Save America’s Small Businesses

Economically and socially disadvantaged firms are currently under pressure from all sides.

Attendees listen as Federal Reserve Chairwoman Janet Yellen speaks during an event hosted by the Small Business Administration at the U.S. Chamber of Commerce on May 15, 2014 in Washington, DC. 
National Journal
Oct. 3, 2014, 1:56 a.m.

Our na­tion’s grow­ing eco­nom­ic in­equal­ity re­ceives sig­ni­fic­ant at­ten­tion in pub­lic policy de­bates and in na­tion­al me­dia, with most people fo­cus­ing on the labor side of eco­nom­ic in­equal­ity. To some de­gree, this makes sense when so many work­ers struggle to make ends meet.

But this fo­cus ig­nores the fact that wealth in Amer­ica is not usu­ally cre­ated through wage labor but through build­ing busi­nesses. If we are to truly ad­dress eco­nom­ic in­equal­ity, we need to em­phas­ize ef­forts to en­cour­age and grow busi­nesses. In par­tic­u­lar, we need to do more to fo­cus on busi­nesses run by those who come from his­tor­ic­ally dis­ad­vant­aged com­munit­ies.

Since the 1950s, the fed­er­al Small Busi­ness Ad­min­is­tra­tion has worked to grow and strengthen small busi­nesses, es­pe­cially through the use of fed­er­al con­tract­ing op­por­tun­it­ies. One of the key pro­grams op­er­ated by the SBA is the 8(a) Busi­ness De­vel­op­ment pro­gram. This pro­gram as­sists firms owned by in­di­vidu­als (and com­munit­ies) that are de­term­ined to be both “eco­nom­ic­ally and so­cially dis­ad­vant­aged.”

The pro­gram provides par­ti­cipants with re­sources to grow their busi­ness through pro­fes­sion­al coun­sel­ing, and it provides a smal­ler pool of com­pet­it­ors for fed­er­al con­tracts. Firms can also re­ceive ne­go­ti­ated dir­ect awards to help grow and build past per­form­ance. This is de­signed to provide ex­per­i­ence to these grow­ing busi­nesses so that at the end of the nine-year pro­gram, it cre­ates more suc­cess­ful busi­nesses that can com­pete in the mar­ket­place.

The de­vel­op­ment pro­gram provides a strong op­por­tun­ity for eco­nom­ic­ally and so­cially dis­ad­vant­aged in­di­vidu­als. The defin­i­tion of “eco­nom­ic dis­ad­vant­aged” is spe­cif­ic, but “so­cially dis­ad­vant­aged” does al­low some flex­ible con­sid­er­a­tion by the SBA. They key is that the in­di­vidu­al meet not only the defin­i­tion of be­ing from a dis­ad­vant­aged group, but that she her­self is also eco­nom­ic­ally dis­ad­vant­aged. It does not guar­an­tee suc­cess, but in­stead pro­motes en­tre­pren­eur­ship for in­di­vidu­als who are not typ­ic­ally rep­res­en­ted in the 1 per­cent.

This would seem to be a win-win for the gov­ern­ment: provide the pro­ver­bi­al hand up in ex­change for goods and ser­vices. And the pro­gram has shown suc­cess. There are cur­rently more than 5,000 firms in the pro­gram, and cu­mu­lat­ive rev­en­ues for 8(a) firms totaled more than $30 bil­lion. For fisc­al 2013, the gov­ern­ment sig­ni­fic­antly ex­ceeded its stat­utor­ily man­dated 5 per­cent goal for the 8(a) pro­gram. Con­tract rev­en­ue totaled 8.62 per­cent. This rev­en­ue helps the own­ers build wealth and cre­ate jobs sim­ul­tan­eously

However, a com­bin­a­tion of leg­al cases and trends in the mar­ket, in ad­di­tion to de­cisions made by Con­gress, are slowly threat­en­ing to un­der­mine and po­ten­tially undo the pro­gram. As a res­ult, the key pro­gram that aims to help small busi­nesses owned by dis­ad­vant­aged in­di­vidu­als may go the way of the di­no­saurs and with it one tool to fight eco­nom­ic in­equal­ity.

Be­cause over­all dol­lars spent on con­tract­ing de­clined in 2013, the gov­ern­ment spent more money on 8(a) con­tracts in fisc­al 2012 than in 2013, des­pite a high­er per­cent­age last year. The cause of the de­cline in con­tract dol­lars is a con­flu­ence of factors, in­clud­ing fo­cused ef­forts to spend more ef­fi­ciently. However, the blunt tool known as se­quest­ra­tion is im­pact­ing gov­ern­ment con­tract­ors, in­clud­ing small busi­nesses. While the con­gres­sion­ally cre­ated policy zom­bie is tem­por­ar­ily de­tained, it could rise again with fu­ture budget battles on the ho­ri­zon.

Few­er dol­lars to spend means small busi­nesses face a tough road, and likely will see a de­clin­ing pie of avail­able small busi­ness dol­lars, even if the gov­ern­ment meets its per­cent­age based goals.

There are still lar­ger threats to the bot­tom line than se­quest­ra­tion—and pro­grams that sup­port eco­nom­ic­ally and so­cially dis­ad­vant­aged busi­nesses—in pending court cases.

Two years ago, the U.S. Dis­trict Court for the Dis­trict of Columbia ruled in Dy­anaLant­ic v. De­part­ment of De­fense et. al that the 8(a) pro­gram was gen­er­ally con­sti­tu­tion­al, but its use in a spe­cif­ic in­dustry was un­con­sti­tu­tion­al. The court ruled that be­cause the fed­er­al gov­ern­ment did not prove that com­pan­ies had ex­per­i­enced dis­crim­in­a­tion in that spe­cif­ic in­dustry (mil­it­ary sim­u­lat­or man­u­fac­tur­ing to be spe­cif­ic) use of the 8(a) pro­gram was un­con­sti­tu­tion­al.

Both the plaintiff and the gov­ern­ment ap­pealed that de­cision, but it even­tu­ally settled early this year. The set­tle­ment pre­cludes use of the 8(a) pro­gram in the mil­it­ary sim­u­lat­or man­u­fac­tur­ing in­dustry “without ar­tic­u­lat­ing a strong basis for do­ing so.”

An­oth­er case may have broad­er con­sequences on the pro­gram. Rothe De­vel­op­ment Inc. v. De­part­ment of De­fense and SBA, chal­lenges the con­sti­tu­tion­al­ity of the en­tire 8(a) pro­gram. Rothe ar­gues the ra­cial com­pon­ent of the 8(a) pro­gram is un­con­sti­tu­tion­al be­cause it pre­vents the com­pany from com­pet­ing with 8(a) firms on an equal basis, vi­ol­at­ing its equal pro­tec­tion rights. Un­like the Dyn­aLant­ic rul­ing that ruled the pro­gram un­con­sti­tu­tion­al in a spe­cif­ic in­dustry, Rothe chal­lenges the en­tire pro­gram on its face. Rothe is be­ing con­sidered by the same court that con­sidered Dyn­aLant­ic.

The out­come of the case could have a pro­found im­pact on small-busi­ness goals for the fed­er­al gov­ern­ment. The out­come could also im­pact and add to the dis­cus­sion of eco­nom­ic in­equal­ity in the United States. If wealth is cre­ated through busi­ness own­er­ship, and the gov­ern­ment can no longer run the 8(a) pro­gram that spe­cific­ally tar­gets eco­nom­ic­ally and so­cially dis­ad­vant­aged busi­nesses, its abil­ity to ad­dress eco­nom­ic in­equal­ity is hindered.

The fed­er­al gov­ern­ment is re­quired to spend 23 per­cent of its con­tract budget on small busi­nesses. It is re­quired to spend 5 per­cent on eco­nom­ic­ally and so­cially dis­ad­vant­aged firms. In 2013, 8(a) con­tract rev­en­ue ac­coun­ted for 8.6 per­cent of small busi­ness con­tract rev­en­ue. Giv­en that 8(a) rev­en­ue ac­coun­ted for one third of the small busi­ness con­tract spend, it is de­bat­able if the gov­ern­ment could meet its small busi­ness goal without the pro­gram.

Den­nis Worden is le­gis­lat­ive dir­ect­or for the Nat­ive Amer­ic­an Con­tract­ors As­so­ci­ation.

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