AS THE ECONOMY wrenchingly declines, Washington has turned its gaze increasingly towards the entrepreneur as the nation's last best hope for economic revival.
"You meet heroes across a counter," Ronald Reagan proclaimed in his inaugural address. ". . . There are entrepreneurs with faith in themselves and an idea who create new jobs, new wealth and opportunity."
Gary Hart, the Colorado senator who is a darling of the neo-liberals, says one of the key ideas of his economic program is to encourage "new entrepreneurial frontiers."
Even old-line liberals like Walter Mondale have been busily courting entrepreneurs. Not only did he hold an "entrepreneurial seminar" in Washington, he trekked to Silicon Valley last summer to meet with the likes of Charles Spork, president of National Semiconductor, Robert Noyce, founder and vice chairman of Intel Corp., and Steve Jobs, founder and chairman of Apple Computer.
But even as the politicians trumpet their newfound buzzwords about the entrepreneurial spirit, it has become painfully clear to the entrepreneurs themselves that the national political leadership understands little about who they are and what they need.
They are deeply disappointed in Ronald Reagan, a politician they hoped would break the mold by actually helping them, as he promised he would. Instead, Reagan's fiscal and monetary policies are driving thousands of them to bankruptcy.
"We're bleeding in so many places and Washington isn't providing us with any answers," claims Mel Boldt, president of the 220-member Illinois Independent Business Association and owner of a small Chicago-area machine shop. "It's like a rat being forced into a corner -- we've got to bite back. When you drive an entrepreneur to the brink of losing his business, you're threatening his life."
This festering resentment among entrepreneurs is not aimed just at the nation's political establishment. It extends to the leaders of the entrenched Fortune 500 companies who have long possessed the dominant business voice in the corridors of power. Pushed to the wall by economic circumstances, a major schism is widening between the two great capitalist groups -- the entrepreneurs and the corporate bureaucrats -- which could alter the shape of American politics.
Many entrepreneurs, particularly the founders and owner-operators of growing firms, increasingly regard the bulk of the nation's giant corporations as lumbering bureaucracies that have lost the creative, competitive drive that accounted for their growth in the first place. After granting the exceptions like Hewlett-Packard, 3M, Texas Instruments and IBM, entrepreneurs associate big business today with companies like U.S. Steel and Chrysler, whose very economic survival has become inextricably linked to protectionist legislation and tax breaks guarded by their friends in Washington.
"The big guns have no credibility anymore," maintains George Hatsopolous, founder of Thermo-Electron, a Waltham, Mass., high-tech firm, and a key member of the entrepreneur-oriented American Business Conference. "We are the only hope left in this country.
"The big companies have thrown up their hands in the battle and surrendered. Now it's up to the small and mid-sized companies to take over leadership and educate both the Congress and the public."
To entrepreneurs like Hatsopolous, Washington's longstanding tilt towards big business makes little economic sense. They note that small and mid-sized firms created some 70 percent of all new private-sector jobs during the last decade, while employment among the nation's 26 largest companies barely remained even.
Although many of these new jobs are in the service sector of the economy, perhaps the most dramatic contributions from entrepreneurs have come in manufacturing, the critical source of the nation's unemployment and trade problems.
Even in generally depressed industries like steel, where some 30 percent of a once 400,000-strong work force has been laid off, entrepreneurial "mini-mills" such as North Carolina-based Nucor's have enjoyed strong sales and employment growth. In fact, during the last 15 years, these energy-efficient, technologically sophisticated mini-mills that specialize in serving local markets, have increased their share of domestic steel production from 3 percent to more than 15 percent of the national total.
Equally important, as big steel companies continue to lose market- share to foreign competitors, the mini-mills have been able to blunt and even reverse that penetration of local markets without resorting to government import quotas.
Even more dramatic have been the contributions made by the nation's entrepreneurial high-technology companies. During the past decade, northern California's Silicon Valley, home to thousands of high-technology entrepreneurial firms, has become the nation's most prolific producer of new manufacturing jobs, adding over 25,000 annually. Across the continent in Massachusetts, small and mid-sized high-technology firms have sparked a remarkable industrial renewal that now accounts for over 250,000 manufacturing jobs.
If they had their wits about them, the Democrats could reap tremendous benefits from a developing split between the entrepreneurs and the Republican-oriented big business bureaucracies. But even those trendy "neo-liberals" or "Atari Democrats," who so loudly proclaim their admiration for entrepreneurs, seem utterly incapable of addressing their needs.
Swept away by their own post-industrial fantasies, the Atari Democrat public-policy gurus have put together a program calling for federal targeting of "future-oriented" industries such as computers. But these proposals leave most entrepreneurs stone cold, including those very high- technology executives who would theoretically gain most from such federal largesse.
"I guarantee you that no government agency can target the right industry; in fact, I'll almost guarantee they'll target the wrong one," says Nolan Bushnell, the California entrepreneur who founded Atari. "The targeting role belongs to the entrepreneurs. The problem is that these Atari Democrats would never have targeted Atari."
Unfortunately, this lack of appreciation for the creative, often unpredictable role of entrepreneurs in shaping new industries increasingly characterizes the set of policy recommendations from some of Reagan's leading liberal critics.
Among the worst ideas now gaining currency among Democrats is in the proposal to revive the Depression-era Reconstruction Finance Corporation (RFC). This proposal, promoted by influential New York investment banker Felix Rohatyn and recently introduced in Congress by House Democrats, would set up a board to dispense government- backed loans to selected industries.
Like the schemes of the Atari Democrats, the RFC proposal grows out of the deeply mistaken notion that public policy experts and politicians are somehow best suited to steer capital into the proper industries. Although the RFC clearly had an important role to play in the Depression years and during the mobilization for the Second World War, its post-war record was clouded by political favoritism and corruption, leading to its abolition in 1954. It seems logical that, under today's conditions, any attempt to revive the RFC would only produce a similar travesty.
Equally ominous for entrepreneurs have been the growing protectionist rumblings in Congress, capped by recent House passage of "domestic- content" legislation meant to penalize Japanese car makers. Six of the seven leading Democratic presidential candidates, including some of the most ardent boosters of entrepreneurism, supported this proposal, demonstrating utter disregard for the fundamental competitive principles which drive most entrepreneurs. "Protectionism is not the answer to our long-run problems in this industry," observes Tom Sigler, president of the Continental Steel Corporation, a recently organized mini-mill-type operation in Kokomo, Ind., a town with nearly 20 percent unemployment. "Meeting the competition, getting the elements together to meet it, that's what made this country. All those foreign people are doing is taking a page out of our book and doing it better. If we can't get ourselves ready to meet the challenge, we're the fools and deserve to lose. And I hate to lose."
In addition, for many entrepreneurial firms, particularly in the high-tech field, protectionism jeopardizes crucial foreign markets necessary for sustaining their fast growth. According to a recent GAO study of 72 young venture-capital-backed firms, more than 15 percent of their total sales, worth $900 million, were to overseas customers.
"When American or Japanese entrepreneurs are protected by the government, the price goes up, the quality goes down and the adrenalin of competition gets drained," said Randy Knapp, chairman of Wespercorp, a Tustin, Calif., computer-parts firm with expanding markets in Japan and Europe. "Protectionism is bad business for us."
On protectionism and so many other issues, entrepreneurs must now face off against a broad array of entrenched interests including both declining industries, such as autos, and those unions which have been so tragically linked to their fate. With the exception of such foward-looking unions as the Communications Workers, organized labor has consistently lobbied within the Democratic Party for positions anathema to entrepreneurs.
"Ever since Roosevelt, the Democrats have fostered the big corporate state," explains Walter Stults, president of the National Association of Small Business Investment Companies (NASBIC) and for 30 years a leading Washington advocate for entrepreneurs. "They always see themselves getting together with a few labor leaders, a few guys from the Fortune 500, and making economic policy. Up until recently, they haven't even bothered to include the entrepreneur."
To combat what Stults describes as "a coalition of the bigs," entrepreneurs must now set out to organize themselves into an independent, coherent political force on the national scene. To accomplish this, however, entrepreneurs will have to overcome the very individualistic -- even egocentric -- impulse central to the entrepreneurial character.
"The nature of these folks is very diverse," comments John Rennie, founder of Massachusetts-based Pacer Systems Corp. and president of the 1,500-member Smaller Business Association of New England (SBANE). "We have our share of high-techers and low-techers, extreme liberals and extreme conservatives. You take a look at them and say, 'Damn, how do you build a constituency out of such a motley group?' "
Despite these problems, entrepreneurs are beginning to develop a new political consciousness and the organizational muscle to make it count. Nothing was more important in pushing them forward than the 1969 doubling of the capital-gains rate by the Congress, a move which dried up sources of venture capital for new- business development and expansion. Entrepreneurs trying to reverse the capital-gains legislation soon found they were fighting a lonely battle, facing both the active opposition of traditional liberals and the indifference of corporate lobbies such as the Business Roundtable.
Most severely affected by the capital-gains increase were the nation's young, high-technology companies who watched their prime sources of capital dry up as their Japanese competitors used their ample supplies of long-term bank credit to develop their products and deeply penetrate high-technology markets around the world, including in the United States.
Driven to desperation, a coalition of entrepreneurial groups, led by the 1,900-member American Electronics Association (AEA) and especially its then-board member, Edward Zschau, lobbied hard to reduce the rate.
In 1978 AEA and its lo allies on Capitol Hill, including the late Republican congressman William Steiger, overcame staunch Carter administration opposition and succeeded in winning a capital-gains reduction. This entrepreneurial victory -- which helped stimulate an increase in venture capital from a mere $10 million in 1975 to over $1.3 billion last year -- contributed to the rapid development of such high-technology firms as Apple Computers, Genentech and Tandem. It also convinced entrepreneurs, most of whom have an instinctive distaste for politicians and government, of the importance of building a strong political presence in Washington.
"About then, entrepreneurs began to realize the problem was the government and politicians, not the Japanese," recalls AEA chief Washington lobbyist Ken Haggerty. "We realized we were in a fight with big business and everyone else over allocating the pie. It changed some attitudes real fast."
Over the last few years, this change of attitude among entrepreneurs has led to the formation of new, independent-minded groups such as the American Business Conference (ABC), a coalition of some 85 mid- range ($25 million to $1 billion in annual sales) growth companies.
ABC, AEA and other entrepreneur-oriented groups have battled such powerful organizations as the Business Roundtable over issues like the "safe-harbor leasing" provision in the 1981 tax bill which ABC president Jack Albertine characterizes as unfairly tilted toward Fortune 500 companies and declining industries. Over the next few years, Albertine believes, Washington will be the scene of a growing conflict between growth companies and the corporate dinosaurs who make up so much of the Fortune 500 today.
"The corporate bureaucrats are interested only in retaining their earnings and big salaries while our guys are into equity and expansion," Albertine, an economist, charges. "It's basically boiling down to a question of perspective and power. Over time, I think it will become clear that the balance of power is shifting away from those big, old companies and towards us."
But before entrepreneurs can expect to acquire significant political power, they must find a way to further develop their organizational strength, particularly in terms of campaign fund raising. Equally important, entrepreneurs need to adopt a clear-cut economic program which can offer hope to the rest of the nation.
Although this is not the place to spell out in detail an entrepreneurial economic plan for America, it is possible to lay out some of the fundamental ideas which are likely to reflect the views of most entrepreneurs. Among the most basic are:
A major revision of the tax code. Traditionally, tax laws have favored large corporations with powerful lobbies as reflected in the 1981 safe-harbor leasing provision, which allowed large, unprofitable companies to sell their tax breaks. That, along with accelerated depreciation and other measures, allow giants like General Electric to pay negligible taxes. Growth companies, like the members of the American Business Conference, consistently pay twice the effective tax rate of the nation's top-100 firms. Tax policy should encourage the entrepreneurial process by eventually eliminating capital gains for investments in entrepreneurial businesses. A good immediate step would be to reduce the current 28-percent capital-gains rate for corporations down to the 20 percent rate prevailing for individuals, thereby accelerating the flow of venture funds from cash-rich institutions to small and mid-sized companies.
Allow companies to earn up to $500,000 in profits before paying any corporate income tax. Such a change could greatly enhance the ability of small firms to grow in the crucial years before they can easily get at public equity and private venture capital markets.
A far-reaching reform of the nation's banking system. Deregulation has so far concentrated only on the deposit-gathering side of the equation. New money-market certificates last month netted gs loiants like Chase Manhattan over $50 billion, but the reform did little to encourage banks to loan more to entrepreneurial firms. In addition, an unspoken rule among American bank regulators discourages banks from making big enough loans to high-growth firms. In America, an entrepreneur can borrow at most $4 against every dollar of equity in his business -- a formula left over from the Great Depression that doesn't allow for the kind of extraordinary growth some of these companies can achieve. Japanese firms can borrow as much as $20 against $1 of equity, depending on how promising the new industry appears.
An expansion of the research- and-development tax credit. Current provisions favor a giant corporation which can spend large sums on expensive equipment for research. This discriminates against smaller firms who tend to spend most of their R&D monies on salaries for creative personnel. A reform allowing small companies to write off their salaries for R&D workers would greatly enhance this nation's technological development since small and mid- sized firms produce from four to 24 times more innovations per research dollar than Fortune 500 corporations, according to the National Science Foundation.
A major federal effort to train workers for new industries. Even under current depressed circumstances, small, innovative firms lack the key personnel they need, such as computer programmers, assemblers and technically oriented sales people. Unlike large companies that have the ability to pay for such training, small and mid-sized firms need some expanded tax credits to train these vital workers. They also need vastly improved technical education in the nation's schools.
Of course, even if the various elements of the entrepreneurial community can unite behind such an agenda, the chances of getting these proposals through Congress in the immediate future are small. But entrepreneurs are a remarkably persistent lot. Aroused, they could give Washington a political jolt.
"You know, we entrepreneurs have one real advantage over everyone else -- we're too dumb to know what's impossible," asserts Edward Zschau, a former AEA official and electronics-company entrepreneur recently elected to Congress from the Silicon Valley. "We are people who have succeeded because we didn't know we could fail. We have spent our lives being told the things we wanted to do were impossible but we've always found a way to make it happen."