The Corner

Oh Look, The Small Business Administration Is Subsidizing Rolex Dealerships, Country Clubs, and Spas

For years now, I’ve argued that the Small Business Administration should be abolished. This is one of my most unpopular positions, because everyone loves small businesses. But you can, in fact, love small businesses without thinking that they should be subsidized by the federal government. (If you really love small businesses, you should be for comprehensive tax and regulatory reforms.)

A few reasons why the SBA is a bad idea: First, it’s unclear what problem these loans are trying to address in the first place. A close look at the SBA lending programs revealed how inconsequential and unnecessary to the thriving small-business sector the agency is. While I do understand that those who get the loans like it, that doesn’t mean that it is socially or economically desirable. There is plenty of evidence that today the SBA hurts more small businesses than it helps, by wasting taxpayer money and distorting economic activity.

The SBA loan programs are just another examples of corporate welfare — the main beneficiaries are exactly who you’d think they are. A few years ago, my colleague Tad DeHaven (who was at Cato at the time) and I documented how “the programs are actually a form of corporate welfare for some of America’s largest banks.” “The banks reap profits from the program, but taxpayers are liable for the losses,” we explained. The biggest beneficiaries are well-connected banks like Wells Fargo, J.P. Morgan, U.S. Bancorp, and PNC Financial Services Group. Those same banks were once against the program on the grounds that the federal government should not be involved in commercial lending (damn right it shouldn’t), but when the SBA switched from direct lending to backing loans issued by private lenders . . . the big banks were magically in favor of the SBA.

And boy, are taxpayers exposed to serious losses. Check out the default rates on franchise lending, for instance. I wrote about it a while back:

There’s a long list of franchise brands with default rates from 40 percent to over 94 percent through 2011, put together by the president of the American Business Brokers Association William Bruce. All the names on the list, including Blockbuster and Quizno’s, had a minimum of ten loans with the SBA. All these defaults are paid for with taxpayer money.

On the list of bands with default rates up to 20 percent, you find Ben and Jerry’s Ice Cream (19.44 percent default rate), McDonald’s (20 percent), UPS Stores (16.11 percent), and more.

Adding insult to injury, SBA loans aren’t only funding mom-and-pop businesses. A new Federal Transfer Report shows that a large amount of loans are going to fund luxury outfits which, I assume, probably have access to capital and aren’t exactly what the public has in mind when thinking SBA lending. Here are some of the findings:

• $67.23 billion in Federal Transfer™ SBA loans and loan guarantees flowed to 34,677 entities with a minimum amount of $1 million (FY2007-2013).

• Amid the $1 million SBA Wealthy Lifestyle loan recipients are:

–    members-only country clubs 

–    high-end private clubs for yachting, skiing, shooting, surfing, & smoking cigars

–    wineries- including those in Napa Valley and Sonoma, CA

–    lodges and resorts in Jackson Hole, Cape Cod, Palm Beach, Lake Tahoe, etc.

–    millions of dollars to high-end pet resorts

–    exclusive Rolex and other up-scale, affluent jewelers

–    Lamborghini and other luxury auto dealers

–    aesthetic enhancement and plastic surgery clinics

–    helicopter tour companies, BMW motorcycle dealers

–    injury lawyers; artistic dental firms

–    venture capital, mezzanine finance & private investment pools

–    specialty entities including golf courses, marinas & more! 

The whole report is here. The Washington Times story on the report is here.

The bottom line is the Small Business Administration is not doing what it claims it does, is careless with taxpayers’ money, and is misleading the public. Let’s abolish it once and for all.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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