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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 | Uncategorized | , , , , , , , , , , , , | Leave a comment

Would You Invest In Public Education If It Was A Business? Probably Not!

Mike Klein

Kids are getting smarter every day.  We know this is true because test scores are rocketing, graduation rates are soaring, parents are thrilled, teachers have never been happier and the return-on-investment is absolutely off the charts.  Kids have become learning zealots and this is happening because the more money we spend on education, the better our results.  So, let’s just go ahead and declare it:  Education is fixed; time now to move onto something else.

Okay, you can blink now.

Real education today is a very different landscape.  We face extraordinary challenges moving kids through middle school, high school and beyond.  Far too many leave formal education without any diploma or certificate.  Far too many are unprepared for futures.  Far too few parents understand why or how this happened.  Far too many good teachers feel beaten down or at war with their school systems and far too many marginal or poor teachers remain in our classrooms.

Education is not fixed.  Just this week U.S. Education Secretary Arne Duncan said 82% of schools could fail to meet No Child Left Behind goals this year, which may say more about the flawed NCLB model than about schools or kids, but it is worth noting here.  Others also see issues.

American public education is in “a productivity crisis because per pupil spending adjusted for inflation has more than doubled in the last four decades while outcomes for students have been flat,” says education myth buster and researcher Jay Greene.  “Kids are not significantly worse off than they were four decades ago, but they are no better off.”

Jay Greene

Greene analyzes gates that open paths to learning and roadblocks that close them.  His hats include University of Arkansas director of education reform studies, George W. Bush Institute fellow, former Manhattan Institute scholar and author for publications too numerous to mention.  His best known title is “Education Myths: What Special-Interest Groups Want You to Believe About Our Schools and Why It Isn’t So.”  Greene takes on all targets; nobody is safe.

This past weekend Greene addressed a Georgia Public Policy Foundation leadership breakfast.  “In very broad terms, the problem is resources that are devoted to schools are unattached to the outcomes,” Greene said.  “It doesn’t matter whether schools do better or worse for them to get resources.  They are entitled to resources and they receive them by right rather than by effort.”

Last month the University of Southern California published a study that compared 2009 U.S. public education spending and academic performance with eleven other nations.  America spent $809 billion and the other eleven countries combined spent $988 billion.  Yet, American students ranked ninth in science and tenth in mathematics achievement tests.

CATO Institute research published in January said federal, state and local per pupil public education spending adjusted for inflation is nearly 2.5 times greater than in 1970, (see what Greene said above!) but there was no comparable increase in academic performance.  CATO said reading and math scores remained flat over 40 years and science scores declined.

Colin Powell

America’s Promise Alliance was founded by retired four-star General and former Secretary of State Colin Powell and his wife, Alma Powell.  Last November APA reported the U.S. national graduation rate reached 75% in 2008.  APA said this was a 3% gain in seven years.  Still, it means 25-in-100 or 25,000-in-100,000 or 250,000-in-1 million do not graduate.  That is scary.

“Anytime an organization spends more than twice as much to produce no more in outcome you have a problem,” says Greene.  “Any industry that was unable to improve its outputs despite doubling its inputs would be an industry that would be gone.  But education doesn’t go away.  Public schools don’t go away.  They just keep going.”

Greene’s presentation included his thoughts on the “fuzzy labels” sometimes used to evaluate learning, such as in Florida where they tried “excelling, progressing (or) meeting goals. The trouble is that no one was quite sure what the different categories were or what they meant and they all seemed pretty cheerful.  Needs improvement is the bad one and that’s not so bad.”

Florida public schools education underwent radical changes within the past decade, extensively engineered by former Governor Jeb Bush.  Greene said Hispanic students in Florida today perform better than the averages of all students in 30 states, adding, “This is a state that went from being very much below average to above average.”

Greene spoke at length about the social vs. test-based promotions.  He noted several studies in Florida and Wisconsin confirmed that marginal students who are held back one year are able to demonstrate better performance the following year, and much better performance in subsequent years than marginal students who were pushed ahead to the next grade.  “The difference wasn’t huge after one year, but after two years, the difference grew to be fairly large.”

The national trend toward smaller class size means we have 3.2 million public school teachers. To see that through another lens, more than 1% of all Americans are public school teachers.  “It’s really hard to have 3.2 million excellent teachers,” Greene said.  “We’ve increased the number of teachers but we’ve decreased their average quality.”

Greene also noted 13% of all public school students nationwide are diagnosed as disabled, more than double the percentage thirty years ago.  He thinks it is largely a money race, schools chasing dollars that are available to support programs for students who are “disabled.”

“What schools do is they see kids struggling and they figure out, ‘How can we help these kids move along?’  Then they realize the state has made money available to us if only we identify the student as having a processing problem.  If we just say we’ve done a bad job or the kid has difficulty at home, we don’t get any extra resources to help the kid,” Greene said.

“Short-term this is a very well intentioned act on the part of people in schools.  But long-term it is very bad because it alters everyone’s expectations about that child who has now been identified as having a processing problem in the brain.  The child has new expectations about himself.  The parents have new expectations about the child.  All the educators have new expectations and this has a very negative effect on the child long-term.”

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

March 10, 2011 Posted by | Uncategorized | , , , , , , , , , , , , , | Leave a comment