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A Pledge Small Businesses Do Not Need

Posted By John Ligon On February 3, 2010 @ 3:54 pm In Economics | Comments Disabled

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Facing the stark reality of double-digit unemployment and the failure of his first $862 billion economic stimulus [2], President Barack Obama unveiled his second stimulus plan last month including a mix of subsidies and government-subsidized loans targeted solely at small business. Obama’s Second stimulus will be funded in part by roughly $33 billion from the TARP, that will be then redirected to community banks through the Federal Small Business Administration [3] (SBA).

While the aim of promoting job growth through the “acceleration” of small business creation and expansion is laudable, businesses do not want more government intrusion.  Unfortunately, in an attempt to stimulate job creation and small business growth, the last round of pledges from the White House will only further expand government regulation over business.

Small business certainly comprises a large share of total employers in the US economy and as small businesses expand—or originate—there is more employment in local economies [4].  It is not clear, however, that there is a direct link between the loan guarantees provided through the SBA and the volume of small business lending in local markets [5]

Most importantly, despite holding nearly $90 billion in total loans (an increase of 70 percent since 2001), the SBA’s system of lending has fallen short on its ability to keep up with industry standards where the average quality of an SBA federally-guaranteed loan (in 2008 corresponding to a Moody’s rating of Ba) falls below that of a typical private, non-government subsidized loan [6]. In a 2009 report, the Government Accountability Office discovered that the “SBA does not follow sound validation practices or use its own data to independently assess the risk ratings, the effectiveness of its lender risk rating system…may deteriorate as economic conditions and industry trends change over time.” [7]

In addition, the President is promising that the SBA will guarantee the loans dispersed under this new round of stimulus spending at the 90 percent level.  Considering the mounting evidence against the ability of SBA to maintain industry standards, this should be worrisome to the American taxpayer since they subsidize these loans—under the current lending structure, SBA guarantees up to 90 percent that SBA lenders make to small businesses [4].

Leaving aside the fact that the SBA has a poor track record of targeting effective loans and overseeing these loans it is vital to reiterate that small businesses will continue to react to uncertainty. The most pressing issue for every American is ensuring that the economy and net employment begins to rebound.

Rather than entertaining poorly targeted policies, the White House and Congress should be spending time assuring American businesses that they are committed to a policy mix centered on permanently lowering capital gains tax rates, income tax rates, the estate tax, as well as mitigating regulation and employer mandates which would give businesses the necessary incentives to innovate and expand in the most efficient manner.


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URL to article: http://blog.heritage.org/2010/02/03/a-pledge-small-businesses-do-not-need/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/small-business-admin.jpg

[2] $862 billion economic stimulus: http://www.washingtontimes.com/news/2010/jan/27/stimulus-price-tag-soars-as-jobless-rate-rises/

[3] that will be then redirected to community banks through the Federal Small Business Administration: http://www.washingtonpost.com/wp-dyn/content/article/2010/02/02/AR2010020200542.html?hpid=topnews

[4] there is more employment in local economies: http://www.sba.gov/ADVO/research/data.html

[5] the volume of small business lending in local markets: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=712622

[6] the average quality of an SBA federally-guaranteed loan (in 2008 corresponding to a Moody’s rating of Ba) falls below that of a typical private, non-government subsidized loan: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1106179

[7] “SBA does not follow sound validation practices or use its own data to independently assess the risk ratings, the effectiveness of its lender risk rating system…may deteriorate as economic conditions and industry trends change over time.”: http://www.gao.gov/products/GAO-10-53

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