Washington continues to entrust stale bureaucracies with the job of righting the economic ship, instead of getting the federal government out of the way. One of those bureaucracies is the Small Business Administration, which has been employed by Congress and President Barack Obama to reignite private-sector lending.
The SBA does this by guaranteeing loans issued by private lenders for up to 85 percent of losses in the event that loan recipients default. As a result of the guarantee, lenders are more willing to lend money to riskier applicants because the SBA — and thus taxpayers — is ultimately responsible for the bulk of any losses.
Never mind that surveys of small- business owners consistently show taxes and regulations are their biggest problems. Instead, the politicians’ faith rests with agencies such as the SBA, which was signed into law against President Dwight D. Eisenhower’s better judgment because he wanted to counter criticisms that Republicans were beholden to “big business.”
Federal subsidies to small businesses didn’t make sense in the 1950s, and don’t make sense today. However, the SBA’s defenders argue that market-driven lending denies credit to worthy small businesses, and so the government must correct this alleged “market failure.”
Except there isn’t any market failure. Capital markets have developed effective private solutions such as credit scoring to overcome the asymmetry of information between lenders and borrowers.
Besides, small businesses with sound business plans and solid prospects should be able to raise debt and equity capital through private means. If a small business has shaky finances and questionable prospects, it should be denied private capital as a bad business risk.
Indeed, the large failure rates on loans backed by the SBA illustrate the government’s interventions do a poor job allocating capital.
Fortunately, the SBA’s presence in the credit markets is largely irrelevant. The Government Accountability Office has calculated that SBA loans only account for a little more than 1 percent of total small-business loans outstanding.
Moreover, the industries that receive the most SBA loans are characterized by a large number of firms and robust competition. That means the vast majority of restaurants, beauty salons, gas stations and other businesses meet their credit needs in the market without SBA subsidies.
SBA supporters have cultivated a myth that being against the agency is equivalent to being against small businesses. In reality, the great majority of American small businesses have thrived without government subsidies. It’s time to axe the SBA.
Tad DeHaven is a budget analyst at the Cato Institute and co-editor of www.downsizinggovernment.org