for the average American small business, as well as for the great majority of average individual taxpayers." GOVERNMENT POLICIES AND THEIR EFFECTS ON SMALL ENTERPRISES These efforts are aimed at reversing the trend of neglect of the small business segment of the economy by decision-makers in the executive and legislative branches of federal and state governments. Prime examples of government policies discouraging enterprise which have emerged as a result include: 1. Taxes. Where the corporation income tax structure had not been revised since 1950, until it was temporarily altered for 1975-78 in favor of independent companies; and estate and gift tax laws whose limitations remained untouched from 1942 until revised by the Tax Reform Act of 1976; 2. Paperwork. The massive accumulation of federal and other governmental reporting burdens is typified by the #941 employment form which Congress has just voted to require annually instead of quarterly beginning in 1978. This one action alone will result in the elimination of a stack of paper almost 2 miles high each year; 3. Overregulation.-As exemplified by the nearly two feet of shelf space taken up by Internal Revenue Service regulations and the 330page regulatory manual originally distributed to small firms by the Occupational Health and Safety Administration. A recent report published by the Small Business Administration ("The Impact on Small Business Concerns of Government Regulations That Force Technological Change," September 1975) tabulated 47 federal consumer protection laws affecting business, 35 of which have been enacted since 1947. This list did not include environmental protection and pollution statutes. Compliance with these laws, especially the burgeoning rules and regulations, is commonly under short-term deadlines requiring additional investment of capital which produces no additional receipts for the business. 4. Lack of representation.-For small businesses in the governmental processes of developing regulations, forms, and technical rulings. The presence of small business spokesmen on existing advisory committees is token, and the establishment of separate small business advisory bodies is in its infancy. The proposed pension reporting forms of 1975, which were ultimately withdrawn, constituted a classic case of regulation out of control, conceived without meaningful input from the small business affected. 5. Virtual exclusion of small firms from public capital markets.The declining access of new and small companies shown by the above cited figures on registered issues and similar reductions in "Regulation A" offerings which shrank from 817 in the pre-recession year of 1973 to 240 in 1976, as tabulated in our Committee's recent Annual Reports. are striking. One consequence is that between 1969 and 1976, the size of the average registered equity issue rose from $4 million to $29 million. Letter to President Carter from Senator Gaylord Nelson, Chairman of Senate Small Business Committee, August 19, 1977. SCHOLARS SAY SMALL ENTERPRISE IS STILL ESSENTIAL Despite the magnitude and speed of change of every kind during the past three decades, however, the authors of the studies in this volume do not hesitate to affirm that the preservation and encouragement of small business is still valid and necessary public policy. On an economic level, there is ample evidence in these studies that small business produces a greater level of prosperity, better balance in the economy, innovative products and services, and a higher overall material standard of living. Whatever scant consideration the economics of small business have received in Washington, the social and political aspects, which are equally or more important, have received less. Small enterprise has contributed mightily to a glorious past. The material in these pages suggests that largely because of governmental indifference, such enterprise may be less a part of the present. And, it is on open question about whether, in the future, it will be merely pleasant folklore or living flesh-and-blood reality. Technological change during these years has been breathtaking. The Commerce Department and MIT studies show dramatically what new industries have been launched by the new technology. There may not be established doctrine at this point whether technology has created or destroyed more small business opportunities. But it is certain that technology and particularly innovations developed by individual inventors have made, and continue to make, life less backbreaking, healthier, more efficient, and more pleasant for the great majority of American citizens. Among the many contributions of small businesses are the cottonpicker, automatic transmissions, power steering, the airplane, the helicopter, the photocopier, insulin, penicillin, air-conditioning, the instant camera, the zipper, the self-winding wrist watch, dacron fiber, shrinkproof knitwear, the motel, franchise fried chicken, minicomputers, and hand-held calculators. The preponderance of inventions by small enterprise in such heavy industries as steel, aluminum and oil refining, as well as in light industry, trade, and consumer goods, is impressive (see document No. 17). Authors such as Mr. McCarthy (document No. 1) credit small business with the gratification of some of the most basic human needs as both producers and consumers, such as: Job satisfaction, motivation, pride in craftsmanship, individual freedom, the discipline of competition. The Mills Study (document No. 22) concludes that small business leads directly to a better quality of community life. Admiral Rickover, in a 1975 speech (document No. 9) related his experience suggesting that smaller firms tend to act more ethically: they understand it is up to them to please the customer and make a success of the work. This they do by paying close attention to the work itself. When confronted with problems, they do not seek bail-outs or subsidies or use influence in high places to get special privileges. I have found that small and medium size companies take a more responsible view toward their contractual obligations than the large ones. One reason for this is that market forces generally are more effective in restraining their behavior. They are also better able to perform a back-up role of providing new and alternative products when larger firms fail to do so. COMPARISON OF SMALL BUSINESS VERSUS BIG BUSINESS ENVIRONMENTS The common thread between views of sociologist Mills and anthropologist Goldschmidt in the 1940's (document No. 21) and scholar Owens (document No. 2) in the 1970's is striking. The Mills study of three pairs of the cities in 1947 found that: Infant mortality was considerably lower and per capita health expenditures higher in cities where small businesses were the predominant employers; Per capita public expenditure on libraries were 10 times greater and such expenditures on education were up to 20 percent greater in small business cities; Housing was superior in small business cities-home ownership was higher and there were one-third as many slums; Church membership was 7 percent to 22 percent higher in the small business cities. Mills gave a key role to the presence and characteristics of small business in his conclusion that the differences In the cases studies (were) due largely . . . to the domination of big business on one hand and the prevalence of small business on the other . . . that in (small business cities) civic spirit was more pronounced, more widely shared and more active. The economically independent middle class was more abundant (and this group) usually took the lead in the voluntary management of civil enterprises. Goldschmidt studied two towns in California-one surrounded by small family farms and the other in the vicinity of large industrial farming. His investigation disclosed Vast differences in economic and social life of the two communities (which) afford strong support for the belief that small farms provide the basis for a richer community life and a greater sum of those values for which America stands.... The study cited the following as evidence: Physical community facilities, such as streets, garbage disposal, sewer systems, are far greater in the small farm community. Schools are more plentiful and offer broader services in the small farm communities. The small farm town has more than twice the number of organizations for civic improvement and social recreation.... The small farm community supports two newspapers each with many times the news space carried in the single paper of the industrialized farm community. Churches bear the ratio of 2:1 between the communities. The author concluded that: The reasons seem clear that the small farm community is a population of middle class persons with a high degree of stability in income and tenure, and a strong economic and social interest in their community. Thirty years later, the Director of Foreign Policy Studies at Brookings Institution, Mr. Henry Owens, wrote a thoughtful column contrasting the condition of Kansas City and St. Louis, both river-front cities in the same part of the country, surrounded by rural areas, and having a similar political situation. Owens observed: St. Louisans are proud of their traditions and they wonder why the other city has fared better. The fact that Kansas City has a more active entrepreneurial class is an important part of the answer. Not even the most cultured, exciting and diverse city can survive without a talented business community which devotes its energy single-mindedly to growth and which renews itself from one generation to another. Keeping that community alive and well *** is the foundation on which all else rests. The history of these two great river cities underlines the lesson. IMPACT OF MERGERS Turning next to the question of structure of the economy, the Cabinet Committee study (document No. 16) and other statistics excerpted in this print (documents Nos. 9 and 13) chart the growth of both bigness and industrial concentration in American life. The Statistical Abstract informs us that in the last 15 years, the number of billion dollar corporations has increased from 28 to 137 and the share of after-tax profits of these billion dollar corporations has increased from 37.1 percent to 54.8 percent. The 1967 Cabinet Committee study further established that this era has witnessed the sharpest increase in mergers in modern industrial history, and that "mergers more than any other single economic factor explain the existing structure of many American industries. Most contemporary big businesses owe their relative size to mergeraccelerated growth." A careful examination of some of the consequences of this merger-fueled growth in the State of Wisconsin was made by Wisconsin Professor Jon G. Udell (document No. 15) whose findings include the following: -70 percent of the acquired companies had shifted their patronage (from local banks) to the financial institutions of the parent corporations. -70 percent of the acquired companies shifted from the use of local accounting firms. -75 percent of the acquired companies changed lawyers; only 25 percent retained the same local attorneys they used prior to the mergers. -Wisconsin suppliers of goods and services lost business through centralized purchasing of supplies on the part of the parent corporations. -55 percent of the merged corporations saw their growth rates decline after acquisition. -The decline in employment growth rates was greater among firms acquired by out-of-state companies than those acquired by in-state companies. Corporate gifts to charities between 1958 and 1968 increased half as rapidly for the sample of 30 merger-acquired corporations than for a comparable sample of 30 independent Milwaukee corporations. These behavior patterns of merged corporations strike at the roots of local self-sufficiency and vitality. Government policies in the tax and anti-trust areas appear to be central to these trends. EFFECTS ON POPULATION MOVEMENTS Statisticians have noted the massive migration of U.S. population from the rural areas and small towns to the large already overcrowded cities to the detriment of both towns and the cities. In this context, the decline of local business and family farms invites closer scrutiny. 31-717 O - 79 - 2 Social scientists have also examined small business difficulties at the social and psychological levels. Kurt Mayer, in the 1947 study included in this Print, observed, with respect to entry into business, that it is the amount of available capital which largely determines the choice. Therefore, when an entrepreneur's capital is small He finds himself barred from entering a number of industries where expensive equipment is necessary. (The data) show obstacles to the establishment of a small business enterprise are nearly insurmountable in certain industries, and that in other, although entry is easy enough, survival is the real difficulty Newcomers with limited capital resources are confined to those trades where profits are lowest and failure rates high-trades where entrance is easy, competition high and consequently, survival chances poor. . . . Thus, we have the phenomenon of a large number of small business competing for a small share of the industrial market. The trend has directly been for small business to become smaller and smaller and big businesses get bigger and bigger. SOCIAL AND PSYCHOLOGICAL CONSEQUENCES OF SMALL BUSINESS DECLINE Mayer also commented that in many cases the financial condition of the small business owner is little better than that of his employee, a fact verified by the Ray study (document No. 19). Mayer's most trenchant conclusions were on the social and psychological consequences of these trends on individual small business owners. Since the center of economic decision-making has migrated to a limited group of large corporations, the freedom of action of small businesses and their independence has generally declined. Mayer concludes Though the small entrepreneur clings desperately to the status symbol of business ownership, it is a status devoid of opportunities of selffulfillment. Economic satisfactions cannot fully repay the vanishing social and psychological rewards. This loss of social identity in enterprise is the crucial problem of small business. The author relates this problem more broadly to those of our society by stating: (This is) not peculiar to small business, for it is the major problem of industrial society as a whole. The small businessman shares his predicament with the modern industrial worker, with the white-collar clerical employee, and even with the vast majority of corporate executives, all of whom have no chance to fulfill themselves as responsible personalities. It is Mayer's opinion that any genuine solution to the problems of small business must come through a general effort to "solve the burning questions of human dignity, of status and function in our industrial culture as a whole.” Small business could seemingly provide part of the answer to these questions. But the small business sector has experienced great difficulty gaining recognition for their arguments. FACING UP TO THE QUESTIONS In view of The Washington Post editorial of September 18, 1976 (document No. 23A) and in the Committee's view, our society has not faced up to the questions of small business, competition, and industrial structure in any systematic manner. The issues raised in these studies deserve to be pursued by the Government, business, labor, the universities, and other decision-making |