Senator Tom Coburn (R-OK) recently called a hearing to evaluate the SBA and its programs. As you know, WIPP issued a statement prior to the hearing. We wanted to provide you with some detailed coverage from this hearing. Please see below for more information. If you have any questions, please feel free to contact WIPP at 415-434-4314.
On Thursday, April 6th, WIPP attended a hearing held by the Subcommittee on Federal Financial Management, Government Information, and International Security entitled, “The Effectiveness of the Small Business Administration”. Committee Chairman Tom Coburn (R-OK) called the hearing with the goal of examining whether the practices that the Small Business Administration (SBA) has in place are an effective use of tax dollars and more importantly serve a useful function for small businesses.
While some of the discussions leading up to the hearing were heated, the hearing did not play out as an insult to small business as previously planned. Instead, the value of the SBA and its programs was evaluated for its effectiveness and efficiency for promoting small businesses across the country. Overall, the subject matter received balanced testimony both for and against SBA programs.
Seven witnesses testified at the hearing: Representative Kelly (R-NY); Hector Barreto, SBA Administrator; Dr. William Shear, Director of Financial Markets and Community Investment for the U.S. Government Accountability Office (GAO); Dr. Veronique de Rugy, Research Fellow at the American Enterprise Institute; Dr. Jonathan Bean, Professor of History at Southern Illinois University; David Bartram, Chairman of National Association of Government Guaranteed Lenders; and John Pointer, Small Business Owner.
Rep. Kelly testified on behalf of her experiences with small businesses in her district and indicated that at the time she took office, two very large businesses had just closed their plants, with a total job loss of over 14,000. The economic revival of the area depended on small businesses filling the void left by the large business departure. She also testified that those small businesses would not have survived without the help of the SBA, and that the use of Small Business Development Centers (SBDC) was especially helpful to businesses in her district.
Administrator Barreto testified on the impact that small businesses have on the U.S. economy. He cited U.S. Census statistics that state that 98% of all businesses have less than 100 employees. Furthermore, the 24 million small businesses in the country produce over 50% of net new jobs and are the engine of the economy. He also testified to the levels of support that the SBA provides for small business. He cited $28 billion in financial assistance to small business in FY 04. Administrator Barreto spoke highly of his staff and the rest of the SBA in their pursuit to promote small business development.
One of the central questions that Chairman Coburn posed to Administrator Barreto was the definition of small business. Coburn produced a chart listing the different sizes, both in revenue and employees, of different companies large and small. Coburn meant to indicate that the definition of small business seems arbitrary and virtually meaningless. Administrator Barreto admitted that some companies may seem large depending on the industry in which they work.
Dr. William Shear, Director of Financial Markets and Community Investment for the U.S. Government Accountability Office (GAO) discussed the changes in SBA’s oversight of the 7(a) business loan program, steps SBA has taken to improve its management strategies, and the administration of the disaster loan program. Dr. Shear was complimentary to the changes that SBA has made in its commitment to oversight and review of 7(a) lenders. In addition, he recognized the struggles that the SBA has had in addressing other management problems that affect its 7(a) program. The GAO found that although SBA applied some key practices important to successful organizational change, it overlooked aspects that emphasize transparency and communication. Furthermore, Dr. Shear commented that the SBA has made good progress in response to GAO’s recommendations addressing financial management issues. Lastly, Dr. Shear discussed several factors that he believed affected SBA’s ability to provide a timely response to the Gulf Coast disaster victims.
Chair Coburn repeatedly asked Dr. Shear if the GAO had conducted any studies as to the cost-effectiveness of the SBA programs. Coburn’s concern was that tax-payer money was not being spent wisely and wanted a study to determine whether or not the SBA was achieving its stated goals in a cost-effective manner.
Dr. de Rugy stated that her testimony sought to answer a few basic questions about the role of the SBA in the market. Those basic questions were: 1) Are the SBA 7(a) loan guarantees desirable? 2) Should the SBA remain in banking, credit allocation, and subsidize business or should these activities be terminated? 3) Is there a market failure that justifies government intervention? If there is a market failure, are the SBA programs well designed to address the problem? The conclusion that she came to is that there seems to be no market failure present in the private sector to allocate loans effectively, thus discrediting the economic justification for any government-sponsored small business lending or loan guarantee program. She testified that in 2004, 29 percent of 7(a) loan guarantees went to minority-owned businesses, but SBA distributed loans to only 3 percent of all minority-owned firms. She indicated that the same trend is true for women-owned businesses.
Her report goes on to indicate that no more than one percent of small businesses receive SBA loans each year, which contradicts the assumption by the SBA that they are helping to solve a critical credit rationing problem that exists in the market. De Rugy emphasized that she is not anti-small business or anti-American. She simply believes that there is no market failure present in the private sector to warrant unneeded government programs.
De Rugy did not testify on her
report, “Are Small Businesses the Engine of Growth,” an AEI Working paper, nor did she testify on her article “Small Firm Idolatry.”
Dr. Jonathan Bean and John Pointer went on record to testify about their claims of instances of fraud, abuse, and waste practiced by the SBA.
Lastly, Dr. David Bartram, Chairman of the National Association of Government Guaranteed Lenders, testified in support of the SBA 7(a) loan programs. He testified that 7(a) and 504 loan programs account for about 40% of all long-term small business loans made in America. He testified that this makes the SBA the single largest provider of long-term capital to U.S. small businesses.
WIPP will continue to monitor this issue. Please visit WIPP at www.wipp.org.
