Why We Shouldn't Be Big on Banking on the Small Business Administration

The Small Business Administration (SBA) is one of those bureaucratic agencies that hardly gets any coverage. What does the SBA even do? According to its own documentation, the SBA "ensures that these [small] businesses have the tools and resources they need to start and expand their operations and create good jobs that support a growing economy and strong middle class." The government wants to help the little guy who wants to live the American dream. What could possibly be wrong with that? Well, the the SBA is another example of government having good intentions, but their policies having the opposite effect of what was intended.

What do I mean by that? One of the primary ways that the SBA provides resources is through government-backed guarantees on loans. The SBA was created back in 1953 to help smaller businesses have access to loans that they otherwise would not have acquired from conventional lenders, or to put it in more economic terms, we're dealing with government subsidizing supply. The reason for these subsidies is to deal with the alleged market failure known as information asymmetry that exists between lenders and borrowers because banks supposedly cannot discern between high-risk and low-risk borrowers. Keep in mind that lending relationships, credit scoring, and credit rationing all exist to mitigate information asymmetry.  Additionally, from an insurance standpoint, if the government is willing to unconditionally pay up to 85 percent on the principle of a given loan, it creates moral hazard, which is why the banks end up being the real winners. So is this all economic theory or is there some substance to SBA opposition? A recent study over at the National Bureau of Economic Research (Young et al., 2014; also see here) measures the direct and indirect effects of the SBA's interventions. Among the findings were that for every increase in SBA loans per capita, we see a two percent decrease in income growth. The study also found negative spillover effects in neighboring counties.  

The Government Accountability Office (GAO) just published a report back in April showing the inefficiencies of its loan program. The GAO has highlighted other SBA deficiencies, including being inefficient at documenting "credit elsewhere" decisions or implementing justifications for 8(a) sole-source contracts. It should also be no surprise that the SBA hasn't helped because its selection process is so arbitrary. Out of 27.5 million small businesses, only 271,000 small businesses receive SBA loans (SBA, p. 30). Other issues I have with the SBA include vague criteria for taking out an SBA loan, waste and fraud, the harm it causes it other businesses (de Rugy, 2006), or having the taxpayers being on the hook for $59.4B on unpaid principle (Congressional Research Service, 2013, p, 13).

Every high-risk venture does not translate into success. What clairvoyance does the government possess to determine whether a certain business would succeed? After being in existence for over 60 years, it has become clear that the SBA is not possess the ESP to help the little guy. Much like the Export-Import Bank, the SBA only perpetuates rent-seeking and arbitrary, ineffective public policy that has regrettably become standard for American governance. It would be nice to reform the SBA, but I think that simply eliminating the SBA and letting the private sector help small businesses find ways to secure loans (e.g., crowdfunding) is right on the money.