Testimony of Jonathan J. Bean, U.S. Senate

…the SBA was and is unwanted, unknown, and unneeded…I asked former SBA Administrator Bernie Boutin why scandals keep sticking to the SBA and he said, ‘‘Any time you have money, you will immediately find the mugs. It draws them like flies.’’ I might add that it is other people’s money.


United State Senate
April 6, 2006

Witness Testimony
Washington, D.C., U.S.A.

The Effectiveness of the Small Business Administration
Hearing before the Federal Financial Management Government Information, and International Security Subcommittee
Committee on Homeland Security and Governmental Affairs

Testimony of Jonathan J. Bean
Professor of History, Southern Illinois University

Mr. BEAN. Thank you, Chairman. I brought a book for you on the history of the Small Business Administration, and since the Ranking Member has left, I will have to send him his copy. Thank you for inviting me here to speak on a subject I have studied for some 15 years, which culminated in my book, ‘‘Big Government and Affirmative
Action: The Scandalous History of the Small Business Administration.’’

I have a written statement for the record and I have also prepared a few brief words on the effectiveness of the Small Business Administration. I will offer a 5-minute assessment of the program, and then hopefully during questions and answers, I have six concrete ways to eliminate what you call waste, fraud, and abuse in SBA programs.

In a word, the SBA was and is unwanted, unknown, and unneeded. First, it was the unwanted orphan of the Reconstruction Finance Corporation, RFC, a huge government lending agency established during the Great Depression. In 1953, a new Republican President and Congress carried through on their pledge to eliminate the corrupt RFC, but created the SBA as a stop to small business advocates in Congress. Since then, however, nearly every President I studied sought to eliminate the ineffective, scandal-ridden SBA or merge it into another government agency, usually the Commerce Department. It has survived because it serves the interests of Congress, not the small business owner.

Second, the SBA is the, ‘‘great unknown’’ among small business owners. Very few ever come into contact with it, and any support is a football field wide and an inch deep. Congress and bankers are the prime constituencies keeping it alive. Indeed, the SBA has been called by more than one author, ‘‘a creature of Congress.’’

Third, the SBA is unneeded. Government reformers have proposed sunsets for legislation so that Congress will periodically revisit the effectiveness of laws that may have outlived their usefulness. The sun set on the SBA a long time ago, yet Congress has failed to follow through on decades of studies, many of them by the GAO, highly critical of the agency’s various programs. There is little fear, however, about sunsetting the Small Business Administration. If the SBA fell dead in the economic forest, few people not on its door would hear it crash.

What are some of the problems with the SBA? And I do have solutions later, if you are interested. First, it represents an unstated back-door industrial policy, a notion discredited by the experience of the past quarter century. That is the notion of the government picking winners in the economy, or gazelles as they are called in small business literature, just as they did in Europe and Japan. The U.S. economy, proponents argued in the 1980s, was lagging behind Japan and Europe because government and business were not intertwined. Twenty years later, we see that the industrial policy model has failed in the long run, vindicating the American path of growth through deregulation and tax reform, so-called climate policies. Yet the latest rationale for the SBA is that it picks winners, though no evidence to back that up, helping small firms create jobs and spawning technological innovations.

Second, the SBA doesn’t help the truly small or disadvantaged business. Those are groups that are never adequately defined by the agency. Moreover, when it did try, the SBA’s efforts to wage war on poverty or create start-up businesses in high-unemployment areas failed miserably. There were additional policy failures in lending with taxpayers cosigning the loans and absorbing the risk bankers should themselves take, contracting preferences to small and not-so-small businesses, affirmative action originally targeted at African Americans which collided with immigration reform, making Asians and Hispanics the unintended beneficiaries of billions set aside for disadvantaged firms.

Last, the SBA’s history is uniquely scandalous in the modern era. Neither party escapes blame. The Eisenhower Administration turned the SBA into a huge pay dirt plum, under Kennedy, an SBIC venture capitalist dealt in their own firms, minority programs have fostered unending scandals involving fronts, cronyism, and governmental corruption, the most spectacular examples being Wedtech under Reagan and Whitewater under President Bill Clinton.

I asked former SBA Administrator Bernie Boutin why scandals keep sticking to the SBA and he said, ‘‘Any time you have money, you will immediately find the mugs. It draws them like flies.’’ I might add that it is other people’s money.

I have one last short paragraph. Let me end with several quotes by Senator William Proxmire, longtime nemesis of the SBA, best known for his Golden Fleece Awards for government waste. In the 1960s and 1970s, Proxmire characterized the SBA as ‘‘a mediumsized or even a big business administration,’’ not dedicated to the truly small businessman and one that only helped a minute number of businesses. He put the SBA on a short list of wasteful, useless agencies—his term—that should be abolished. Others included the Selective Service and the Interstate Commerce Commission, agencies that have passed away.

In 1979, this maverick Democrat, joined by a growing chorus of critics, stated, ‘‘The Federal Government is too big, spending is excessive, the SBA, which has lost its way and outlived its usefulness, is the place to start cutting.’’ And later, in 1985, Proxmire labelled the SBA one of Washington’s ten worst boondoggles.

This Congress has an opportunity to carry through on Proxmire’s legacy and eliminate this distraction from the real problems facing small business.

Senator COBURN. Mr. Bartram.


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