White House Watch: Free Lunch Fans

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DONALD T REGAN, the White House chief of staff, is good at cheap bravado. During a senior staff meeting one morning in early June, he announced that, contrary to a report in the Washington Post, the Reagan administration hadn't abandoned its proposal to eliminate the Small Business Administration. It will fight on, he indicated, against the SBA in an effort to slash federal spending and streamline the government. This is nonsense. After 18 months the administration is no closer to killing off the SBA. If anything, the agency is in a stronger position than ever, since its supporters in the so-called iron triangleCongress, the bureaucracy, and the special-interest communityare now fully mobilized. Too bad. The SBA richly deserves elimination. Created in 1953, it has the seemingly uncontroversial job of aiding small businesses, particularly those run by minorities, that are short on money and business skills. Its tools are loans, loan guarantees, and advice.

In fact, it doesn't transform the poor into entrepreneurs or help small businesses challenge big ones. Its budget this year is $934 million, but it furthers no public policy. Aside from the federal contracts that are "set aside" by the agency for minorities, women and blacks profit little from the SBA's programs. Instead it has become a source of pork barrel, a "petty cash drawer for members of Congress," in the words of Howard Kurtz of the Washington Post. For example, the SBA funds "small business development centers" at universities in the states of 18 of the 19 members of the Senate Small Business Committee. Its loan programs are a scandal. Republican bigwigs have abused it: Richard Richards, the GOP national chairman from 1981 to 1983, and Gerald Carmen, the former head of the Government Services Administration, were delinquent on loan payments in Reagan's first term. Those who have qualified in recent years as "disadvantaged"and thus eligible for SBA loans at a three percent interest rate include an Asian American doctor with a Mercedes and an annual income of more than $200,000, a black with a master's degree in finance and a net worth of $1.2 million, and a well-educated Hispanic who runs an insulation company and has a net worth of $2.4 million. According to John Bennett of Scripps Howard newspapers, under SBA's minority loan program Donald Nixon, a nephew of former president Richard Nixon, got $45,000, with which he bought a gold mine. The Los Angeles Times found numerous applicants who would seek bank loans at below-market interest rates knowing they'd be turned down. Then they would take the letters of refusal to the SBA and get cut-rate loans. Of course many loans are never repaid. In 1985 the agency swallowed $275 million in defaults and liquidations. That was a good year. This year $417 million in defaults and liquidations are expected. "But who knows how much it will really be," an SBA official says blithely. Why can't a president as ostensibly effective as Reagan get rid of the SBA? One reason is that much of his conservative constituency likes the agency. Many Republicans who talk about shaving back the federal government go limp on the subject of the SBA. They've found that boasting about the federal contracts that are put in minority hands is a painless way of showing they are concerned about blacks. More abstractly, who wants to be labeled a foe of small business? Not many politicians, including Reagan. He has praised "the jobs created and retained, the economic gains, and, yes, the additional taxes" generated by small business programs. When Reagan proposed elimination of the SBA in January 1985, not one of the 53 Republican senators stepped forward to sponsor legislation to that effect. This year five GOP senators (plus one Democrat) did, but Republican leaders are not pushing the bill. Why should they? The White House may say it's for killing the SBA, but Reagan never demonizes it in his speeches. He scarcely mentions it. This is no accident. lulling conducted for the White House found that small business is the most popular institution or person in the country. "Small business beats everything, even Ronald Reagan, who was second," says a White House official.

 

THE MAN BEHIND the bid to snuff out the SBA was not Reagan, but David Stockman, who was budget director until last summer. In late 1984, he writes in The Triumph of Politics, he scoured the budget "for spending cuts that would not poison the political environment or violate ironclad presidential commitments." The SBA, he says, "could be attacked on principle." It was, in the fiscal 1986 budget-The costly loan programs would be ended, and the SBA's other functionsombudsman for small business, procuring federal contracts for minorities, the 12,000-strong Service Corps of Retired Executiveswould be shifted to the Commerce Department. In early 1985 Stockman finagled support for the measure. The U.S. Chamber of Commerce wanted to keep the SBA alive while ending its loan programs, but Stockman persuaded Richard Rahn, the chamber's vice president and chief economist, to go along with elimination. Stockman told him that quibbling over the SBA's fate might jeopardize the entire $50 billion package of spending cuts. The chamber, which favored most of the cuts, endorsed the package. A few weeks later. Stockman worked out a different deal with John Sloan of the National Federation of Independent Business. In effect, he agreed to the proposal originally made by Rahn: preserve the SBA as an independent agency, but kill the loan program. Rahn was furious when he discovered he'd been double-crossed by Stockman. "I don't think I've ever sworn at a Cabinet level officer as I did that day," Rahn says. He did wangle a prize, though. Stockman, chagrined, quickly arranged to have both Reagan and Vice President George Bush attend the chamber's annual meeting.

TO SOLIDIFY his pact with the administration, Sloan s granted a personal meeting with Reagan. Still, the deal fell through. Stockman and Senate Republican leaders found themselves short of votes in spring 1985 for a budget resolution with deep spending cuts. Something had to go, and Senator Lowell Weicker, the Republican chairman of the Small Business Committee, was bent on protecting the SBA. Stockman had already clashed bitterly with Weicker on the subject. He spent days putting together copiously detailed testimony denouncing the SBA's loan practicesbefore Weicker's committee. It "reallocates funds away from more creditworthy firms to less creditworthy firms," Stockman said. Most of the loans go to firms in the crowded retail, wholesale, and service sectors, thus exacerbating the plight of struggling small businesses. "Millions of taxpaying small businesses face unneeded and uneconomic competition from bureaucratic clients who can't compete profitably, or at all, on a level playing field," he insisted. Weicker was unimpressed. Later, to get his vote for the budget resolution. Stockman relented and agreed to keep the SBA alive, in full flower. Stockman's successor as budget director, James Miller, revived the death-to-the-SBA proposal in this year's budget. Few take him seriously on this, even at the White House. "You can't expect conservatives to declare themselves enthusiastically for this after what happened last year," says an administration official. "There are lots of them in Congress who agree with us on the SBA, but they say it's an uphill battle, so why fight it? Besides, they're convinced the administration will back off again and leave them out on a limb." Nor do they want to squabble with the phalanx of interest groups with a stake in the SBA's survivalNational Small Business Association, Small Business United, Minority Association of Small Business Investment Companies, etc. The administration took one bold step at the SBA in 1986, replacing administrator James Sanders, who wanted to preserve the agency, with Charles Heatherly, a capable conservative. Heatherly was named acting administrator in April, thus maintaining the fiction that the SBA might soon expire. He riled its allies his first day by firing six of the ten regional directors. White House officials were irritated at Heatherly's rashness, but they stuck by him when Weicker accused him of dismantling the agency. Employees at the SBA's Washington headquarters knew better and stayed calm. "They'd figured out nothing is really going to happen," says Heatherly. Regan and budget officials still contend that the administration is intent upon eliminating the SBA. But a slow retreat has begun. The first move came in May, when officials quietly notified congressional leaders that they would concentrate on ending the wasteful loan programs, not on killing the SBA. Yet they know that Congress doesn't have any intention of terminating them either. "We're in a hopeless position," says a senior budget official. "We just don't have any support," adds a White House aide.

How will we know the White House has thrown in the towel? The signal will come when the White House nominates a permanent administrator for the SBA. In August the White House Conference on Small Business will beheld in Washington with several thousand delegates, many of them on record in favor of retaining the SBA. "It ought to be a very positive affair," says a White House official. He notes that the delegates are to discuss the litigation explosion, Davis-Bacon, the line item veto, and tax reform. But the White House is fearful the SBA's fate will overshadow these issues. "To have a secondary, mostly symbolic, issue black out the bright sun would be dumb," the official says. Given this thinking, the smart thing is to knuckle under and nominate a new administrator. Stranger things have happened.

This article appeared in the June 30, 1986 issue of the magazine.

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