October 22, 2008 4:23PM

“Small” Businesses Not Getting “Fair Share” of Government Cheese

The decades long battle over what constitutes a “small business” for purposes of government contracting set‐​asides (and subsidies for that matter) continues in today’s Washington Post. Once again, it appears that the federal government has been negligent in making sure the “big” guys aren’t swiping slices of the “small” guys’ cheese. Oh dear.

With regard to set‐​asides, regardless of who gets the government contract, taxpayers lose because they foot the bill. Because set‐​asides effectively limit the competition for a government contract, taxpayers can end up paying even more — especially when economies of scale would have allowed a larger business to offer a lower‐​cost alternative. Thus, I had to chuckle at the bereaved “small” defense contractor cited by the Post who bizarrely claims that these set‐​asides “keep down the cost to the taxpayers.”

Not to be outdone, the ever‐​excitable defender of small business set‐​asides, Lloyd Chapman, told the Post that the economy has been damaged by small businesses not getting their “fair share.” Lloyd heads up a group called the “American Small Business League,” which sounds innocuous until one discovers that it’s just another special‐​interest outfit fighting to secure a suckling position on the federal underbelly.

The federal government’s flagship promoter of the small business plight, the Small Business Administration (SBA), has been “helping” small businesses since the 1950s. However, Cato adjunct scholar, Dr. Veronique de Rugy, has found that “no more than 1 percent of [all] small business loans each year are SBA loans. The private sector finances most loans without government guarantee and, hence, the SBA is largely irrelevant in the capital market.” Moreover, because SBA financed loans have below market rates, small businesses who aren’t subsidized by the government are placed at a competitive disadvantage. (Read de Rugy’s entire piece here.)

So how does a bureaucracy that is a detriment to the interest it is supposed to promote still alive? The simplest reason is that, like thousands of other unnecessary government programs, the SBA has developed a vocal constituency. The small minority of businesses on the SBA dole obviously have an interest in its survival. Banks lobby for the SBA’s existence because SBA‐​backed loans guarantee lenders up to 85% repayment in case of default (i.e., SBA loans represent welfare for bankers).

Historian Jonathan J. Bean touched on additional reasons for SBA’s survival during his 2006 testimony before a Senate subcommittee hearing on the agency. The context is the Reagan administration’s failed attempt to abolish the SBA in the 1980s (click here for entire testimony):

“To a large extent, the SBA is a “creature of Congress.” Why was Congress so interested in the SBA? Many members were sincerely interested in small business issues. Others used their committee membership to strengthen ties with the business community. The SBA was a useful conduit for the constituent work of the Small Business Committees, a dumping ground for politicos, and a “petty cash drawer” for the pet schemes of Congress. The agency’s extensive field structure served many congressional districts; the field directors were “often as loyal to their district Congressman as to the agency.” It is little wonder, then, that Congress was so fond of the SBA.”

Set‐​asides and subsidies aren’t good for small businesses — they’re only good for politicians and taxpayer‐​dependent special interests. If Congress really wants to help, it should drastically reduce the tax and regulatory burden that inhibit a small business’s ability to compete and prosper. Heck, just doing away with the SBA would be a plus.