From the April 2003 issue of Entrepreneur

Over the past two years, as the economy has gone south, businesspeople, politicians and economists have fiercely debated what the government should do to help small businesses--or if it should do anything at all. As fiscal policy director at the Cato Institute, the nation's leading free-market-oriented think tank in Washington, DC, Chris Edwards is one of the loudest advocates of limited government as the best solution to stimulate entrepreneurship. On the other side, Congresswoman Nydia Velazquez (D-NY), ranking minority member of the House Committee on Small Business, is a passionate supporter of government programs to help entrepreneurs. Entrepreneur spoke with Edwards and Velazquez.

Broadly, what is your vision of government's role in fostering entrepreneurship?
Rep. Nydia Velazquez: The government should play a major role in encouraging entrepreneurs. Many entrepreneurs start off with a great idea but lack the know-how and connections to turn those ideas into legitimate, successful businesses. This is especially true of minority entrepreneurs and women who didn't grow up in a climate where capital was easy to obtain. The government has to level the playing field.

Chris Edwards: I disagree. The government has some role to play, but it should not be actively encouraging business. You see the slow economic growth in Europe and Japan over the past two decades--these are the problems you get when the government tries to pick winners. The government should serve as a lawmaker, a guarantor of the rule of law, but mostly it should stay out of the way of entrepreneurs, who are naturally dynamic.

What specific things could the government do to help entrepreneurs?
Edwards: The government could more strictly enforce fraud statutes and other laws. But the best thing it could do would be to push for more deregulation in industries, stop handing out corporate welfare, and make the tax and health-care and regulatory burdens on small businesses as light as on big business. Over the past decade, entrepreneurial booms have occurred when the government has broken up monopolies, stopped subsidizing industries and allowed entrepreneurs to flourish. There are still many industries that are dominated by a few big companies and could be privatized, and that would open the doors to small businesses. That would be the best long-term contribution our government could make, rather than trying to prop up small companies.

Which industries do you think should be privatized? And hasn't the California energy crisis taken the shine off deregulation?
Edwards: The California energy crisis is an example of half-deregulation. If they had totally deregulated the energy industry, we might not have had these problems. Other industries ripe for privatization--the postal system would be the first one. The U.S. Post Office has a monopoly on first-class letters and other mail. Break that up and there would be tons of opportunities for entrepreneurs in sending mail. I also think air traffic control is ripe for privatization. Canada has already begun privatizing air traffic control.

Congresswoman Velazquez, what is your view on what specific things the government could do?
Velazquez: The government should be a rule-enforcer, and we should work harder to ensure that small business does not face higher tax or health-care burdens. But just being a rule-enforcer does little for the small businesses that are just starting out.

We must be proactive. We need more programs that give entrepreneurs tools to get their ideas off the ground. We need agencies in the government to stop favoring large businesses when handing out federal contracts. And we need to make sure small businesses have less of a health-care burden, so they don't lose employees because they can't provide them with health insurance.

SBA Loans, Small-Business Burdens & More

Should the government provide start-up capital to small businesses?
Edwards: Absolutely not. America has the largest and most liquid private capital markets in the world, and the amount of private start-up capital available has increased vastly over the past 20 years. There are angel funds, more VCs--so many other options available today that there didn't used to be, even in a weaker economy. There are still huge pools of capital out there to be tapped if you have an innovative business plan. This suggests we don't have any shortage of capital.

So you do not support SBA loans?
Edwards: No. We should get rid of SBA loans and reduce the size of the SBA. SBA loans traditionally have high failure rates. If banks and other private lenders have rejected companies, those companies are a risk. Why should taxpayers fund them? If companies cannot get financing, that's the natural order of the market. I don't think there are certain industries private capital won't fund. And if it is harder for young companies to get funding during an economic downturn, perhaps it should be harder. That makes young companies tougher and more efficient.

Instead of making loans, a smaller SBA should focus on being a check on other branches of the government to look out for small-business interests.

Congresswoman Velazquez?
Velazquez: We need the SBA loan program. SBA loans are vital to helping businesses take off, and ultimately, they pay for themselves since the taxes the government receives from companies that get the loans more than make up for the money loaned out.

You can't compare SBA loans to bank loans or venture capital financing. Banks and venture capitalists don't hand out the type of longer-term loans the SBA provides, which give small businesses more time to get off the ground. SBA loans go to people who get denied loans from traditional networks for no reason at all. There are just too many cases where people starting businesses won't get money from a bank or don't know how to approach a VC firm.

You've both said the government should try lessening the tax and health-care burdens on small business. How so?
Edwards: The government should make it easier for small businesses to write off purchases of new technology. Washington could make it easier for small businesses to be self-insured and to use medical savings accounts (MSAs). And the government could stop handing out corporate welfare to big companies. The new farm bill gives out $35 billion in subsidies, and most of that will go to agriculture conglomerates like ArcherDanielsMidland. The Export-Import Bank, which gave $1 billion to Enron, is still basically corporate welfare for huge companies.

Velazquez: We definitely need to give small businesses help on health care. Health insurance is becoming the number-one issue for small businesses. But the government cannot be passive about it, allowing MSAs, which are market responses to health care. The government should pass legislation to make it easier for small businesses to join association health plans.

Are the congressional committees well-placed to push the small-business agenda?
Velazquez: The congressional committees on small business are the places where the majority of thinking about small business goes on. The committees serve a vital role. They allow us to hold hearings where we get to understand real concerns, to educate the public about the contributions of small business to the economy.

Edwards: It's true--the administration is focused on big business. I think they see it as their business-friendly legislation will trickle down. But the congressional committees are effective advocates. The House and Senate committees generate a lot of propaganda on how important small businesses are to the economy, and I'm not sure it's that accurate or has much impact. You need a high-profile member of the administration to show some interest in small business. The Treasury Secretary could go around the country on a listening tour to hear from small companies. Pass a set of laws that equalizes burdens, and let entrepreneurs do the rest.

Joshua Kurlantzick is a writer in Washington, DC.