreneurial and innovative activity that will boost productivity. But the administration's tax plan is directed toward large, capital-intensive corporations - historically the least innovative sector of the economy.
More than 80 percent of the benefits from accelerated depreciation, the cornerstone of the business tax package, are expected to go to the 1,700 largest corporations. And during last-minute bargaining, the administration agreed to $5 .8 billion in small business tax breaks through 1986 - drafted by the Democratic-controlled House - to be divvied up between millions of enterprises. At the same time, it accepted twice that, $11 billion, for a handful of oil companies already flush with cash.
Further, as the administration now acknowledges, the $750 billion tax break will lead to at least another four years of large federal deficits. That means continued inflation and tight money supplies, which hit small businesses hardest.
Already small businesses have had to swallow more than their share of high interest rates. Large companies, as congressional studies have concluded, can bypass high interest rates by generating other sources of credit and obtaining preferential treatment from their bankers, who value the high-volume business of the largest corporations.
This year's merger spree, which has so far topped $60 billion, twice as much as was recorded by the same time last year, suggests that acquisition-minded members of the Fortune 1,000 have had little trouble lining up billions of dollars in credit.
In a period of tight money supply, the Reagan administration's frequently announced plans to loosen antitrust enforcement inevitably hurt small businesses vying for a share of the limited credit available. While six oil companies in July were lining up $28 billion in credit to finance potential mergers, for instance, thousands of small businesses were closing their doors for lack of affordable short-term credit. In that month alone, 3,733 US businesses went bankrupt.
It is ironic that an administration which relies on cost-benefit analysis in health and safety regulations, where benefits are difficult if not impossible to quantify in dollars, seems oblivious to the economic benefits of a healthy small business community.