The Small Business Administration Should Be Abolished

Being pro-market is not the same as being pro-business. A free market means that nobody is using the coercive power of government to obtain unearned goodies, and that is true for big business as well as big labor, or any particular segment of the population.

Indeed, handouts to big business are the worst form of redistribution, as I noted in my previous post, because they transfer money from the poor to the rich and thus violate “Mitchell’s Guide to an Ethical Bleeding Heart”.

This is why I have strongly criticized subsidies and favors for the business community, whether for entire industries or for specific companies such as General Motors, Wal-Mart, and General Electric.

But it’s not just big business that should be weaned from the public teat. Veronique de Rugy of the Mercatus Center has a Wall Street Journal column explaining why the Small Business Administration should be shuttered.

…the SBA hurts more small businesses than it helps, wastes taxpayer money and distorts economic activity. The SBA’s main activity is to provide government-backed loans to qualifying small businesses. In fiscal 2011, the agency requested $1.5 billion in discretionary outlays. However, total outlays, which include projected payouts for defaults, were $6.2 billion. …the agency has suffered increased losses in recent years on its guarantees. How this trend will evolve depends on the economy and whether default rates on SBA loans continue to increase. Currently, outstanding loans guaranteed by the SBA—and federal taxpayers—total about $92.9 billion. …The SBA loan program is best understood as a subsidy to banks. Borrowers apply to an SBA-certified bank. The SBA guarantees 75% to 85% of the value of loans made in the flagship program. The banks then boost their earnings by selling the risk-free portion of the loans on a secondary market. Ironically, it’s also the biggest banks that do the most business through the SBA.

Ms. de Rugy then closes with an important insight from Frederic Bastiat (who is probably Veronique’s great great grandfather since I’m only slightly exaggerating when I say they’re the only two free market people in French history).

French economist Frederic Bastiat noted that many economic fallacies persist because the beneficiaries of government actions are easily visible, while the victims are harder to identify. The SBA is a classic example. Small-business owners who get subsidized loans feel good (so do the banks that profit from the loans), but we can’t identify how that capital would have been used absent government intervention. We can count the jobs created at the subsidized businesses, but we don’t know how many more jobs might have been created if market forces determined the allocation of capital. That’s the economic analysis. The political analysis is that politicians have successfully sold the SBA as a program to help small business—a widely held belief that’s almost as sacrosanct as baseball, motherhood and apple pie. In reality, the SBA is a form of corporate welfare, and America’s biggest banks are the only clear winners, leaving taxpayers on the hook for billions of dollars.

By the way, Veronique could use your help. There’s an online poll and the statists have been stuffing the ballot box. So click on the column link above and help her out. You folks have helped me prevail in some of my online debates for U.S. News and World Report (see here, here, here, and here), so don’t hesitate to cast a vote for Veronique and against cronyism.

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A Test for the GOP: Shutting Down the Spigot of Corporate Welfare at the Export-Import Bank

Republicans are telling voters that they’ve learned the hard lessons from the 2006 and 2008 elections and that they are back on the side of taxpayers. I’m not convinced, which is why I’ve outlined some key tests that will demonstrate whether the GOP genuinely supports limited government.

o No tax increases, since more money for Washington will encourage a bigger burden of government and undermine prosperity.

o To stop bailouts for Europe’s decrepit welfare states, no more money for the International Monetary Fund.

o Reform the biased number-crunching methodology at the Congressional Budget Office and Joint Committee on Taxation.

o No more money from American taxpayers to subsidize the left-wing bureaucrats at the Paris-based Organization for Economic Cooperation and Development.

I have another item to add to this list, and it’s one that may actually go the right way.

It appears that there’s a chance to end a major source of corporate welfare known as the Export-Import Bank. As the irreplaceable Tim Carney notes, a handful of Republicans are standing up for free markets over corrupt cronyism.

Ex-Im reauthorization typically passes easily. But after the Wall Street bailouts, Fannie Mae’s bailout, Solyndra’s collapse, and the rise of the Tea Party, many conservatives in Washington have grown hostile to corporate welfare. The free-enterprise Club for Growth, which was central in 2010 in helping conservatives and hurting moderate Republicans, blasted Ex-Im as “nothing more than a corporate welfare slush fund for companies with the best lobbyists.”

You won’t be surprised to learn that the President wants to expand this honeypot of corporate welfare. Here’s some of what George Will wrote about Obama’s plan to divert more capital to subsidize the well-connected.

This looks like a promise to compound market distortions by further politicizing credit markets, while enunciating no limiting principle. Obama is directing the bank to offer United Airlines a subsidy to match any subsidy Canada offers to persuade United to choose the Montreal-made Bombardier as United chooses between it, Boeing and Airbus. So American taxpayers will subsidize United to subsidize Boeing, which is already being subsidized in ways injurious to Delta and others.

Other than self-interested companies with their snouts in the trough – and the politicians and lobbyists they finance, it is very difficult to find any legitimate argument for this cesspool of cronyism.

One of the few self-professed conservatives to support the program is Hugh Hewitt, though I’m befuddled how anybody who supports corporate welfare (and Mitt Romney) can call himself a conservative.

But let’s set that aside. Hewitt’s main argument is that exports are good and that the federal government should subsidize good things. If that argument sounds familiar, it’s probably because you’ve heard Barack Obama say that health insurance is good and that the federal government should subsidize good things.

If you think I’m being unfair, I invite you to read the column. You’ll be especially amused by this passage.

Hamilton argued for a trading empire, a robust union deploying its combined power and resources to advance the nation’s interests abroad to the benefit of its merchants and thus its people at home.

Sounds reasonable, but Hewitt fails to mention that Hamilton’s view of “a robust union” did not include subsidized exports. Heck, Hewitt notes earlier in his column didn’t exist until it was created during the New Deal – about 130 years after Hamilton’s death!

Besides, the Export-Import Bank doesn’t even have an impact on trade balances, as explained by my colleague Sallie James, so mercantilists are barking up the wrong tree.

The Ex-Im Bank at best recreates, and at worst misallocates, private financial behavior. And to what end? The U.S. General Accounting Office (now the Government Accounting Office) has pointed out that“export promotion programs cannot produce a substantial change in the U.S. trade balance.” A country’s trade balance is driven largely by underlying macroeconomic factors, such as the ratio of savings to investment.  …rather than authorizing an increase in the Ex-Im Bank’s operating bud-get, or expanding its role in the U.S. economy,Congress should recognize that the alleged justifications for the Ex-Im Bank’s existence are hollow and abolish the agency completely.

Let’s also address the argument of Frank Gaffney, who normally is sensible about public policy. He makes the claim that the Export-Import bank is a profitable activity for the Treasury.

the Export-Import Bank is a money-making activity for the U.S. government.  According to the U.S. Chamber of Commerce, since 2005, Ex-Im loans, guarantees and insurance programs have returned $3.4 billion over and above its costs and loss reserves, with a default rate of less than 2%.  That includes $400 million in 2011 alone.

Since defenders of Fannie Mae and Freddie Mac made the same claims up until the eve of the financial crisis, this is not exactly a compelling claim. And deposit insurance premiums were a money-maker for the federal government prior to the Savings & Loan crisis about 20 years ago.

It’s possible, of course, that the Ex-Im Bank avoids losses in the future, but that’s not the key point. The real issue is whether the allocation of capital should be distorted by government subsidies. I imagine the government could “profit” by giving sweetheart loans to selected big companies, which would allow those firms to undercut their competitors. Such a scheme might generate some revenue, but it would still undermine prosperity and foment corruption.

Last but not least, don’t forget the moral component. This is a debate about whether ordinary Americans should directly and indirectly pay for a program that enriches some of the biggest companies and richest shareholders in America.

This galls me so much that I’m motivated to create another narcissistic poster (adding to Mitchell’s Law and Mitchell’s Golden Rule), which I’ll call Mitchell’s Guide to an Ethical Bleeding Heart.

This is a formalized version of something I wrote when writing last year about a disgraceful welfare queen.

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