Raising an Army of Entrepreneurs

Arnold Schwarzenegger’s election could transform California’s political landscape in ways not seen since Howard Jarvis led a tax rebellion in the late 1970s. But unlike yesterday’s anti-tax movement, whose core was older Anglo homeowners, the forces assembling behind the new governor are chiefly drawn from the state’s small-business owners and the swelling ranks of the self-employed. And they are ethnically and racially diverse, because minorities own as many as one-third of all businesses in Los Angeles, San Francisco, Santa Clara and Orange counties.

Joel Fox, a Jarvis acolyte, dubs the emerging group “Arnold’s army.”

Fox’s new group, the Small Business Action Committee, appears to be one of several pro-Schwarzenegger grass-roots efforts among the state’s smaller businesses. It aims to fight any proposal to increase business property taxes and push for reform of workers’ compensation. At the same time, existing economic-development organizations and chambers of commerce are experiencing new vitality because, they feel, someone powerful in Sacramento is finally listening to them.

“There is more optimism now than I have seen in a very long time,” says Blaine Fetter, chairman of the San Gabriel Valley Economic Partnership and a local real estate developer. “I am seeing people renewing [lease] options when they come up because they think the governor can help make us more competitive.”

For many entrepreneurs, the best thing about Schwarzenegger, revealed in scores of conversations over the last month, is that he seems simpatico with their plight. As Bill Clinton was said to feel the average American’s “pain,” many small-business owners feel that Schwarzenegger, a self-made multimillionaire and immigrant, shares their aspirations.

By contrast, they see the progressive Democratic majority in the Legislature as sympathetic to European-style social programs. “We constantly are being told, ‘Well, they do that [mandate health coverage for employees] in Europe,” says Donald E. Rinaldi, president of MacDonald Carbide, a small San Gabriel Valley manufacturing firm. The problem, he adds, is that California has to compete against such states as Arizona and Texas, which have no interest in being European.

The governor’s budding entrepreneurial constituency not only presents a potential challenge to the entrenched welfare-state liberals who dominate the Legislature but also to the corporate establishment and socially conservative Republicans. Owners of companies with fewer than 500 employees and sole proprietors now number more than 2 million, roughly the size of union membership in the state. They also employ about two-thirds of all private-sector workers.

Yet, several factors could impede the flowering of this constituency. Small-business owners, no matter how enthusiastic they are about the new governor, generally don’t have a lot of time to devote to politics. Unlike labor unions and large corporations, which can support public-affairs bureaucracies, they cannot afford political operatives to make their case in Sacramento. “How can you spend enough time lobbying,” asks Gerald Shane, president of Qual-Pro, a South Bay electronics firm, “when you have a business to run?”

Another impediment is the wide range of economic niches inhabited by small businesses. High-tech, service and manufacturing companies have different, sometimes conflicting, interests. Traditionally, many have relied on trade associations, rather than business-advocacy groups, to push their agenda.

Finally, small-business owners and small-company executives, relative to their corporate counterparts, cover a wider spectrum of political opinion. There are Greens, traditional liberals, fiscal conservatives and social moderates, like the governor, and far-right conservatives.

Nevertheless, entrepreneurs are united in their desire to keep Sacramento, as much as possible, out of their lives. New regulations or mandates have more immediate business consequences for small firms than large ones. They can be the difference between survival and bankruptcy. Thus, workplace rules and workers’ compensation are rallying points, and Schwarzenegger has vowed to take these issues on, even threatening to go to the people to reform workers’ compensation.

The entrepreneurial constituency can only get stronger because the economic winds are at its back. Throughout the state’s last recession, the number of business incorporations continued to rise at a rapid rate, a sharp contrast to previous downturns. This year, new incorporations are running more than 2,000 a month more than in 1999, the height of the last boom. According to business-climate surveys conducted in Los Angeles and San Diego, many small businesses are poised to expand rapidly as the national economy gathers momentum.

At the same time, many economists have been struck by a strong uptick in the number of self-employed people, particularly over the last year or so. Michael Bernick, director of the state Employment Development Department, says the rising number of smaller firms and self-employed people reflects a reaction both to corporate downsizing and legislative attempts to impose additional mandates on companies with large numbers of employees, as well as the state’s entrepreneurial culture.

On a grass-roots level, greater regulation may spur the growth of the “informal” underground economy, which, by some estimates, employs as many as 14% of workers in urbanized areas like parts of Los Angeles County. As has been the case in many developing countries, some less-educated immigrant entrepreneurs may find it far easier to start businesses underground than submit to the paperwork, licensing and regulatory burdens required by Sacramento.

One unwitting recruiter for Arnold’s army may be the Legislature. In general, smaller companies, whether in manufacturing or services, have proved impervious to union organizing. The Democrat-dominated Legislature, on the other hand, is widely seen as union-friendly. To the extent that the Legislature continues to push for more pro-union marketplace regulation like SB 2, which requires companies with as few as 20 employees to offer them health insurance, it may turn small-business owners, many of whom are still Democrats, into independents or even Republicans. Centrist Democrats like Bernick see this dynamic as a long-term threat to the party. It is noteworthy that nearly one-third of Democrats supported Republicans in the recall vote.

The increasing numbers of Latino and Asian entrepreneurs also could weaken the Democrats’ hold on minority voters. Many Latino small-business executives are particularly bitter at the unwillingness of local elected officials -- notably Fabian Nunez, the new Assembly speaker -- to deal with such issues as workers’ compensation, which disproportionately affect their companies.

“There’s a big disconnect,” says Araceli Gonzalez, human resources manager of LuLu’s Dessert, a Latino-owned food processor in Vernon that has laid off workers because of soaring workers’ comp costs. “For [many Latino legislators], it’s just about unions. But in our district, most people work for small firms that don’t have unions. If you’re not in a union or collecting welfare, [they don’t] care.”

By contrast, Gonzalez says, Schwarzenegger appears to be someone who “understands us.”

Big business may write some checks, but to defeat Democrats who are in the Legislature, especially after the budget compromise fades into memory and next year’s fiscal deficit becomes pressing, the governor will need a grass-roots army to keep them at bay. On such issues as regulatory relief and workers’ compensation, it will probably be prolonged trench warfare between Schwarzenegger and liberal Democratic legislators. The governor already faces a generally unfriendly mainstream media, and the unions, trial lawyers and pro-regulatory advocacy groups have yet to get serious. As the state’s small business constituency enlarges, it could supply the shock troops that can allow the new governor to reshape the political landscape of the Golden State.