Mike Klein Online

As White House Pushes SBA Loans, Bad Debt Piles Up All Around

Mike Klein

This week President Barack Obama traveled through important Midwest primary states to carry the message that he’s doing something about jobs.  Or, he will soon, probably next month, after his smart people think about it a few weeks longer.  The White House website already features a Small Business Administration section and what it says are 100 SBA success stories.

SBA is neither Republican nor Democrat and it definitely is not Tea.  It has been used by White Houses of both stripes, and it has been praised and condemned.  The White House budget director under President Ronald Reagan wanted to abolish it.  SBA survived because politicians recognized that receiving money from politicians made folks feel good about politicians.

The Small Business Administration is a Dwight Eisenhower-era invention.  It has been around since 1953.  It came into vogue after World War II and the Korean War when Americans were on a mission to create consumerism.   Folks wanted to buy things and folks who wanted to sell things were starting businesses by the millions.  SBA money helped start some of those shops.  Less important were cumbersome philosophical issues about whether government should fund business start-ups.

The White House is holding up the Small Business Administration as one resource to help put Americans back to work – which will put taxpaying Americans in hock because SBA loans have to be paid back.  It ain’t free money.

In pursuit of transparency, here’s what the White House would rather you didn’t know:  Taxpayers are on the hook for nearly $70 billion in SBA loans to start-up businesses that failed, especially during the last ten years.  When that happens the largest portion of the bill goes to taxpayers.  That is not a message politicians are eager to share.

A new CATO Institute report from Veronique de Rugy and Tad DeHaven even makes their case to abolish the Small Business Administration because, “The SBA benefits a relatively tiny number of small businesses at the expense of the vast majority of small business that do not receive government assistance. SBA subsidies also represent a form of corporate welfare for the banking industry.”  SBA loans are made by banks.  Taxpayers are on the hook for 85 percent when loans default and the banks are owed.  Banks are willing and even eager government partners.

The CATO report states:  “The SBA will cost taxpayers about $6.2 billion in 2011.  Annual outlays are typically closer to $1 billion, but the SBA has suffered higher than usual losses on its guaranteed loans in recent years, so the costs imposed on taxpayers have soared. The SBA will guarantee almost $24 billion in new loans in 2011. The share of guaranteed loans outstanding that the SBA — and ultimately federal taxpayers — are on the hook for is about $70 billion.”

Using data from the Federal Reserve Board, the National Federation of Independent Business, the Government Accountability Office and academic and government sources, CATO said 19.4 percent of SBA loans made to the top 15 industries that received them failed between 2001 and 2010.  One in four restaurants failed, two in ten beauty salons failed, one in four miscellaneous retail sales stores failed and so forth.  Dentists and physicians had the lowest failure rates.

In their analysis de Rugy and DeHaven noted that President Dwight Eisenhower initially opposed creating the Small Business Administration but he eventually relented.  In 1958 the White House Budget Office said SBA was “an uncontrollable program.”  The agency grew into its own dynasty over several decades.

SBA loans were used by President Ronald Reagan during his first term to support federal set-asides to minority firms.  During Reagan’s second term his budget director, the often controversial David Stockman, described SBA as “a billion dollar waste – a rat hole” and Reagan supported trying to abolish SBA.  That didn’t happen. Presidents Bill Clinton and George W. Bush both supported expansion of SBA loan programs.

Two years ago President Obama used SBA loans as part of the American Recovery and Reinvestment Act and this week SBA loans and success stories are being showcased again, as if there is no possible downside.  This is happening, de Rugy and DeHaven point out, even though SBA’s recent track record continues to get worse.  Bad loans increased from $1 billion in 2006 and 2007 to $3.9 billion in 2009 and $4.8 billion in 2010.

Beware whenever someone says, “I’m from the government and I’m here to help.”

(Mike Klein is Editor at the Georgia Public Policy Foundation)

August 17, 2011 - Posted by mikekleinonline | Uncategorized | Barack Obama, Bil Clinton, CATO Institute, David Stockman, George W. Bush, Georgia Public Policy Foundation, Mike Klein, Ronald Reagan, SBA Loans, Small Business Administration, Tad DeHaven, The White House, Veronique de Rugy