SBA’s Risky Franchise Lending

The Small Business Administration’s (SBA) stated mission is to aid small businesses and strengthen the economy. Under its popular 7(a) program, SBA provides private lenders with loan guarantees. In the case of default, SBA steps in to cover up to 85percent of the lender’s losses.

This structure encourages lenders to provide more loans, but also encourages the approval of riskier loans. The lenders are insulated from most of the risks of default.  

A new analysis conducted by the Wall Street Journal confirms that this arrangement induces SBA to provide loans that result in a large number of defaults. Default rates for some franchise companies can be as high as 40 percent. According to the Wall Street Journal:

Quiznos, Cold Stone Creamery, Planet Beach Franchising and Huntington Learning Centers Inc. ranked among the 10 worst franchise brands in terms of Small Business Administration loan defaults.

Franchisees of the 10 brands in the ranking defaulted at more than double the rate for SBA borrowers who invested in all other chains, according to a Wall Street Journal analysis of charge-offs of all SBA-backed franchise loans in the past decade.

Put another way, franchisees of those 10 brands have left taxpayers on the hook for 21% of all franchise-loan charge-offs in the past decade, collectively failing to pay back $121 million in SBA-guaranteed loans from 2004 through 2013.

Thirty percent of the loans provided to Quiznos and Cold Stone Creamery franchises ended in default. The losses from loans to Quiznos franchises totaled $38.4 million during the 2004 to 2013 period, while losses to Cold Stone Creamery amounted to $34.1 million.

This is not the first time that SBA’s franchise lending has been criticized. In a report focused on franchises, SBA’s Inspector General noted in 2013 that SBA “had not implemented a program or process to monitor risk in its portfolio.” The report continues: “SBA did not monitor portfolio segments to identify risk based on default statistics…SBA continued to guarantee loans to high-risk franchises and industries without monitoring risks, and where necessary, implementing controls to mitigate the risks.”

Franchise businesses are an important component of SBA’s activities. In its new analysis, the Wall Street Journal points out that “SBA guaranteed nearly $18 billion in 7(a) loans [in 2013], including $2 billion for franchisees.”

Taxpayers are picking up the costs of these government loan guarantees. SBA charges lenders fees to mitigate the costs of default, but the fee amount seem to be too low. Most recent years, SBA has received a net outlay, or subsidy, from Congress.

What should be done? At the very least, SBA should take its inspector general’s recommendations and review its practices regarding franchise loans to reduce the number of defaults. Ideally as argued on www.downsizingovernment.org, SBA should be closed down.

Secret Service Spending

Another federal agency has screwed up. This time it is the Secret Service, which almost allowed an intruder to make a surprise visit on the Obamas. The Washington Post reports:

The Secret Service on Saturday launched a security review to learn how a man carrying a knife was able to get inside the front door of the White House on Friday night after jumping a fence and sprinting more than 70 yards across the North Lawn.

In response to the failure, Rep. Jason Chaffetz observed that “the Secret Service has a serious management problem.” According to the Post:

The service, which once enjoyed a sterling reputation as an elite law enforcement agency, has struggled with some embarrassing episodes recently and the perception that its leadership is lagging in the best security strategies. In spring 2012, the service faced a humiliating moment when a dozen agents were shipped home from a presidential trip in Cartagena, Colombia, where they were implicated in a night of carousing and boozing with prostitutes.

The latest fence-jumping incident is no laughing matter, but this line from the Post did make me chuckle: “Former agents said they fear the breach may be related to a severe staffing shortage the agency has struggled with in the last year in its Uniform Division.”

Staffing shortage? How is that possible when the Secret Service budget has doubled in real (inflation-adjusted) terms since 1998—from $0.9 billion to more than $1.8 billion? The chart shows the particularly strong growth during the George W. Bush years.  

Education under the New Swedish Order

Just over a week ago, Swedes threw out the relatively pro-market coalition that had goverened the country for the past 8 years, handing power (though not an outright majority) to a new left-of-center coalition. Swedish students’ falling scores on international tests were a key cause of public dissatisfaction, and they have been widely blamed on a nationwide voucher-like school choice program introduced during the early 1990s. But as I point out in an op-ed in yesterday’s Svenska Dagbladet, the facts simply don’t support that narrative. Here’s the English draft of the op-ed:

Sweden’s collapsing performance on international tests was clearly a factor in the recent election, and redressing that slide will be a priority for the new government. A good first step in charting the way forward is to understand what has gone wrong and what has gone right in the past. Unfortunately, the most popular narrative about Swedish education trends is badly mistaken.

Many have blamed Sweden’s falling international test scores on the proliferation of free schools, merely because the decline is thought to have followed their large-scale expansion. This would be a common logical fallacy even if the timing were correct—but it isn’t.

Between 1995 and 2011, Swedish math scores on the Trends in International Mathematics and Science Study (TIMSS) fell by a massive 56 points. But the vast majority of that decline—41 points—had already taken place by 2003. In that year, 96 percent of Swedish students were still enrolled in government schools.

Another international test, the Programme on International Student Assessment (PISA), began in the year 2000 and has the advantage of breaking out the scores for government and private schools. The last PISA test was administered in 2012, by which time government school scores had fallen by 34 points while free school scores had fallen by only 6 points.

Anders Böhlmark and Mikael Lindahl’s long-term nationwide study helps to explain these trends: increased local competition from free schools actually raises the performance of students in both sectors—on both national and international tests. But, since free schools still enroll a small fraction of students nationwide, the benefits of this competition have yet to be felt in many areas.

Of course, none of this is to suggest that there are no bad private schools. There has never been an education system in history capable of producing only good schools. The best that can be hoped for is that unsuccessful schools close while good schools expand. And that is precisely what has been happening in Sweden.                                           

Much has been made of the failure of JB Education, which attracted too few students to remain financially viable, and was forced to shut down. This was regrettable for everyone directly concerned, in the short run. In the long run, it is better than any realistic alternative. In most countries, including the United States, atrocious government-run schools are able to continue operating indefinitely because they face no meaningful competition—the poor parents they most often serve simply cannot afford any alternative. These schools are numerous enough that a term has been coined to describe them: “dropout factories.” Swedish families are lucky that they can far more easily escape such schools.

Not only does the Swedish system pressure failing schools to close, it encourages good ones to expand. International English Schools is one of the highest-performing school networks in the country, even after controlling for the parental level of education and immigrant background of its students. It is also one of the fastest growing, now operating 25 schools serving nearly 18,000 students. IES has plans to continue growing so long as demand for its services remains unmet. But if IES’s emphasis on academics and civil classroom behavior seems too traditional for some families, there are many other options to choose from. Another large and successful network is Kunskapsskolan, which allows students to proceed through the curriculum at their own pace, combining tremendous student autonomy with weekly one-on-one meetings with teachers.

But not all good private schools grow. Specifically, non-profit schools tend not to build large networks, no matter how good they are. As a result, thousands of students who might benefit from their services never get the chance to do so. The only good schools that consistently “scale-up” in response to rising demand are those operated as for-profit enterprises. This is not a coincidence. Building a network is both risky and expensive. The profit-and-loss system provides both the resources and the incentives that allow and encourage successful enterprises to grow.  

Sweden is fortunate to have harnessed that system to spur the growth of its high performing schools. Chile does the same thing, and has become not only the highest-performing nation in Latin America but also one of the fastest-improving countries in the entire world on international tests. If Sweden wishes to become a fast-improving nation educationally, the evidence strongly supports preserving the entrepreneurial freedoms and incentives that promote the growth of successful education networks.

The Constitutional Dimension of Your Morning Commute

Over the last few years, D.C.-area drivers may have noticed the continual increases in toll fares on the Dulles Toll Road, the highway going through the Northern Virginia suburbs past Dulles Airport.  Indeed, since 2005, the toll for the typical round-trip commuter has more than quadrupled from $1.50 to $7.00, with more increases coming. These extra toll dollars haven’t been going for upkeep or expansion of the highway, however, but instead have been funding the over-budget and under-performing construction of the Metro’s Silver Line extension.

While originally slated to fund only 25% of that cost, commuters are now looking at paying more than half of the $5.6 billion (and counting) total cost, with years of construction still to come. The entity in charge of the construction project (and of gouging the toll road’s commuters) is the Metropolitan Washington Airports Authority, a public body established to govern Dulles and Reagan National airports at the behest of the Department of Transportation. But who’s actually in charge of the MWAA, and to whom can beleaguered commuters turn for relief? Although created by an interstate compact between D.C. and Virginia, the MWAA was granted all of its authority by an act of Congress, and the highways and airports that it oversees are federal property.

In many ways, the MWAA acts like a federal agency—in nearly all ways, in fact, except one important aspect: oversight. If federal assets and lawmaking power are being delegated to the MWAA, then there must be a means for the executive branch to “take care that the laws be faithfully executed.” The MWAA, however, is governed by a board of individuals whom the president has no meaningful ability to appoint, oversee, or control. This means that the MWAA has no political accountability for its decisions.

Having no other meaningful recourse, a group of Dulles Toll Road users sued the MWAA, arguing that its decrees violate the separation of powers. (Full disclosure: my wife and I just bought a house in Falls Church and will likely be using the road every now and again, though not on my commute to Cato.) The federal district and appeals courts—two of them, in an unusual development whereby the Federal Circuit transferred the case to the Fourth Circuit—decided that the MWAA’s nature as a state-created entity required the case to be dismissed. Moreover—get this—because the MWAA has no meaningful executive-branch control, there is no separation-of-powers issue. (This despite the federal government’s appearance as an amicus to argue that the MWAA exercises federal power and is subject to separation-of-powers scrutiny.)

Undeterred, the plaintiffs have petitioned the Supreme Court to hear their case. Cato has joined the American Highway Users Alliance and the Recreation Vehicle Industry Association on a brief supporting their petition. We argue that the Court should take the case because (1) there is a critical violation of the separation of powers, (2) there are already manifest harms resulting precisely from that violation, and (3) the federal government sees and treats the MWAA as a federal agency—but one without any meaningful accountability whatsoever.

It isn’t every day that a separation-of-powers case is as squarely presented as it is here, where commuters are being railroaded, so to speak, by a runaway agency whose conductor is absent. The executive branch has to take the blame not only for the MWAA’s policies, but its corruption, incompetence, and mismanagement.

The Supreme Court will decide whether to take Corr v. Metro. Washington Airports Authority later this fall.

Bipartisan Agreement against the Taxpayers

The Washington Post reports on strong disagreements in consecutive appearances by Virginia Senate candidates Mark Warner and Ed Gillespie. Obamacare, terrorism, lobbying, partisanship – lots of arguments. But take heart, the Post advises us: “Despite the positioning, both candidates agreed on a few topics.” As usual, as I’ve written before, when you hear about bipartisanship, watch your wallet. Here’s what Warner and Gillespie agree on:

For example, they each called federal sequestration cuts devastating to the Northern Virginia economy.

Gillespie said Warner was in support of sequestration, while Warner blamed Republicans for allowing the automatic spending cuts to go through after Congress failed last year to resolve the debt-ceiling crisis.

“Sequestration is stupidity on steroids,” Warner said, promising to look for places to cut spending in other areas. “You have to take on entitlement reform and tax reform.”

Both also agreed that there is an urgent need to improve Virginia’s transportation infrastructure, though Gillespie said the solution lies in bringing in more revenue through deep-sea oil drilling and Warner argued for privatizing portions of transportation improvements.

On national security, Gillespie and Warner agreed on a need to spend more on the U.S. military in the face of the threat posed by the Islamic State.
Once again, what the candidates agree on is spending the taxpayers’ money.

Should We Credit Global Warming When Disasters Don’t Happen?

Every time there is some sort of weather disaster somewhere, someone blames it on human-caused global warming. Maybe not directly, but the implication is clear. “While we can’t link individual events to global warming, the increase of this type of event is consistent with our expectations, blah, blah…”

Most recently this came in testimony from White House Science Adviser John Holdren before the Committee on Science, Space, and Technology of the U.S. House of Representatives:

In general, one cannot say with confidence that an individual extreme weather event (or weather-related event)—for example, a heat wave, drought, flood, powerful storm, or large wildfire—was caused by global climate change. Such events usually result from the convergence of multiple factors, and these kinds of events occurred with some frequency before the onset of the discernible, largely human-caused changes in global climate in the late 20th and early 21st centuries. But there is much evidence demonstrating that extreme weather events of many kinds are beginning to be influenced—in magnitude or frequency—by changes in climate.

Holdren then goes to list a bunch of types of extreme weather whose characteristics have changed (remarkably, all becoming worse), adding that:

There are good scientific explanations, moreover, supported by measurements, of the mechanisms by which the overall changes in climate resulting from the human-caused build-up of heat-trapping substances are leading to the observed changes in weather-related extremes.

San Francisco Taxi Trips Plunge Amid Rise of Rideshare Companies

According to Kate Toran, the San Francisco transport authority’s Taxis and Accessible Services interim director, companies such as Uber and Lyft, which provide ridesharing services, “have dramatically changed the for-hire transportation industry in San Francisco.”

A few days ago, the San Francisco Examiner reported on a presentation Toran gave to the San Francisco Municipal Transportation Agency (SFMTA) board of directors. The presentation included the slide below:

 

Uber and Lyft are both headquartered in San Francisco and are classified as Transportation Network Companies (TNCs), a designation created by California’s Public Utilities Commission last year.