Abolish the SBA

by Veronique de Rugy

Today, in the pages of the Wall Street Journal I debate Barbara Kasoff, the president and chief executive of Women Impacting Public Policy, about whether or not we should abolish the Small Business Administration. I say, yes, abolish SBA; she disagrees.

In my piece, I argue that SBA has, at best, a negligible impact on the lending market for small businesses, is nothing more than corporate welfare, and costs taxpayers a lot of money. Here is my conclusion:

More than 150 years ago, 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.

Ms. Kasoff, on the other hand, begins her piece by explaining that “about half of the people who work in this country are employed by a small business.” Considering that the SBA says that small businesses account for 99.7 percent of firms in America, this means that a small fraction of non-small businesses employ about half of the people who work in this country.

She also claims that small businesses create more of the new jobs, and hence, must be promoted and helped. To that I would say that if in fact they are so productive, there is no reason to help them. However, the claim that small businesses are the engine of growth has been proven wrong many times in the last five years.

As I explain in my upcoming Reason column, the academic literature shows that it is new firms not small firms that create jobs.

For instance, a 2010 paper from University of Maryland economist John Haltiwanger and researchers at the U.S. Census Bureau published by the National Bureau of Economic Research found no systematic link between net job-growth rates and the size of a business. Instead, they found that firms less than ten years old, particularly start-ups, are where the job growth is. Businesses less than a year old account for 3 percent of U.S. employment, but almost 20 percent of new gross jobs. As former Obama administration official, Jared Bernstein recently explained in the New York Times, “It’s not small businesses that matter, but new businesses, which by definition create new jobs. Real job creation, though, doesn’t kick in until those small businesses survive and grow into larger operations.”

In the end, real job growth comes not from people dreaming of being small-business owners, but from people committed to building large and sustainable companies. A seminal study on entrepreneurship by David L. Birch, a former MIT researcher, shows that small-firm job creation occurs within relatively few firms, which he calls “gazelles.” Gazelles are high-growth entrepreneurial companies that started small and quickly grew larger. This subset of small firms, not small firms in general, is the powerful engine driving job growth and innovation in our economy. It is these firms that should be targeted by government policies, if it were the role of the federal government to promote job creation.

Unfortunately, that cannot be done. No one can identify a gazelle before it takes off. The label can be applied only by looking at past growth, long after the firm has created new jobs. Because no one knows where new jobs or innovation will come from, it is impossible to accurately pinpoint the job-creating or entrepreneurial firms.

I wrote about this issue back in 2005 here.

Our debate is here.

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