Over the past three years, the Small Business Administration has approved a record number of loan guarantees, supporting nearly $100 billion in small-business loans since 2011. It’s an accomplishment the agency officials have touted as evidence of their continued support for small companies and their contribution to the nation’s economic recovery.
But are they actually doing more harm than good?
A new study published by the National Bureau of Economic Research suggests that the SBA’s lending programs have a detrimental effect on the economy.
Under the agency’s primary lending programs, the department provides what’s known as a loan guarantee, usually equaling between 50 percent and 90 percent of the loan, that insures banks against losses in the event a borrower defaults. In large part, the decades-old programs are meant to encourage banks to approve small-business loans they might otherwise consider too risky.
But comparing three decades of the department’s lending data to income growth in more than 3,000 counties over the same period, researchers found that “an increase in SBA loans per capita in a county is associated with negative effects on its own rate of income,” as well as a negative impact on income levels in neighboring counties.
Specifically, they found that a 10 percent increase in SBA loans in a county was associated with a 2 percent slowdown in that county’s income growth.
How can programs so long considered an economic boon instead be deflating the economy? Researchers argue that the agency’s programs, because they entice bankers to consider riskier loans, appear to “come at the cost of loans that would have otherwise been made to more profitable and/or innovative firms.”
Considering the popularity of pro-small-business policies, they argue the findings should prompt policymakers and constituents to rethink their economic priorities.
SBA officials did not respond to questions about the study.
This isn’t the first study that casts doubt on the long-held notion that small firms fuel the economy and should thus receive special treatment from policymakers.
In 2011, for instance, a study by researchers at the University of Maryland and the Census Bureau found that no meaningful relationship exists between a company’s size and it’s rate of growth. Instead, it’s simply young firms, not necessarily small ones, that generate most of the country’s new jobs, researchers concluded.
A similar analysis published last year by the National Bureau of Economic Research arrived at a similar conclusion, leading researchers to question the economic impact of subsidizing financial support for small businesses. Others have found that the jobs small businesses do create are less desirable, as they often exist for a shorter amount of time, pay lower wages and generally include less generous benefits.
“The job creating prowess of small businesses is often used by policymakers to motivate and justify specific policies,” the Maryland and Census researchers wrote in their concluding report, adding that their “findings suggest the policy debate about encouraging private sector job creation should be refocused.”