The Economy: That Uneven Tide

Some economists like to compare the current advance to a rising tide—it lifts everyone's boat, enabling big and small business alike to prosper. The tide is still coming in strong: the Federal Reserve Board last week released record industrial production figures for June, and President Johnson personally announced "notable advances" for the second quarter in gross national product (a new record), nonfarm employment (another new record), and personal income. But the tide does not seem to be lifting everyone equally, and the Senate Select Committee on Small Business has just produced another, less pleasant nautical metaphor. As the committee sees it, U.S. small business is "floundering in the backwash" of the speeding economy, failing for the first time in modern business history to share proportionately in the nation's prosperity.

Chronic Lack. Before the current economic expansion began 41 months ago, small businesses—those firms with fewer than 250 employees—did more than half the business in the U.S. In the advance, however, the 4,600,000 firms that make up the small business community have accounted for little more than 40% of the $100 billion gain in gross national product and no more than 25% of the $130 billion spent on business expansion. The profits of small retailers and manufacturers are growing at less than half the pace of their big brothers; the number of small manufacturing firms has been declining since 1957. Wrote Democratic Senator William Proxmire, chairman of a small-business subcommittee, in his new book, Can Small Business Survive?, published last week: "Whether you are a butcher, baker or candlestick maker, you may be as extinct as the village blacksmith."

Both the National Small Business Association and the Small Business Administration insist that small business is doing well, and there is no doubt that it has profited by the expansion. But small business suffers from a chronic lack of cash and management skill—and those shortages hurt far more in these days of computers and tougher competition. Defense spending cutbacks have hit hard at small subcontractors; in the year ended last March, 118 electronics firms from Long Island to Los Angeles were forced to merge or liquidate because of the cutbacks. Small business also finds it harder to cut costs, since there is less to cut from; this is one reason that small businessmen have been turning away from manufacturing toward service industries, where costs are less and business is growing faster.

New Ski Lifts. U.S. big business in the past has operated much more closely to capacity in times of economic advance—thus enabling small business to meet much of the extra demand—than it is doing now. "This time," says William Butler, chief economist of the Chase Manhattan Bank, "small business is slower to catch up because of industry's extra capacity." But, adds Butler: "As the boom goes on, small business will feel it more and more." Even now, the expansive U.S. economy is generating new ski lifts, coffeehouses, dry-cleaning shops and motels at almost the same rate that it produces autos and chemicals for the U.S. consumer.