Giving A Hand to Small Business; L. Fertig

Only now and then does a Bas tiat come among us, one who can discern a profound principle at work. Mostly we're plagued with would-be philosopher kings, men who are explicit and disarmingly persuasive. Yet, we are critically dependent on the kind of discern ment displayed by our French friend and on a healthy skepticism of the philosopher-king idea in its myriad .forms. Let man .confine himself to his own realm and never invade God's; freedom in transac tions will admirably serve us as the most efficient of organizers. ~ GIVING A HAND TO SMALL BUSINESS LAWRENCE FERTIG THE AMERICAN PUBLIC is natural ly very sympathetic to small busi ness. Everyone likes to see David victorious ()ver Goliath. The best way to help the little fellow is to remove from his back the load of taxes, work restrictions enforced by labor unions, artificial miniMr. Fertig is an economic columnist. This article appears by permission of Columbia Features, Inc.

mum wage laws, and other bur dens which now severely affect him. But even under these current restrictions thousands of small businesses, privately· financed and privately managed, have been very successful. Look through the Over the-Counter stock market and you will find there many glowing rec ords of success by small compa nies making fried chicken, elec1967 GIVING A HAND TO SMALL BUSINESS 539 tronics, hamburgers, special tools, and so on. But this record has been due in no way to government intervention by the Small Busi ness Administration (SBA). The Small Business Adminis tration in Washington has achieved an unenviable record. The SBA is probably the biggest flop of all government agencies employing Federal cash in an attempt to improve the economy by subsidiz ing special groups. This mus;t be considered a remarkable achieve ment considering the long history of failure by these agencies.

Conflicting Objectives One basic trouble with the SBA is that it tries to achieve two ob jectives which often defeat each other. On the one hand the SBA tries to "fight poverty." On the other it tries to help small busi ness grow and become more profit able. The result has been that poverty has not been noticeably relieved, and. millions of dollars of taxpayers' money has been wasted on loans to small business which never had a chance from the start. In the name of AntiPoverty the SBA has financed automobile repair shops, laundries, bakeries, hobby shops, pet shops, and the like. Frequently, these have been run by people with little experi ence and less talent. Many soon failed. In nearly all cases these businesses could not get commer cial financing because the chance of success was practically nil. An SBA spokesman said quite truth fully, "You've got to expect losses when you're fighting a war on poverty." This statement reveals a deep confusion. Most of these loans had little to do with fighting poverty.

To encourage small business (which is the other objective of SBA) this agency has financed what are known as Small Busi ness Investment Companies (SB IC's). These companies, private ly owned, are subsidized by gov ernment loans of up to twice their invested capital, at a low interest rate. They can charge off capital losses 100 per cent against current income. They can accum ulate earnings without incurring tax penalties. Stockholders of an SBIC get special tax privileges if they sell their stock at a loss they can deduct the loss from in come. A lot of people rushed to take advantage of this govern ment-financed gravy train - but the results were quite different from the anticipation. In March this year the SBA officially re ported that out of 732 such com panies, 232 were "problem" com panies ; 60 were in process of liquidating; 42 had lost more than half their private capital; and 13 540 THE FREEMAN September had lost more than half their pri vate and government capital.

Bernard L. Boutin, [then] Di rector of SBA, estimated in April that $50 million of the $242 million so far advanced by the Federal government to SBrC's would be lost. This is a sorry record. Much· of it could have been anticipated. As every businessman knows, it takes unusual ability to make a small business grow. Easy financing frequently induces sloppy man agement, and in many cases in ternal corruption. This is what happened to many SBIC's. Gov ernment cash freely distributed is not the way to stimulate sound private enterprise. In Case 01 Failure, Try More 01 Same Having produced this record of failure, what is the solution of fered by the SBA? It is the usual one offered by every government agency which is not successful after losing substantial Federal funds. Their solution is - more government money and an expanded program for Small Busi ness Investment Companies. The SBA sent to Congress at the end of May proposed legislation which would give these investment com panies greater access to Federal cash. "The average Small Business Investment Company," said Mr.

Boutin, "is much too small, much too limited in financial resources and management skills to do the job contemplated by Congress." So Mr. Boutin would raise private investment from the present $300,000 to $1 million, and he would increase maximum govern ment investment to $10 million from the present $4.5 million. In this plan there is no guarantee of "management skills" necessary to protect government cash. Many SBIC's have failed and they will again. The way to encourage small business is to relieve its back breaking load of high taxes and labor union restrictions on work. This is the form of Federal aid it needs - not government sub sidies. ~ Capital Punishment CAPITAL PUNISHMENT is when the government taxes you to get capital in order to go into business in competition with you, and then taxes the profit of your business in order to pay its losses. AUTHOR UNKNOWN GEORGE C. ROCHE III 4. PROSPECTS WIELDERS of power are destroying the world in the mistaken belief that they are improving it. Many men have experienced the tempta tion to remake the world. Some have hoped to build a happy and prosperous nation through the suppression of all traffic in alcohol.