Message to the Congress Transmitting the Annual Report on the State of Small Business

To the Congress of the United States:

This seventh report to the Congress on the state of small business continues the positive story of earlier messages. Small businesses continue to make significant contributions in expanding industries and in new job growth. Industries dominated by small firms created 1.3 million new jobs in 1987; over 600,000 businesses were incorporated. As the American people enjoyed the longest peacetime expansion in our history, the overall trend for small business remained clear: low interest rates, steady growth, and stable prices have allowed small businesses to thrive.

It is a pleasure to report that the small business news continues to be good news. A wider appreciation of the innovation, the competitive strength, and the quality of life that small firms bring to our economy is an important goal for all who are interested in the long-term economic health of our Nation. We need to understand the small business sector because ignorance of its contributions and inattention to the effect of government activities on it will result in policies that squelch the vitality of small firms.

Over the last 7 years, the policies of this Administration have dramatically improved opportunities for the millions of men and women who are our entrepreneurs. Inflation, which ran at double-digit rates in 1979 and 1980, has averaged 3.3 percent since the recovery began. The prime interest rate, which was 21.5 percent just before I came to Washington, has been below 10 percent for almost 3 years. Lower tax rates, reduced regulation, and streamlined government have made our small business economy the envy of other nations.

The continuation of this strong small business record is a national priority. There is still much to be done. Important changes in Federal policies can further increase the opportunities for businesses to start up and expand. At the same time, we must be wary of proposals that directly attack the flexibility, adaptability, and innovative abilities of small business. If we saddle employers with excessive burdens of economic and personal risk, if we direct the Nation's savings to excessively high levels of government consumption, if we fail to provide opportunities for coming generations of entrepreneurs, then our economic leadership is clearly at risk.

We have made choices in this Administration, choices in favor of innovation, in favor of private enterprise, and in favor of jobs for millions of men and women. In fact, since 1980, the private sector of our economy has produced 13.8 million new jobs. A majority of these jobs have been in small businesses, whose constant testing of new markets, new ideas, and new ways of doing things assures our future strength. Policies to allow this activity to flourish have been the cornerstone of our economic agenda.

Tax rates have been slashed, leaving more resources in the hands of millions of Americans who operate or invest in small businesses. Business tax rates are at their lowest level since 1941; individual rates, which apply to the greatest number of small business owners, are at their lowest since 1931. Changes in tax rules have reduced the impact of tax-induced acrobatics on business decision-making. Estate-tax reform has allowed thousands of familyowned businesses to stay under family ownership.

Continued deregulation in transportation, communications, and financial services has allowed thousands of new firms to flourish and many thousands of new jobs to be established as firms discover new markets and better ways of performing old tasks. Elimination of many hours of Federal paperwork has allowed business managers to devote more of their valuable time to managing the business. With improved economic analysis, pursuant to my Executive Order No. 12291 and the Regulatory Flexibility Act, millions of dollars in regulatory costs have been avoided or eliminated. In hundreds of individual regulatory proceedings, we chose to reduce regulations, to search for alternatives that promote responsible, independent decisions by businesses. We chose not to believe that blind faith in the efficiency of regulation is the only answer to society's problems.

Reforms of our Federal procurement system have opened up new opportunities for small businesses to compete and have ensured that the government is a responsible business partner. Today, we do a better job paying our bills on time, and we draw on small businesses for a greater share of the $380 billion of goods and services purchased in 1987 by the Federal Government. This increased competition in Federal procurement assures us that tax dollars are spent more wisely.

The emergence of the private sector as a major provider of research and development support is one of the most important developments in science and technology in the last two decades. Approximately onehalf of U.S. R&D expenditures are funded by private sources, up from about one-third in 1965.

We have sought to draw on the energy of firms large and small. The Small Business Innovation Development Act, the National Cooperative Research Act, and the creation of a tax credit for research and development expenses have refocused efforts to develop new products and ideas. Reductions in patent fees for small firms and steps to automate the patent system are making it simpler for small companies to protect their inventions.

I count as one of the central accomplishments of this Administration the shift in the debate on these issues. The steps we have taken to improve the small business climate reflect a new and broader understanding by policymakers. Affordable credit, stable markets, simpler Federal regulations, and lower tax rates all combine to benefit thousands of people whose days—and sometimes nights—are occupied in pursuing their individual entrepreneurial dreams.

Much remains to be accomplished on the small business agenda. Many of the policy changes recommended by delegates to the 1986 White House Conference on Small Business are still before us. All of us must work hard to ensure that past gains are solidified and expanded.

Small business concern about the size of the Federal deficit is as warranted today as it was during the White House Conference in August 1986. I welcome small business support for a line-item veto, and I hope that the Congress will give future presidents the same authority that 43 governors have to pare the fat out of massive appropriations bills.

Similarly, our budget process needs the discipline of a constitutionally required balanced budget. Small business owners understand this, and I invite the Congress to join me and the plurality of Americans in supporting such a measure. A government that lives within its means will free billions of dollars in private resources for yet greater small business growth.

Progress in reducing Federal spending will allow more firms, large and small, to expand into world markets, a necessity as our economy becomes increasingly interconnected with those of other nations. Negotiations to reduce trade barriers around the world are underway. Small business owners will find considerable opportunity in new markets opened by the historic trade agreement we have signed with our largest trading partner, Canada. Legislative approval of the agreement with Canada and success in other negotiations will reduce tariff and other barriers to American products and expand opportunities for our service and agricultural sectors. Our economy is increasingly integrated into the world economy; we need the resources, talent, and energy of small business to meet the competitive challenges ahead.

In addition to reducing barriers to trade among nations, we need to make sure that our domestic laws and regulations do not themselves act as barriers to increased competitiveness. Small business owners have felt the effects of such constraints quite sharply, and the small business agenda highlights the types of policies we must work toward. For example, product liability reform has been an important goal of both small firm owners and this Administration.

The Congress currently has before it several bills that aim at the heart of independent business decision-making. These are bills that layer rules, mandates, and employer obligations on top of each other in an effort to regulate the relationship between employers and their workers. Federally mandated leave and health care, duplicative notice requirements on workplace safety, advance notice of layoffs and plant closings or across-the-board increases in the minimum wage combine to limit the flexibility that is the strength of small firms and indeed the strength of our economy. Uniform, inflexible Federal requirements are not the best answer to the issues these bills address.

I urge the Congress to listen to the small business owners who have increased overall employment so dramatically, who have produced a disproportionate share of innovations, and who make our economy different from, and more lively than, that of other nations. Government did not create these jobs or produce these innovations. It cannot be presumed that this national resource-small business—can continue to flourish as it has in the past if it is overly burdened with mandates and obligations or with excessive taxation and regulation.

The report that follows, prepared by the Small Business Administration, details the latest information available on the state of the small business economy. It encourages all of us who have a hand in shaping Federal policy to redouble our efforts to ensure that all Americans who wish to can turn ideas and dreams into businesses and jobs.

RONALD REAGAN

The White House,

May 9, 1988.