California Needs a New President Who Believes Small Is Economically Beautiful

Unlike George Bush, Bill Clinton comprehends the entrepreneurial forces driving America’s future industries. More than any Democrat in recent memory, he seems to under stand the implications of the fact that there are more business owners in America than union members. Accordingly, the President-elect has generally shunned the traditional anti-business rhetoric of the Democratic Party and assiduously courted chief executive officers from key growth companies. Many of these companies--Western Digital, Silicon Graphics and Calpyte Biomedical--are based in California.

As President, will Clinton tailor his economic strategies to the needs of these emerging growth companies? Or will he succumb to the powerful political voices calling for rehabilitation of the old economic order? For California’s sake, he had better think small- and medium-sized.

The new California economy is composed of sophisticated, often smaller manufacturing and service companies that have adjusted to the demands of global competition. The state’s textile industry, for example, now competes successfully in world markets. Four of the nation’s five largest biotech companies call California home.

The needs of these growth companies frequently conflict with those of larger, less dynamic firms, many of which are longtime members of the Fortune 500 list. Rather than Pentagon protectionism, environmental deregulation or corporate tax cuts, the usual agenda of high-salaried executives at declining firms, America’s high-growth companies want greater access to venture and other risk capital, tax incentives for research and development and an effective education system.

Formulating an economic policy heavily biased toward these companies is essential to job creation--and California’s business future. Between 1980 and 1991, the Fortune 500 types shed an estimated 4 million jobs nationwide, while small and mid-sized companies generated nearly 20 million new ones. The current run-up of unemployment, especially in California, is far more the result of slower growth among smaller companies than the headline-grabbing layoffs of big firms. Indeed, the smaller producers are creating fewer than one-quarter the number of new jobs monthly than they did during the 1980s.

Reflecting his interest in the new economy, Clinton’s policy package includes tax-incentive proposals to encourage research, for reduced capital-gains taxes to reward long-term investments, and for 170 manufacturing “technology extension” centers explicitly designed to improve the manufacturing skills of smaller companies. These policies would be important to growth companies because they invest heavily in capital equipment and constantly want to upgrade their technical expertise.

Unfortunately, there already are disturbing signs that a Clinton Administration, pressured by lobbyists for economic dinosaurs and traditional Democratic interest groups, might turn its back on the more competitive sectors of the economy--and California. For example, his plan to finance huge worker-retraining programs through a mandatory payroll deduction would severely sap the economic vitality and flexibility of smaller firms while almost certainly lining the pockets of less competitive, but politically connected companies. Small firms living on the edge of profit margins and investing heavily should not be asked to absorb a tax that mostly benefits larger companies. Transferring wealth from growing to declining companies could stall America’s return to economic health.

Clinton is also vulnerable to a different kind of economic argument. Some of his closest advisers and large multinationals are aggressively pushing the idea that only centralized, vertically integrated industries can compete in the global marketplace. These advisers want the new President to adopt European-style industrial policies that traditionally favor corporate giants over smaller, frequently more innovative companies. This approach, if adopted, would end up weakening the most vital, job-creating parts of our economy, while eroding our most significant competitive advantages.

The basic economic philosophy of the Clinton Administration will become clear within six months. If it forsakes the new economy for the old, America’s present business malaise will deepen, and Republicans eager to take back the entrepreneurial mantle will dream happy thoughts of retaking power. But a Clinton Administration true to its economic instincts will be capable of transforming his party into the champion of the nation’s emerging industries and pulling California out of the economic doldrums.