Tad DeHaven

There's plenty of talk about cutting the federal budget these days in Washington. And there's lots of fighting over the size of the federal government. But there has been relatively little discussion about the scope of Uncle Sam's activities.

That's unfortunate because our ailing economy is still struggling to recover from a recession that had Washington's manipulating fingerprints all over it.

Not content with the damage they've already done, politicians in Washington continue to entrust stale bureaucracies with the job of righting the economic ship instead of getting the federal government out of the way.

One of those bureaucracies is the Small Business Administration, which has been employed by Congress and President Obama to reignite private-sector lending.

The SBA does this by guaranteeing loans issued by private lenders for up to 85 percent of losses in the event that loan recipients default. As a result of the guarantee, lenders are more willing to lend money to riskier applicants because the SBA -- and thus taxpayers -- is ultimately responsible for the bulk of any losses.

Never mind that surveys of small-businesses owners consistently show that taxes and regulations are their biggest problems while financing polls in the single digits. Instead, the politicians' faith rests with agencies like the SBA, which was signed into law against President Eisenhower's better judgment because he wanted to counter criticisms that Republicans were beholden to "big business." (How'd that work out?)

Federal subsidies to small businesses didn't make sense in the 1950s and it doesn't make sense today. However, the SBA's defenders argue that market-driven lending denies credit to worthy small businesses, and so the government must correct this alleged "market failure."

Except that there isn't any "market failure." Capital markets have developed effective private solutions such as credit scoring to overcome the asymmetry of information between lenders and borrowers.

Besides, small businesses with sound business plans and solid prospects should be able to raise debt and equity capital through private means. If a small business has shaky finances and questionable prospects, it should be denied private capital as a bad business risk.

Indeed, the large failure rates on loans backed by the SBA illustrate that the government's credit market interventions do a poor job allocating capital.

Fortunately, the SBA's presence in the credit markets is largely irrelevant. The Government Accountability Office has calculated that SBA loans only account for a little more than 1 percent of total small-business loans outstanding.


Tad DeHaven

Tad DeHaven is a budget analyst at the Cato Institute. Previously he was a deputy director of the Indiana Office of Management and Budget. DeHaven also worked as a budget policy advisor to Senators Jeff Sessions (R-AL) and Tom Coburn (R-OK).