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Everybody Hates the SBA

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tags: bailouts, COVID-19, Small Business, Small Business Administration, SBA, Regulatory capture



COUNTLESS STORIES HAVE emerged to this effect: small-business owners left out of a too-small program, hastily assembled by an overmatched administration, furnished by a too-greedy private banking sector. All of this has conspired to push mom and pop to the brink. Already there have been lawsuits; with each new revelation about the program’s well-fed recipients, outrage swells.

Who is to blame? And how did the SBA, a government department that has been generously described as a backwater for almost its entire 70-year existence, end up as the last line of defense against a global economic crisis? One would think that an agency designed to cater to the needs of something so universally adored and essentially American would be as robust and well managed as any in the federal government. One would be wrong. Understaffed, underfunded, habitually scorned, sleepy, captive, and at times uncertain in its own methods, the SBA became the most important unknown government agency, basically overnight.

The SBA was founded in 1953, under President Eisenhower. It was cobbled together from spare parts of the recently dismantled Reconstruction Finance Corporation, an agency created by Herbert Hoover but expanded drastically by Franklin D. Roosevelt to become one of the essential bodies of the New Deal. At the height of the New Deal era, the RFC loaned money to state-chartered banks and small banks in rural areas that were not part of the Federal Reserve System. The RFC could make loans that the Fed and other lenders would not accept, expanding access to funding to crucially underserved and underdeveloped parts of the country. It even bought stock in flagging industries and helped them right the ship.

As the country prepared for World War II, Congress gave Jesse Jones, the RFC’s head, practically limitless power in establishing weapons and defense manufacturing. At the same time, it created the Smaller War Plants Corporation (SWPC), which made direct loans and encouraged banks to lend to small entrepreneurs, diversifying military contracting and preventing monopolistic dominance. As the RFC waned, Eisenhower, wary of the “military-industrial complex” from his time commanding the Army, looked to create a nondefense analogue to the SWPC. “Eisenhower was an anti-monopolist, he very much understood small business, and believed the role of government was to keep industries from becoming too concentrated,” said Stacy Mitchell, co-director of the Institute for Local Self-Reliance. “Republicans wanted to differentiate themselves from Democrats and decided to launch the SBA as part of that thinking.”

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But before long, large corporations discovered the SBA money pot, and began scheming to siphon funding for their own advancement. The automobile, oil, and hotel industries pestered the agency for access. But the chain restaurant industry was most successful in breaking through. Fast food in particular relied on franchising to circumvent some restrictions on monopoly behavior. Like Harpreet Chima, franchise owners were freestanding legal entities, but the parent company controlled them through restrictive and far-reaching contracts.

Franchises were initially considered, in the words of then-Administrator Eugene Foley, “distribution outlets of large businesses.” But in 1966, the SBA succumbed to lobbyist pressure from the International Franchise Association and changed its rules, which overnight set it on its current path toward corporate capture. The SBA now actually gives special preference to aspiring franchisees, despite the fact that the failure rate of Subways and 7-Elevens is much higher than that of the average independent small business. In 2014, 43 percent of first-time franchisees obtained financing from SBA loans.

Read entire article at American Prospect

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