By: Griffin Adams
Appropriation discussions for the 2014 fiscal year are in full swing in Washington, providing Congress with a natural opportunity to re-evaluate where federal dollars are going. As part of this process, Congress should consider shutting down costly federal agencies. One of the first that should be on the chopping block is the Small Business Administration (SBA). Established in 1953, the SBA is tasked with helping small business owners obtain loans and learn entrepreneurial and management skills. There are a number of problems with the SBA, and Congress should shut down this costly and unnecessary agency.
In the 6 decades since its inception, the SBA has grown at a staggering rate and has departed from its mission of helping small businesses. Presently it accounts for $1.1 billion dollars of our federal budget. Under its current requisites, 99.7 percent of all businesses qualify for some degree of SBA assistance. These businesses range from a small family operation worth less than $100,000 to companies with up to $30 million dollars in annual revenue.
One of the biggest concerns about the SBA is that it’s based on bad principle. When the government subsidizes a loan to a particular business, it is supporting and favoring that business over others. Picking winners and losers with these subsidies is an inappropriate function for government. Businesses that do not receive subsidized loans from the SBA have a tougher time competing in the market, and taxpayers are left with the bill. Loans should be based on value, the state of the market, and risk—not government favoritism.
Not only is subsidizing loans bad principle, it’s bad economics. The SBA causes economically-damaging distortions in the financial market by shifting risk from lenders to taxpayers. Even though private lenders issue the loans, the SBA guarantees them. If the borrower defaults on their loan, the SBA protects the lender from up to 85 percent of the loss. This leaves the bank liable for only a fraction of the loan. By removing almost all the risk associated with these loans, lenders can give more loans to less reliable people, resulting in higher default rates. Without these government subsidies, these failure-prone loans would have most likely not have been issued and we would not have the high default rates we have today.
The evidence of this is staggering: The top 15 industries who received SBA loans in the last decade had an average failure rate of nearly 20 percent. This is over eight times the failure rate in 2004 and eight percent higher than it was in 2008. In fact, as we saw in 2010, defaults on these loans cost the taxpayer as much as $4.8 billion dollars annually and remain at historically high levels today. This is far from the “strong track record” the SBA claims to have and further evidence of its inefficacy.
The SBA prides itself on how much it helps small business. However, these loan subsidies result in what is essentially corporate welfare for the large banks issuing the loans. These guaranteed subsidies present banks with a highly profitable win-win scenario. If the business does well, they collect the profits. However if the business defaults, the taxpayer is left to pick up the majority of the tab. This allows banks to make thousands of loans they would otherwise decline, with an almost guaranteed return on their investment. Without SBA involvement, banks would give more reasonable loans with additional consideration to the risk for default. This would cut the amount of wasted tax dollars substantially and remove much of the distortion from the credit market caused by these subsidies.
Despite proponents’ claim that the SBA is crucial for getting loans to small business owners, there is little evidence to suggest businesses would be unable to obtain similar loans without SBA subsidies. This affirms how useless this agency really is. Eliminating the Small Business Administration would cut the federal budget by over $1 billion dollars and provide some much needed restraint to discretionary spending. With government spending as excessive as it is today, removal of this unnecessary agency is a step in the right direction and an action the Appropriations Committee should seriously consider.