Eliminate the Small Business Administration

Small businesses are often celebrated in American society, but the role of the government in supporting these enterprises through agencies like the Small Business Administration (SBA) is increasingly scrutinized. The assumption that it is the government’s duty to subsidize private businesses, whether they’re small, minority-owned, or environmentally conscious, deserves reevaluation. Though small businesses employ a substantial percentage of American workers—45.9 percent, according to the SBA—this statistic can be misleading. Notably, 99.9 percent of all businesses in the U.S. are classified as small, which means the colossal businesses that make up the remaining 0.1 percent employ a greater share of the workforce. This raises questions about the real impact of the SBA, which has often been criticized for its inefficiency and limited reach.

While the SBA may claim to fill a critical gap in lending for small businesses that struggle to get sufficient capital, its loans constitute a mere 1 percent of the total small business loans made in the country. The whole premise of government intervention based on the idea of market failure—believing that the absence of support indicates a lack of suitable financial backing—is questionable. Though some businesses benefit from the SBA’s subsidies, it is crucial to consider the hidden victims of this lending practice. By favoring certain small businesses, the SBA creates an uneven playing field, particularly in competitive sectors such as retail and hospitality, where some businesses enjoy lower borrowing costs. Consequently, unsubsidized companies may face higher costs, further complicating their ability to compete.

The existence of SBA guarantees, which can cover up to 85 percent of losses in case of default, incentivizes lenders to favor subsidized borrowers over unsubsidized ones. This trend shifts the lending landscape in a way that can harm businesses not reliant on government aid, ultimately leading to marginally higher borrowing costs for these enterprises. The burden also extends to taxpayers, who are responsible for covering the losses incurred from SBA defaults, which traditionally happen in about one in six loans. The fact that taxpayers are on the hook for these loans draws attention to the problematic nature of the SBA’s existence and operations.

The COVID-19 pandemic further inflated the SBA’s budget, escalating from less than $1 billion in annual expenditures prior to 2020 to an estimated $33 billion for 2024. A major component of this increase was the Paycheck Protection Program (PPP), designed to mitigate the negative effects of government-imposed lockdowns. However, evidence suggests that much of the PPP financing reached companies that were relatively well-capitalized and less affected by closures. This highlights a significant flaw in the SBA’s distribution practices, where funding often flows to businesses that lack need-based criteria for support.

Moreover, the SBA’s history of responding to disasters has been fraught with complications. From Hurricane Katrina to the recent pandemic, the agency has struggled to provide swift and efficient access to capital for small businesses in times of crisis. Testimonies reveal that working through the disaster loan program is commonly viewed as “horrific,” with those businesses best positioned to benefit being the wealthier ones, already equipped with relationships and processes in place for navigating the bureaucratic landscape. This raises concerns about equity, as many smaller businesses are unable to secure support when they need it the most.

Critics of the SBA, including former policymakers like President Reagan’s budget director David Stockman, have long viewed the agency as a “billion-dollar waste.” Despite attempts to abolish it, the SBA persists, growing from a relatively modest entity into a behemoth costing taxpayers $33 billion annually. This growth raises concerns not only about fiscal responsibility but also about whether the SBA effectively fulfills the needs of small businesses or simply exacerbates existing inequalities in the lending landscape. In a competitive economy, it is crucial to consider whether government intervention in the form of SBA loans does more harm than good, ultimately distorting credit markets and favoring a select few over the broader business community.