Business loans in Obama's budget another form of pork

Obama rolled out his massive $3.8 trillion budget yesterday and, as Politico writes, it "shows that, like any politician, he's focused on rewarding friends and not enemies. Just take a look at the huge increase in education. Teachers unions are a strong component of the Obama coalition."

"Like any politician" - does someone I the media finally get it? During the campaign and afterwards, we were fed an image that he transcended politics, was our Savior, was bipartisan, was ‘like a God". Pastor Jeremiah Wright was right. He knew Obama like few others did and he told us that Obama was ‘just a politician". Aside from that observation, there is a huge increase in small business "lending".

The president touted the importance of small businesses to the economy at length during his State of the Union, and his budget gives small companies big advantages. Obama's budget completely eliminates capital gains taxes for investments in the smallest tier of business and provides for a total of $28 billion in loan guarantees aimed at businesses with few employees or little revenue.

The $28 billion in loan guarantees for small business will be accompanied by a 21% increase in the Small Business Administration's budget to $994 million. Perhaps these are in a response to the image of Obama as being anti-business; perhaps they are a response to head off the Chamber of Commerce's campaign to inform America of Obama's anti-business policies. Or perhaps the team from Chicago has a different purpose in mind

Both these programs provide plenty of ammo for patronage and pork. The loan guarantees will be channeled to people, companies, and areas that Obama and his team want to reward. They might as well be written off when granted because they will be a disaster.

In fiscal year 2008, the SBA will guarantee $28 billion in loans, mainly through its flagship 7(a) loan program Plenty of evidence indicates, however, that the time has come for Congress to abolish the SBA loan programs. Here are just three reasons.

First, academic literature shows that private capital markets already efficiently allocate loans to small businesses. Banks give credit at the right price to companies that deserve it at that price, including small businesses.

Empirical studies prove that point, too. In 2002, the Federal Reserve Board reported that the demand for small-business financing closely tracked the pattern of debt growth from 1997 to 2002, suggesting a correlation between the demand and supply of financing. Although conditions deteriorated substantially in 2001 and the beginning of 2002, small businesses didn't find financing conditions onerous and weren't suddenly having more difficulty obtaining credit during that period.

Second, shutting down the SBA would hardly stop small businesses from getting loans. Only 1% of small businesses receiving loans (long- or short-term) in a given year receive them from the SBA. And while 29% of 7(a) loans go to minority business owners, SBA distributes loans to roughly only 3% of all minority-owned firms. The same trend is true for women-owned firms. In other words, the SBA is largely irrelevant in the capital market. Even the National Federation of Independent Business, the chief small-business lobbying group, agrees. "Our members tend not to rely on SBA loan programs," Says Andrew Langer, the NFIB'S manager of regulatory policy.

We know that stimulus dollars have been focused on rewarding Obama supporters and Democratic special interest groups; Democratic districts received nearly twice the amount of stimulus funds as GOP districts.The loan guarantees will flow the same way. They are not loans that will be repaid; they are welfare under a different name.

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