Obameter #36: Small Business Loans

Stop. It's Obamatime.

Obama believes that small businesses are the key to the economy, both for the recovery from our immediate situation and for long-term growth. In his own words, "Our recovery in the present and our prosperity in the future depend upon the success of America's small businesses and entrepreneurs." So when the US Small Business Administration (SBA) reported loans to small businesses were looking to be down $10 billion this year he felt compelled to act.

The old program said loans of up to $150,000 given to small businesses would be guaranteed for 85% of their value by the SBA. That way, the banks would get most of their money back one way or another. With the risk thus minimized, banks would be more willing to give out loans and small businesses would have a little boost from Uncle Sam. Larger loans might be guaranteed for as much as 75% of their value.

$3,600b 2009 Federal Budget

Previously discussed wasteful spending

Previously discussed worthwhile spending

$15b Small Business loan incentive expansion

Obama expanded this incentive program, just as promised. For a limited time, the government will cover 90% of the amount of small business loans. The price tag on this limited time expansion will be "up to $15 billion", according to the White House website.

What kind of measure of success is this? The government is spending less money than was expected. Thus, we must increase the amount of money government is spending to $5 billion more than was expected. The unspoken assumption in this logic is that government spending makes things better. But does it?

All through 2008 the SBA was up to it's $20 billion spending expectation, encouraging banks to lend to small businesses that were less likely to be able to pay them back. At the end of 2008, there was a huge financial crisis caused, in part, by lending money to people who probably wouldn't pay it back. Now banks aren't loaning money to risky clients even with the current SBA incentives. And Obama's solution is to increase the incentive for banks to lend money to business plans risky enough that they won't do it without government taking away 90% of the risk?

The banks learned their lesson. Why won't government?

Learn from Duke Nukem Forever: some projects are doomed to fail and do not deserve continued funding. They should be allowed to die. That's why investors aren't investing in them: they don't want to be carried down into debt with them. Government should not be spending money in support of risky lending.

Thankfully, Obama's lousy business loans plan has merely a $15 billion price tag. It's a drop in the federal bucket, less than one half of 1% of the annual budget. It's too little money to seriously worry about for it's own sake. What this example demonstrates about this administration's economic sense, though, remains a strike against them.