APPENDIX XII SELECTED CORRESPONDENCE AND MATERIALS ON CORPORATE GIANTISM AND CORPORATE SECRECY NOTE. The staff editors of the Senate Small Business Subcommittee on Monopoly, under the direction of Subcommittee Chairman Nelson, have selected the following materials as representative of a wide range of views on corporate giantism and corporate secrecy, and on public policy approaches to each of those social phenomena. The choice of materials for this appendix does not and should not be construed to suggest approval or disapproval by the subcommittee, or any of its members or staff, of any of the views reflected in these writings. Because of the vast amount of literature on the subjects, it was necessary to omit many additional materials that could, with as much interest and importance, have been included. No offense is intended to the authors of many valuable writings not reprinted here.-Committee editor. A. COMMENTS ON THE STATUS OF SMALL BUSINESS AND BIG BUSINESS IN THE AMERICAN ECONOMY, AND ON GOVERNMENT POLICY TOWARD BUSINESS 1. Paper by Marian D. Hall, "Background Report on Small Business in the American Economy Today," Economics Division, Legislative Reference Service, Library of Congress, July 22, 1971 BACKGROUND REPORT ON SMALL BUSINESS IN THE AMERICAN ECONOMY TODAY (By Marian D. Hall, Analyst in Consumer Protection and Small Business, Economics Division, Library of Congress, July 22, 1971) BACKGROUND REPORT ON SMALL BUSINESS IN THE AMERICAN ECONOMY TODAY 1. Introductory Statement When President Nixon proclaimed Small Business Week on April 8, 1971, he declared: "The American tradition of independent enterprise is as old as our society itself. The freemen who tended little stores, ran coastwise shipping, traded in furs, or made candles helped this tradition put down deep roots early in our history *** From such beginnings, small business has grown into one of the principal economic forces in this, the world's greatest industrial nation * * * "For the industry and resourcefulness which millions of Americans invest in them (small businesses) as owners and employees, they return not only profits but also the rich rewards of self-reliance. They contribute to the wide diversity of our society and our economy, and they offer members of disadvantaged minority groups an open door into full participation in the Nation's prosperity * Another appraisal of the importance of small enterprisse was given in the Congressional Record of April 6, 1971 by Congressman G. William Whitehurst who concluded: "The inventions of the past few years have come from the men and companies who have been regarded as independent or small. Such wonderful items as the rocket, Polaroid cameras, helicopters, the jet engine, xerox, insulin, FM radios, vacuum tubes, and a large number of other devices and processes have been the products of independent inventors or small firms." "So it is obvious that small business is a great deal more than a local grocery store or delicatessen. We must face up to the fact that small business is a major economic force in our country and that it needs our assistance." In this background report on small business, these topics are included: small business population; sales and profits of small manufacturing corporations compared to large manufacturing corporations; contribution of small business to gross national product; jobs accounted for by small business; and what's in the 1970's. 2. Small Business Population Economists of the Small Business Administration estimated that in 1966, of a total of 5,086,000 industrial or commercial enterprises, 4,750,000 or about 94 percent were small businesses. In 1969, the number of small firms, that is, independent concerns with at least one paid employee or an established place of business, were estimated at 5.4 million, according to a special report contained in a Review of Small Business Administration's Programs and Policies- 1969, hearings before the Senate Small Business Committee, in 1969. However, we should remember that these concerns are primarily industrial or commercial establishments. When we examine income tax returns of the Bureau of Internal Revenue, in 1969, the latest year for which such data are available, we find that unincorporated businesses totaled 10,129,132. This figure includes farmers and professionals, such as doctors, dentists, and lawyers. Most of these enterprises would be classified as "small." The following table presents a "profile" of small business; as reported to the Bureau of Internal Revenue. Farming and professional services are included in this tabulation since the tax laws applying to proprietorships and partnerships treat commercial and industrial establishments and farming and professional occupations alike. The table shows that between 1967 and 1968, there was an increase of almost 97,000 noncorporate businesses reporting to the Bureau of Internal Revenue. Concentration of these small establishments, excluding farming, forestry and fisheries, in both years was in services retail trade; finance, insurance and real estate; and contract construction. The largest increases in numbers of enterprises were in services and retail trade. Declines were recorded in contract construction, finance, insurance and real estate, and mining. Data on receipts and net profits illustrate the significance of unincorporated businesses. According to the Bureau of Internal Revenue, almost $303 billions in business receipts was generated by unincorporated businesses in 1968, compared with $289.4 billions in the preceding year. This was a gain of almost 5 percent. Net profits of noncorporate establishments amounted to almost $43.3 billions in 1968. This represented an increase of nearly 5 percent over the previous year. NUMBER OF UNINCORPORATED BUSINESSES, BY INDUSTRIAL DIVISION, 1967 AND 1968 Note: Estimates are rounded and may not necessarily add to totals. Not shown separately, but included in the appropriate totals, are data for industries, wholesale and retail trade not allocable, and nature of business not allocable. Source: U.S. Internal Revenue Service. 3. Sales and Profits of Small Manufacturing Corporations Compared to Large Manufacturing Corporations Most of the current information on the competitive and economic status of small business is confined to manufacturing corporations and is published by the Federal Trade Commission in cooperation with the Securities and Exchange Commission. Unfortunately, data on proprietorships and partnerships are derived chiefly from annual tax returns submitted to the Bureau of Internal Revenue and are therefore subject to a time-lag. The following data on manufacturing corporations indicate that small firms have been hardest hit during the current economic downswing, while sales and profits of huge corporations with $1 billion and more in assets have actually expanded. United States manufacturing corporations reported sales of $177.5 billion in the first quarter of 1971, according to the Quarterly Financial Report for Manufacturing Corporations, First Quarter, 1971 (FTC-SEC). This total was 4 percent above the first quarter of last year. Profits after taxes amounted to $7.0 billion in the January-March quarter of 1971, or one percent above the like period of 1970. For those manufacturing corporations with assets of $1 million or under, the "smalls," sales declined from $16,050 million in the first quarter of 1970 to $15,614 million in the like period of 1971. This was a drop of 2.7 percent. At the same time, profits after taxes fell from $265 million in the first quarter of 1970 to $93 mililon in the comparable period of this year. This was a decline of 64.9 percent. Although manufacturing corporations in other categories of asset size experienced greater percentage declines in sales, the downward skid in profits of almost 65 percent between the first quarter of 1970 and the comparable quarter of 1971 recorded by small manufacturers was the largest percentage decline among all categories of manufacturing corporations. In contrast, sales of those manufacturing corporations with assets of $1 billion or more, made gains of 15.5 percent from the first quarter of 1970 to the like period of this year. Profits earned by these giants expanded by 18.2 percent between these two quarters. These two percentage increases, the one in sales, and the other in profits, were the highest recorded among all categories of corporations ranged according to asset size during the quarters under review. 4. Contribution of Small Business to the Gross National Product The small business share of Gross National Product (Gross National Product less Government output, agricultural product and miscellaneous adjustments) has about drawn even with the share of its big business competitors, "The trend toward a progressively higher small business share of gross business product is expected to continue through the 1970's."1 5. Jobs Accounted for by Small Business About 40 percent of the Nation's labor force was accounted for by small firms in 1963, according to the Office of Economic Adviser of the Small Business Administration. However, in a later report, "the Twentieth Annual Report of the Senate Select Committee on Small Business, 1970," we find that "perhaps 50 percent of job opportunities" are provided by small business. 6. Current Economic Situation "As a member of the business community, small business can prosper only when the total environment is reasonably healthy and growing." Data for the first quarter of 1971 show that the gross national product climbed to the unprecedented figure of $1,202.7 million (annual rate), compared with $989.9 million in the fourth quarter of 1970. This was a gain of 3.1 percent. According to forecasts by government economists, at the beginning of 1971, the GNP should reach an annual rate of $1,065 million by the end of this year. However, many economists in and out of government now believe that this year's GNP will fall short of this prognostication. Furthermore, preliminary figures for May 1971 indicate that industrial production has improved somewhat since the low of November 1970. However, the industrial output index in May of this year, at 105.8 (1967-100) was still 4.6 percent below the July 1969 peak. Capital spending by businessmen in 1971 is expected to rise only 2.7 percent for the year to $81.85 billion. This would be the smallest increase in such expenditures in a decade, according to the latest quarterly survey of the Department of Commerce and the Securities and Exchange Commission. This is a sharp revision downward of the estimated capital expenditures projected in a similar survey three months ago, when a 4.3 percent rise in such spending was anticipated for the year 1971. Nevertheless, many observers believe that the expansion in business activity is not sufficient to pull the economy out of its present doldrums. Unemployment, poverty and inflation are still with us. 1 SBA Economic Review. Annual Issue 1971. Small Business Administration, Office of Planning, Research and Analysis. p. 7. 2 Ibid., p. 37. Unemployment reached the disturbing rate of 6.2 percent of the total labor force in May 1971, the highest rate in nine years. A decline to 5.6 percent was noted in June. Moreover, the unemployment rate for Vietnam era veterans between the ages of 20 and 29 years averaged 8.5 percent in the second quarter of 1971, according to the Department of Labor. The rate during the comparable period a year ago was 6.3 percent. And poverty is on the rise. The Census Bureau reported that for the first time in a decade, there was an increase in poor people. In 1970, there were 25.5 million poor people, or an increase of 1.2 million over the preceding year. Unemployment and poverty spell reduced purchasing power and shrinking markets. In this type of economic situation, it is the small firm, with limited resources which finds the going far "tougher" than the well-cushioned large corporation. For the small businessman, inflation may well means a cost-price squeeze. As his costs rise, his profit margin is threatened since he must maintain his prices within the competition range of all firms, large and small alike. Another development of the current recessionary situation is the tightening of bank lending policies. As a Wall Street Journal article of June 1, 1971 stated, *** many (American banking) institutions in recent weeks have started to scrutinize balance sheets more carefully, boost credit standards and even lop off loans they approved in palmier days." These trends in lending policies by banks tend to affect small enterprise adversely. Closely related to more stringent lending policies is the persistent rise in interest rates, another trend of serious concern for the small businessman. Finally, according to Dun and Bradstreet in 1970, business failures edged up to 10,748, or 1,594 above the 1969 level. Most business casualties occur among small firms. Furthermore business failures totaled 2,807 during the first quarter of 1971, an increase of 335 over the comparable months of 1970. However, some improvement is currently underway in this area. During the week ended June 17, 1971, there were 195 business failures. This was 25 below the number recorded in the like week of 1970. And during May and June, business casualties have been on the downtrend. 7. What's Worrying Small Businessmen At a national meeting of small businessmen during May 17-19, 1971 in Washington, D.C. under the sponsorship of the National Federation of Independent Business, it was found that the two leading complaints of the small business community were (1) high and rising taxes; and (2) inflation. Here are two comments on the tax question "Taxes have gone up so much " according to the owner of a women's specialty shop in Plant City, Florida, "that by now the small businessman barely gets by, since all that comes out of your profits. We need more exemptions, or something, so that we have more money to operate on." Another independent businessman from Avon, Connecticut stated that he believes that big business "gets a better tax break than he does, in part because he cannot afford to hire a full-time tax man." Among numerous other complaints mentioned at this conference was the grave danger of the large firm "swallowing up" smaller ones. Unfortunately, this is not an ungrounded fear, according to the following statistics published in a new work, "America, Inc." by Morton Mintz and Jerry Cohen. About 200 corporations control two-thirds of all manufacturing assets. And from 1948 to 1968 these corporations "went on a speculative binge and bought up 3,900 other companies worth some $50 billion." 8. Conclusion Since small firms, which comprise a large and significant segment of the American economy, are particularly vulnerable in periods of economic sluggishness such as we are still experiencing, measures to get the economy on the road of expansion and prosperity are vitally needed. One of the most important and effective of such measures would be liberalization of the tax laws as they affect small business." Cost of bankruptcy proceedings. During fiscal year 1969, 22,355 bankruptcy cases were closed. These were cases in which assets were involved. The total realization or assets recovered in these cases was $113,136.826. Of this total, expenses amounted to $26,446,037. All of these bankruptcy cases were filed under the Federal Bankruptcy Act. A separate memorandum on such tax proposals, in the 92nd Congress, including H.R. 3480, is attached herewith. [Note.-Not included in this record. Committee editor.] 2. Paper by Walter Adams, "Corporate Power in America: Proposals for Restraint," Ralph Nader's Conference on Corporate Accountability, Oct. 30, 1971 Excerpts of Remarks by Dr. Walter Adams, Distinguished University Professor Mayflower Hotel, Washington, D.C., October 30, 1971 In 1610, a Padua professor rejected Galileo's discovery of the Jupiter satel lites. "We know," he said, "that there are seven planets and only seven, because there are seven openings in the human head to let in the light and air: two eyes, two ears, two nostrils, and a mouth. And the seven metals and various other examples also show that there have to be seven. Besides, the stars are invisible to the naked eye; therefore they do not influence human events; therefore they are useless; therefore they do not exist. (Quod erat demonstrandum)" For some time, in a manner reminiscent of the Padua savant, President Nixon tried to deal with inflation--as if economic power was not concentrated; as if a benevolent competitive market performed its traditional regulatory control over the economy; and, as if orthodox monetary and fiscal policies could cope with structural problems like "inflation in the midst of recession." On August 15, 1971, the President took an initial step toward shattering these cheerful illusions. He peremptorily imposed a wage-price freeze to be followed, 90 days later, by Phase II of his New Economic Policy. From November 15 forward--for a period as yet unspecified--wages and prices in major industries are to be regulated by a troika of government agencies. These agencies, not the impotent "competitive" market, are to protect the public from the rapacious exploiters inhabiting the New Industrial State. This game plan is musty wine in old bottles. It is a public policy, dating back to the age of the robber barons, when wily tycoons first learned that government regulation of prices is no threat to their vested power and their vested control |