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Small business and the Clinton agenda.

As an advocate for the small business community, I believe I have good reason to celebrate. For the very first time during my tenure in the Congress, I believe we have a Small Business President. President Clinton clearly appreciates the role that small business plays as a catalyst to economic growth and appears committed to designing his policies in such a way as to enhance that role. The President's appointment of Erskine Bowles--an experienced businessman with a sophisticated knowledge of the world of finance--as the new Administrator at SBA underscores that commitment.

Both the needs and accomplishments of the small business sector have received more attention in the last few months than I have seen over the last several years. I intend to seize the opportunity that this new focus offers.

I would like to speak to you about the role of the small business community in our economy and some of the key policy concerns affecting small business.

The Importance of Small Business

The small business sector is a critical sector of our economy, with unique needs, problems and opportunities. Moreover, it has become the primary catalyst for economic growth as our overall economic structure has evolved. Neither economic growth nor job growth has come from our industrial giants--they have come from small business. President Clinton recognized as much when he said on March 10, "...this has turned out to be, so far, a jobless recovery because small business job creation hasn't offset big business job losses. And that is the challenge we face..."

The number of small businesses in the United States increased by more than 49% in just the last ten years. Of the 21.3 million businesses in the nation, 99% are "small." They employ 54% of the workforce, account for 54% of all sales and produce 50% of the private gross domestic product. Even the lowest estimates attribute fully half of all new jobs to the small business sector.

The small business sector has also become the chief avenue through which many of our citizens, long kept out of the economic mainstream, have been able to become fuller participants in our economy. Of particular note is the dramatic increase in women and minority-owned businesses. Since 1982, the number of women-owned businesses doubled to over 5.3 million. And the receipts of these businesses tripled from under $100 billion to nearly $300 billion. During the same period, black-owned businesses increased by 38% to 424,000, with receipts--$20 billion--double what they had been ten years ago. The Small Business Administration's programs have helped facilitate this transition and continue to enable small business to play its crucial role in our economy.

This is a critical time for small business and for our economy. President Clinton has made it clear that his program to stimulate the economy and create new jobs will rely heavily on the growth potential inherent in the small business community.

But if we are to rely so heavily on the potential of the small business community, we must meet its needs. If we fail to do so, it is not just small business but our economy at large that will suffer.

Let me discuss some of those needs now in the context of the Administration's agenda.

Regulatory Burden Reduction

I am heartened to note that this new Administration clearly appreciates the connection between a vital and functioning financial sector and the full economic recovery it seeks. The President's early efforts to end the credit crunch reflect that understanding.

In 1989, the passage of the S&L bail-out legislation began a cycle of over-reaction and excessive regulation that has placed a stranglehold on our lending institutions. Since that time, I have consistently tried to call attention to the serious implications for credit availability and growth. As chairman of the House Small Business Committee, I have been particularly aware of the devastating impact of regulatory excess on the small business community which relies so heavily on traditional lending institutions.

Excessive regulation has driven banks to avoid even prudent risk-taking. Instead, they are pouring funds that could otherwise go into productive use into the purchase of government debt. Denied necessary funds, small businesses have in turn failed to provide much job growth, innovation and economic expansion--certainly less than we had come to expect and depend upon.

Early in March, President Clinton announced a package of credit crunch initiatives that constitute a significant step toward removing the stranglehold that excessive regulation has placed on the flow of credit to small businesses. The changes will reduce burdensome documentation requirements and remove unnecessary inhibitions to making the kinds of "character loans" that are so characteristic of small business lending. We can now hope more realistically for a real recovery with real job growth. This new policy initiative has taken a significant chunk out of the credit crunch wall.

At the time the president's program was unveiled, an Administration spokesperson indicated the initiative could mean that up to $46 billion in additional lending would be made by sound lending institutions. That would be an enormous achievement. But our expectations must be realistic. The credit crunch initiative is a step, it is not a panacea. While some new lending will hopefully result, I do not believe anything of that magnitude can reasonably be expected.

We need to do far more and I believe the new Administration is willing to continue on the course it has charted. The regulators are now reviewing current statutory requirements and are expected to recommend any necessary legislative changes by early summer. The banking industry has also identified regulatory reform proposals that it believes would enhance its ability to deliver needed credit. It is not yet clear whether we will see legislative action on these issues. Much depends on the shape of the regulators' own recommendations.

Moreover, the overall burden of government regulation must be examined so we can free up small business to do business. The Vice President is heading up a Task Force on re-inventing government, trying to streamline government so it can more effectively meet small business needs. That is an important effort.

Access to Capital

While the President's initiative is important, it is only a small part of what we must do to get capital out to small business. A key component of the economic stimulus package that failed to pass in the Senate was a supplemental appropriation for the Small Business Administration's 7(a) loan guarantee program. The SBA loan guarantee window is now closed and it will remain closed--unless and until additional funds are appropriated in another measure. The House is expected to act on this important issue. I would hope we can finally resolve this problem in very short order.

The SBA loan guarantee program has been the safety valve for small businesses during the credit crunch. As other sources of funding have effectively dried up for even the most creditworthy small firms, the SBA program--which grew by 40% last year--has taken up the slack. If it is not available to do so, we risk stalling the economic recovery we have worked so hard to begin. As important as the President's credit crunch initiative may be, it will take some time for it to have any real impact and it is no substitute for the program that is really doing the job now.

While the demands on the loan guarantee program have increased, there is another demand we are all trying to confront--the need to reduce the Federal deficit. As a result, there are pressures on the Small Business Administration's programs, as on many others. But the SBA cannot be expected to bear a disproportionate burden in balancing the Federal budget through reductions in its program.

Furthermore, we must look at the bigger picture. Were deficit reduction our only goal, the response would be simple. But it is not. The Administration is also seeking to stimulate the economy--spur investment, enhance community development and create new jobs. We need more, not less, small business development and growth to achieve those objectives. Any draconian cuts in small business programs that have been key sources of capital for credit-starved small firms will fly in the face of the president's efforts to end the credit crunch.

Keeping SBA's programs strong and effective must be a top priority. But we must also keep looking forward. Given the budget constraints that will continue to apply pressure, we can never realistically expect to expand existing programs sufficiently to meet the full demand.

In the longer term, we must develop new and innovative mechanisms for financing small business. Even before the credit crunch, small businesses had a very difficult time getting the longer term fixed-rate financing that is so important for their health and growth. SBA's loan guarantee program has helped, but the need remains substantially unmet.

Sources of long-term capital do exist among our institutional investors. But there is no mechanism for making the link between those investors and the small business community. We can help make that link by expanding the secondary market in small business loans. I have a proposal which I call "Velda Sue" which would provide the same kind of catalyst for small business finance that existing mechanisms like Fannie Mae and Freddie Mac have long provided for our housing sector.

Velda Sue would rely upon the nation's network of private sector lenders to process and service loans to the small business sector. However, 80% of each of these loans would be sold to Velda Sue, which would then package these loans and sell securities to large private sector institutional investors, creating a secondary market for private sector loans to small businesses.

This new program would not be a substitute for current SBA programs. There would continue to be a number of small businesses that do not have the financial standing to participate in financial markets without some type of direct government support in the way of a guarantee. Velda Sue is intended to be a supplement to the current SBA programs, not a competitor.

In order to jump-start the program, the Federal government would provide an initial infusion of capital to make a market, just as was done with Fannie Mae. I believe that this temporary Federal money would permit us to leverage tens of billions of dollars to the small business community. Once fully operational, Velda Sue would repay the government and would then be self-supporting from funds provided by the private sector.

I believe that this proposal is consistent with the Administration's objectives and hope it might become a key part of the Administration's economic program. I have spoken with Administrator Bowles about the issue and he seems quite intrigued. I plan to work closely with the Administration in the days ahead to make this new concept a reality.

Health Care

Let me spend a few moments on another major issue on the immediate horizon for small business--health care reform. There has been a lot of concern within the small business community about what it has to lose from such a proposal and the prohibitive costs any new mandate could impose. It is also true, however, that the small business community potentially has something to gain.

Many small businesses already provide health care coverage to their employees. But they do so in an environment in which exponential increases in cost make the provision of such a benefit an increasingly overwhelming burden.

A health care reform proposal that promises real cost containment would benefit many in the small business community and the economy as a whole. In addition, reforms that would permit small businesses to enter larger pools so that better and cheaper coverage could be obtained would also be of assistance.

But small business has much to lose as well. Many smaller firms have found themselves unable to provide health benefits because of exorbitant costs. Any arbitrary mandates that do not reflect the economic precariousness with which many small businesses live daily could drive good companies out of business and people out of their jobs at a time we can ill afford it.

I am hopeful that the Administration will be sensitive to the concerns of small business and will make every effort to accommodate those concerns in the formulation of its health care reform package. But this is a key area in which the voice of small business must be heard.


This is a new era for small business. I believe we have an Administration in place that understands how important small companies and the entrepreneurs who build them are to the economic fate of this country. That bodes well, not only for small business, but for our economic future.

Congressman John LaFalce (D-NY) is chairman of the House Small Business Committee.
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Title Annotation:Guest Column
Author:LaFalce, John J.
Publication:The National Public Accountant
Article Type:Column
Date:Aug 1, 1993
Previous Article:Capital investment analysis.
Next Article:The IRS and personal property rental income.

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