To the Congress of the United States:
I am sending the Congress this Message on Small Business to emphasize the vital importance of the small business sector to the American economy, and to report to you on the steps taken by my Administration to strengthen it.
Our efforts to control inflation, maintain high levels of employment, and stimulate productivity and economic growth depend in large measure upon a strong small business sector. Yet too often in the past the Federal government has been insensitive to the needs and concerns of small business.
It is essential, not just for the sake of the small businessmen and businesswomen of America, but for the economic welfare of the Nation as a whole, that the voice of small business be heard and heeded. I have made a special effort to open my Administration to small business and to maintain a continuing dialogue with its leaders. In addition, in order to focus that dialogue and to provide a forum in which the small business community can develop and transmit its policy recommendations, I have convened a White House Conference on Small Business, which meets in Washington this week. Senator Gaylord Nelson and Congressman Neal Smith have been at the forefront of those urging such a conference. I look forward to receiving the recommendations of the Conference. As the conferees begin their deliberations, I want to report to you on the state of small business, our progress thus far in dealing with its problems and concerns, and our plans for the future.
At the root of the problem of governmental insensitivity is the popular misconception that small business is not a significant factor in our economy. Viewed in the aggregate, there is nothing small about small business. Small businesses account for more than fifty percent of all private employment, forty-three percent of the gross national product, and over half of all inventions.
The small business sector is critically important not just because of its sheer size, but because of the unique way it affects the economy. In the years between 1969 and 1976, small and medium size businesses accounted for virtually all of the net new private sector jobs added to our economy. Employment in firms with 500 or fewer employees increased by 7.5 million, while employment in firms with over 500 employees dropped by 1.2 million.
There is, as well, an aspect of small business which cannot and need not be quantified to demonstrate its importance. Our Nation has grown strong as the land of opportunity in which each individual can aspire to financial security through hard work and enterprise. The pursuit of economic self-realization by free citizens has fueled the most productive economy in the history of the world. And throughout our own history, economic opportunity and political freedom have gone hand in hand, each supporting and reinforcing the other.
Given the crucial roles which small businesses play in our economy and our society, it is incumbent upon us to identify and address those conditions which inhibit their formation and growth. Among the problems small business confronts today, the most acute are:
• the burden of excessive and needless governmental regulation and paperwork requirements.
• the need to improve access to capital to start up new enterprises and finance growth.
• inflation, which often places special strains on smaller businesses less able to pass along cost increases.
• the special problems of members of minority groups and women in starting and building business enterprises.
REGULATION AND PAPERWORK
When I took office in 1977 I found that 90 separate Federal agencies were issuing regulations at a rate of 7,000 new rules every year. Yet there was no mechanism to assure the cost-effectiveness of such rules, to eliminate overlapping and obsolete rules, or even to require that they be expressed in plain English.
Unnecessary or poorly designed regulations and paperwork requirements hurt the whole economy, but they particularly hurt small business. For example, reporting requirements which may be no more than minor irritants for large enterprises may well involve unacceptable costs for small entrepreneurs.
During the past three years I have taken a number of steps to reform the regulatory process and eliminate needless burdens. These actions include:
• Issuance of an Executive Order subjecting major regulations to cost-benefit analyses; imposing annual sunset reviews on various regulations; providing for the publication of a Regulatory Calendar to facilitate public participation in the rulemaking process; and requiring that regulations be written in plain English.
• Creation of the Regulatory Council to improve coordination of Federal regulatory activities.
• A direction to Federal agencies to develop flexible regulations which take into account the size of the regulated business, and which provide for reduced burdens for smaller businesses where possible.
• As a result of a paperwork reduction program I have initiated, we have reduced by 15% the number of hours Americans spend filling out Federal government forms.
A major impediment to the creation of a new business or the expansion of a small one is the difficulty in obtaining financing. During the period immediately prior to my Administration, access to the public capital markets was virtually closed to small businesses. In 1969 there were 548 public offerings of the securities of new or small companies; in 1976 there were a mere 29. At the same time, the cost of debt financing has increased as a result of the actions taken by the Federal Reserve System to reduce inflationary pressures in the economy.
In the face of these serious problems, Congress and this Administration have acted to encourage investment in small and innovative businesses:
• The maximum tax on long-term capital gains has been reduced from 49% to 28%.
• The three-step corporate income tax has been replaced by a five-step rate structure, which lowers the tax on the first $100,000 of corporate income by $7,750.
• The ERISA rules which define the fiduciary responsibility of the Nation's pension fund managers have been amended to encourage prudent investments in small and innovative businesses. These funds, which contain approximately $500 billion in assets, can be a major source of venture capital for our economy.
• The Small Business Administration has greatly expanded its lending activity in the past three years. SBA loans rose from $1.8 billion in 1976 to $3.1 billion in 1979, an increase of 72 percent.
Inflation is one of the most vexing and intractable problems we face as a Nation. It afflicts all segments of our society, but some elements are especially vulnerable. Small business is one of the sectors that is particularly hard hit.
Cutting down oil imports must be a top priority in fighting inflation. Virtually all of last year's increase in our inflation rate came from OPEC, and we will never control inflation until we control our appetite for imported oil. To help do so I have put in place a national energy policy which will encourage production through a rational deregulated pricing policy and will encourage a shift to coal, our most abundant resource. We have devised effective incentives for energy conservation, and have strongly encouraged the use of solar and renewable resources. I have also called on Congress to enact a Windfall Profits Tax to finance the most massive peacetime effort in American history to develop synthetic alternatives to foreign oil.
Another major line of defense continues to be strict budgetary discipline by the Federal government. My Administration has succeeded, with the cooperation of the Congress, in reducing the Federal deficit from $67 billion to $30 billion in less than three years. The budget that I shall propose for Fiscal Year 1981 will call for a further significant reduction.
In 1976 the Federal deficit represented 4.6% of our gross national product. In 1979, the fiscal year just completed, it was 1.2% of gross national product. In the 1981 budget, shortly to be released, the proposed deficit will be no more than one-half of one percent of gross national product.
We cannot afford to backtrack on our commitment to further deficit reductions. I urge you to join with me in the year ahead in resisting expensive and improvident pressures on the budget which would surely undermine our efforts to contain inflation.
I also urge business and labor to continue to work with us under the voluntary wage and price guidelines which I have put in place.
During a period of high inflation and accompanying high interest rates, many small businesses may face special financing problems. Chairman Volcker has recognized the need for banks to take particular care that small businesses, home buyers, and farmers receive a reasonable share of available funds. I know that the Nation's banking community has responded favorably to the Chairman's suggestion, and I expect it will continue to assure that adequate credit is available to finance the basic needs of the economy.
In addition, I would hope that the banking community would be sensitive to the pricing of small business credit. Decisions regarding rates and availability of credit must be made by each individual institution on a case-by-case basis and in response to local market conditions. At the same time, I hope that banks will act in a manner which recognizes both the critical role small businesses play in our economy and their special needs in a time of increased credit cost.
MINORITY BUSINESS ENTERPRISE
Members of minority groups are greatly underrepresented in the ranks of small business. Although minorities comprise roughly 18% of the population, only 4% of the Nation's firms are minority owned, and those firms account for ]ess than 2 % of all business receipts. Minority entrepreneurs confront unique problems in obtaining capital and often have special requirements for technical assistance. These problems require, and are receiving, the attention of the Federal government.
• Since 1977 we have more than doubled Federal purchases of goods and services from minority firms from $1.1 billion to $2.5 billion in 1979. I am confident that such purchases will exceed $3.5 billion this year.
• In order to promote and coordinate Federal activities in support of minority business development, I have revitalized the Interagency Council for Minority Business Enterprise and asked the Undersecretary of Commerce to report to me on its progress regularly.
• Last year I signed Public Law 95-507 which requires plans for subcontracting to minority and small businesses before sizeable contracts are awarded. I have taken steps to ensure that this legislation is vigorously implemented.
• SBA has greatly expanded its activities in placing Federal procurement contracts with small businesses owned by socially and economically disadvantaged persons under the Section 8(a) program. The value of such contracts rose from $368 million in 1976 to more than $1 billion in 1979.
• In my 1981 budget, I shall propose a new initiative within SBA to provide necessary financial assistance to support the growth and expansion of existing minority firms which have demonstrated their viability.
• I have restructured minority business programs within the Department of Commerce to provide a broad range of technical, advocacy, and support services, and I shall be sending proposed legislation to the Congress to establish a statutory base for the Minority Business Development Agency within the Commerce Department, to administer these programs.
WOMEN IN BUSINESS
Although women make up more than half of the work force, less than 5% of all United States firms are owned by women, and these firms account for less than one half of one percent of all business receipts. Businesses owned by women tend to be among the smallest and the most vulnerable to the vicissitudes of the economic cycle. Such businesses face major barriers in raising capital and often require considerable management assistance.
To help deal with these problems, I have issued an Executive Order which directs Federal agencies to strengthen the role of women in business and to take affirmative action to include women in management assistance and other business related programs. I have also created an Interagency Committee on Women's Business Enterprise to assure effective implementation of my directive. My Administration is responding with initiatives such as:
• SBA's new pilot mini-loan program which offers women entrepreneurs direct loans with flexible terms.
• In 1981, SBA will increase direct loans targeted to women business owners.
• My 1981 budget will also contain additional funding for SBA management and technical assistance programs designed for women-owned firms.
• The Farmers' Home Administration has targeted $50 million of its Business and Industry Loan Program funding for Fiscal Year 1979 for rural women's projects.
In addition, the Federal Reserve Board is considering actions to strengthen protections against sex discrimination in commercial credit.
OTHER SMALL BUSINESS INITIATIVES
In addition to the actions I have mentioned, we have initiated a number of other steps which are no less important in our efforts to create a more favorable environment for individual enterprise:
• At my direction, a major interagency review was undertaken to identify policy options to encourage industrial innovation. Because of the key role small business plays in the innovative process, many of the program components which will be implemented as a part of our comprehensive innovation policy will directly benefit small businesses. These include the creation of Corporations for Innovation Development in partnership with States and regions to provide seed capital for promising, innovative enterprises. We will also expand the existing National Science Foundation program which provides funding to small companies to assist in the commercial development of new technologies. We are seeking to strengthen and rationalize the patent system, and we will establish Patent Counsels for Small and Minority Business in the Small Business Administration and the Department of Commerce to assist inventors in bringing their innovations to market.
• I have instructed the Small Business Administration to accelerate the establishment of a small business data base to provide the information needed to guide effective policymaking for the small business sector.
• The Small Business Administration has taken steps to expand and strengthen its advocacy function. With the appointment of the first Chief Counsel for Advocacy in the SBA, the establishment of SBA advocacy offices, and the addition of the SBA to the Regulatory Council, I have moved to ensure that the problems and issues facing small business are addressed wherever relevant policy decisions are made within the Federal government.
THE PENDING LEGISLATIVE AGENDA
Congress can be justifiably proud of the legislative actions it has taken over the past three years to help create a more favorable climate for small business. There are, however, a number of legislative proposals of great importance to small business now pending or shortly to be submitted which require urgent consideration:
• Comprehensive Regulatory Reform. I urge Congress to adopt the comprehensive regulatory reform legislation which I proposed last March. This bill will make permanent and extend to the independent regulatory agencies the regulatory reforms I have already instituted by executive order. Such legislation should also require agencies to give appropriate consideration to alternative forms of regulation which minimize the adverse impacts of agency rules on small business.
• Paperwork Reduction. In a Message to Congress last November I called for passage of a Paperwork Reduction Act. This bill will ensure coordination among agencies to avoid duplicative reporting requirements and will strengthen central oversight of paperwork requirements. I urge its prompt approval.
• Trucking Deregulation. The trucking industry is enmeshed in a complex, and competitive web of regulation. The existing statutory scheme limits entry, restricts the goods truckers can carry and the routes they can drive, and allows them to meet in secret and fix prices. As a result, transportation costs are inflated by billions of dollars, and precious fuel is wasted. These regulations are particularly harmful to small businessmen who depend on common carriers, as opposed to large corporations which can establish their own private trucking fleets.
I have submitted a bill to open up entry, lift restrictions on commodities and routes, improve service to small towns, and ensure vigorous price competition in the trucking industry. I hope that the Congress will follow its extremely salutory action on airline deregulation with comparable action for the trucking industry.
• Uniform Patent Policy. In my Message to Congress on Industrial Innovation last year, I noted that the patent process has become increasingly expensive, time-consuming and unreliable. Its deficiencies have tended particularly to penalize small and independent entrepreneurs. In particular, confusion generated by conflicting policies regarding the disposition of proprietary rights in Federally supported work has seriously inhibited the commercial application of patents resulting from such work. I will shortly submit to Congress proposed legislation to remove this confusion through the establishment of a uniform patent policy. Under this bill, small businesses and universities will retain patent ownership.
• Securities Law Simplification. Last month I sent to Congress a proposed "Small Business Issuers' Simplification Act" which will significantly reduce the paperwork and regulatory burdens of small businesses which sell their securities to institutional investors, such as banks, insurance companies and pension funds, and others making investments of at least $100,000. The high costs of compliance with the registration provisions of the Federal securities laws have effectively prevented smaller businesses from raising capital in the public securities markets. Existing paperwork requirements constitute a needless impediment to the raising of capital where the securities are sold to a purchaser well able to fend for itself in the marketplace. This legislation would exempt such transactions from existing statutory registration requirements, while preserving all the present protections of law for small investors. I urge Congress to give it early and favorable consideration.
These initiatives represent parts of a larger process by which we can, working together, make the Federal government the ally of small business, not its adversary. We must recognize that our aspirations for a free and productive society rest to a significant extent upon the fate of America's entrepreneurs, and we must act accordingly. Our job is to provide a climate in which their energies, their enterprise, and their dynamism can work for all Americans. I ask you to join with me in meeting that challenge.
The White House,
January 14, 1980.