University of Kentucky UKnowledge American Politics Political Science 2001 Big Government and Affirmative Action: The Scandalous History of the Small Business Administration Jonathan Bean Southern Illinois University Click here to let us know how access to this document benefits ou.y Thanks to the University of Kentucky Libraries and the University Press of Kentucky, this book is freely available to current faculty, students, and staff at the University of Kentucky. Find other University of Kentucky Books at uknowledge.uky.edu/upk. For more information, please contact UKnowledge at [email protected]. Recommended Citation Bean, Jonathan, "Big Government and Affirmative Action: The Scandalous History of the Small Business Administration" (2001). American Politics. 36. https://uknowledge.uky.edu/upk_political_science_american_politics/36 BIG GOVERNMENT and Affirmative Action "Won't all these new rules impact adversely on the viability of small businesses with fewer than fifty employees?" BIG GOVERNMENT and Affirmative Action The SCANDALOUS HISTORY of the Small Business Administration Jonathan J. Bean Copyright © 2001 by The University Press of Kentucky Scholarly publisher for the Commonwealth, serving Bellarmine University, Berea College, Centre College of Kentucky, Eastern Kentucky University, The Filson Historical Society, Georgetown College, Kentucky Historical Society, Kentucky State University, Morehead State University, Murray State University, Northern Kentucky University, Transylvania University, University of Kentucky, University of Louisville, and Western Kentucky University. All rights reserved. Editorial and Sales Offices: The University Press of Kentucky 663 South Limestone Street, Lexington, Kentucky 40508-4008 05 04 03 02 01 5 4 3 2 1 Frontispiece: © The New Yorker Collection. 1993. Ed Fisher. From cartoonbank.com. All Rights Reserved. Library of Congress Cataloging-in-Publication Data Bean, Jonathan, J. Big government and affirmative action: the scandalous history of the Small Business Administration / Jonathan J. Bean. p. cm. Includes bibliographical references and index ISBN 0-8131-2187-6 (cloth : alk. paper) 1. United States. Small Business Administration—History. 2. Small business—Gov- ernment policy—United States. 3. Affirmative action programs—United States—History. I. Tide. HD2346.U5 B344 20001 354.2'799'0973—dc21 00-012040 To my parents, with love and appreciation CONTENTS Acknowledgments ix List of Abbreviation xi Introduction 1 1. Politics and Patronage 7 2. Small Business on the New Frontier 21 3. The Entrepreneurial Era 37 4. Crisis and Consolidation 54 5. The Agony of Hilary Sandoval 70 6. The Small Scandal Administration 882 7. Small Business in an Age of Big Government 95 8. Eternal Life 110 Conclusion 128 Appendix A: Chronology 137 Appendix B: Graphing Growth 141 Notes 145 Bibliography 189 Index 215 ACKNOWLEDGMENTS The research and writing of this book were made possible through the gener- ous support of the Earhart Foundation, the Institute for Humane Studies, the Economic History Association, Southern Illinois University Carbondale, the Lyndon B. Johnson Presidential Library, and the Social Philosophy and Policy Center. Students of modern American government are blessed with an abun- dance of documents. The archivists at the presidential libraries and the Na- tional Archives helped me mine this material. The Small Business Administration made available records not yet released to the National Ar- chives. I am indebted to Helga Taylor and Margaret Hickey for fielding que- ries from an inquisitive historian. I am also grateful for the industrious research assistance of David Hurley, Rachelle Stivers, Andrew Volpert, and Mahesh Ananth. The constructive criticism offered by Melvin Holli, K. Austin Kerr, Robbie Lieberman, Paul Moreno, and Fred Siegel was extremely beneficial. Mansel Blackford, David Wilson, and David Werlich read the entire manu- script and provided useful advice on improving it for publication. A special thanks to the many individuals who shared their memories of the past. Their oral histories offered valuable insight into the politics of small business. Last, but never least, I express the deepest gratitude to my wife for understanding the everyday trials of a writer. ABBREVIATIONS USED IN TEXT AND NOTES ABA American Bankers Association AGCA Associated General Contractors of America BAC Business Advisory Council CCSB Cabinet Committee on Small Business CASBO Congress of American Small Business Organizations DNC Democratic National Committee DOD Department of Defense EDA Economic Development Administration EEOC Equal Employment Opportunity Commission EOL Economic Opportunity Loan EPL (Dwight D.) Eisenhower Presidential Library GAO General Accounting Office GFL Gerald Ford Library HSBC [U.S. Congress] House Small Business Committee HSTPL Harry S. Truman Presidential Library JCL Jimmy Carter Library JFKPL John F. Kennedy Presidential Library LBJPL Lyndon Baines Johnson Presidential Library MESBIC Minority Enterprise Small Business Investment Company NAM National Association of Manufacturers NASBIC National Association of Small Business Investment Companies NBL National Business League (formerly National Negro Business League) NFIB National Federation of Independent Business xii Abbreviations NPM Nixon Presidential Materials NSBMA National Small Business Men's Association OEO Office of Economic Opportunity OMB Office of Management and Budget OMBE Office of Minority Business Enterprise OSHA Occupational Safety and Health Administration PCGC President's Committee on Government Contracts RFC Reconstruction Finance Corporation RNC Republican National Committee RRL Ronald Reagan Library SBA (U.S.) Small Business Administration SBIC Small Business Investment Company SBDC Small Business Development Center SCORE Service Corps of Retired Executives SDPA Small Defense Plants Administration SSBC [U.S. Congress] Senate Small Business Committee WHCSB White House Committee on Small Business (1962); White House Conference on Small Business (1980) INTRODUCTION On 14 January 1999, members of the U.S. Senate gathered for one of the re- markable political events of the twentieth century: the trial of President William Jefferson Clinton on charges of "high crimes and misdemeanors." Although a presidential sex scandal provided the immediate backdrop, die allegation of cor- rupt business dealings had prompted the original investigation. A Small Busi- ness Administration loan intended for"disadvantaged " minorities was at the heart of the initial probe. David Hale, head of a small-business investment com- pany, had granted a fraudulent loan to Susan McDougal in 1986. Money from the SBA-backed loan ended up in the Whitewater Development Corporation, a firm owned by Mrs. McDougal, her husband, and the Clintons. Hale testified that then-governor Clinton had asked him to make the illegal loan, a charge Clinton denied. In 1996, an Arkansas jury convicted the McDougals and Gov- ernor Jim Guy Tucker of defrauding the SBA. The continued Whitewater in- vestigation by Independent Counsel Kenneth Starr eventually uncovered evidence of unrelated misconduct that led to Bill Clinton's impeachment; although the Senate acquitted him, the episode left a black mark on his presidency.1 Whitewater was only the latest in a series of scandals involving the Small Business Administration. Long before Bill Clinton entered the White House, the SBA earned the tide of "Small Scandal Administration," as corruption, fraud, and incompetence marred its minority enterprise programs. For example, Presi- dent Ronald Reagan's administration was embroiled in a sensational scandal involving the incomprehensibly corrupt Wedtech, another minority firm ben- efitting from SBA largesse. The Wedtech scandal implicated White House aides, SBA officials, and several congressmen in what one reporter called "an elaborate soap opera of crime." It also reportedly resulted in Attorney General Edwin Meese Ill's resignation.2 In the cases of Whitewater and Wedtech, the stated aim of helping disadvantaged business owners provided a cover for corruption remi- niscent of the Gilded Age. 2 Big Government and Affirmative Action Despite the media attention given to these high-profile scandals, few Americans realize the important role of the Small Business Administration in promoting affirmative action. Historians have likewise ignored the pioneer- ing efforts of the SBA in developing racial preferences.3 Led by Eugene Foley, a young administrator who took office the month Martin Luther King Jr. marched on Washington, the agency targeted African American entrepreneurs for aid even before passage of the Civil Rights Act of 1964. The new policy was technically color-blind, but the riots of the mid-1960s transformed the program into an emergency remedy to mollify racial discontent. The election of Republican presidential candidate Richard M. Nixon, who ran on a "black capitalism" plank, solidified the agency's commitment to racial preferences. Nixon and his Republican supporters in Congress defended affirmative ac- tion at a time when it faced a strong challenge from Democrats. Later, the Reagan administration's self-contradictory stance on the issue—denouncing "quotas" while establishing them within the SBA—further demonstrated that the politics of affirmative action made for strange bedfellows. Researching the history of affirmative action is difficult because docu- mentation is often lacking and civil rights agencies have resisted opening their sensitive