Now Is the Time to Tear Down the SBA

If the SBA wants to live up to its own mission statement - "helping small business succeed" - it will close its doors…What we don't need is a federal agency that cynically uses small business as an excuse to help bankers avoid their fair share of risk.

FORTUNE Small Business magazine
June 5, 2006

Now Is the Time to Tear Down the SBA
By nominating a successor to outgoing chief Hector Barreto, President Bush has overlooked the perfect candidate: nobody.
Richard McGill Murphy

FEW ENTREPRENEURS WERE SADDENED BY THE NEWS that Hector Barreto was stepping down as chairman of the Small Business Administration after a six-year run. Barreto's SBA had come under attack for its slow and bungling response to Hurricane Katrina last fall. Its loan programs reach less than 1% of U.S. small businesses. The SBA's employees suffer from the lowest morale in the federal government, according to one recent survey. President Bush has already announced his nominee to replace Barreto (see the accompanying story on the next page), but a better choice may be: nobody. If the SBA wants to live up to its own mission statement - "helping small business succeed"- it will close its doors.

The SBA has sparked controversy since its foundation in 1953. From the beginning, critics noted that the agency had no clear definition of "small" - which explained how American Motors was awarded "small business" status in the 1960s. (The agency's varying definitions today cover 98% of businesses.) The SBA is best known for its 7(a) loan program, which provides government-backed bank financing to help launch a business or expand an existing one. But even the National Federation of Independent Business, the chief small-business lobbying group, deems 7(a) loans irrelevant. "Our members tend not to rely on SBA loan programs," says Andrew Langer, the NFIB's manager of regulatory policy. "And we don't want to go down the road of advocating that government hand out more money to private individuals."

The 8(a) federal contracting program, established in 1968 with the goal of stimulating inner-city employment, is similarly flawed. This program steers federal contracts to "socially and economically disadvantaged" (read: minority-owned) firms. Over the past three decades many contracts have been claimed by unscrupulous white-owned businesses that recruited minority "partners" with the sole purpose of nabbing government contracts. At times the 8(a) program has crossed the line into outright corruption. During the 1980s, for example, a scandal erupted after a Hispanic-owned defense contractor called Wedtech bribed public officials to win a no-bid minority contract from the U.S. Army that ultimately totaled $32 million.

The agency's primary victims are the entrepreneurs who don't use SBA loans but face competitors who do, and so enjoy lower interest rates and longer repayment schedules. "The SBA is in the discrimination business," Jonathan Bean - a professor at the University of Illinois at Carbondale and the author of Big Government and Affirmative Action: The Scandalous History of the Small Business Administration - recently told the Senate Committee on Homeland Security and Governmental Affairs. "It takes wealth from all taxpayers and awards loans and contracts to [relatively few] small and minority business owners."

Despite its history, the SBA boasts two powerful constituencies. Banks profit from small-business loans that pose little risk because taxpayers guarantee up to 85% of the principal amount. These guarantees represent some $70 billion in potential taxpayer liabilities, a risk that banks would otherwise assume. And in recent years bankers have built a multibillion-dollar industry by securitizing SBA loans and trading them on the open market.

The SBA also enjoys reliable backing from legislators, who are always looking for ways to channel pork to a few favored constituents - in this case, the tiny percentage of business owners who benefit from SBA loans and programs - while pleasing the banking industry. "The SBA is a big corporate-welfare program," says economist Véronique de Rugy, a resident fellow at the American Enterprise Institute who recently called for the agency's abolition.

The SBA does have its defenders. "Someone needs to stand up for the small-business community," says James Ballentine, a former SBA official who now serves as director of community banking at the American Banking Association. "If you say it's Congress and the banks, we'll take that." But even Ballentine admits the agency has done a lousy job of justifying its existence. "Until they start proving the value in the programs," he says, "it's easy to question that value."

Indeed, the SBA makes little effort to quantify the impact of its loan programs. The agency instead measures its success mainly by the volume of its lending. "In fiscal year 2005 the SBA made or guaranteed $19 billion in loans for small businesses, the most in its history," states the agency's most recent performance and accountability report. That's it. The SBA typically does not track the survival or growth rate of its loan recipients.

Closing the SBA would free up its half-billion-dollar annual operating budget for programs that would truly help small businesses. Fiscal conservatives argue that the money - meager as it is by Washington standards - should be returned to taxpayers or used to pay down the federal deficit. Or Congress could return that money in the form of a targeted rebate on FICA taxes, one of the heaviest burdens on small business today—15.3%, split between employer and employee, to be paid before a business posts the first dollar of sales or profit.

Not all of the SBA's programs need to go. Its disaster-loan program - while horribly managed in the wake of Hurricane Katrina - serves a vital purpose. Perhaps it could be spun off from the SBA and administered by a more competent agency. Similarly, the SBA's successful training and microfinance programs could be devolved to the state level or privatized. And someone - the Commerce Department, say - should assume the useful role played by a small corps of SBA officials who fight burdensome regulations and help steer a fair share of federal contracts to small businesses. What we don't need is a federal agency that cynically uses small business as an excuse to help bankers avoid their fair share of risk.

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