Cleaning House

In his battle to close the SBA, President Reagan has turned on his own appointees, offended his business constituency, and welched on a deal with Congress. Even so, he's probably right.

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Washington is a monument town. The Lincoln, the Jefferson, and the Washington are of the simpler variety. Less frequently visited by tourists, yet more expensive to maintain, are the bureaucratic monuments to political influence and self-interest that line the broad avenues of the capital: the Veterans Administration, the Export-Import Bank, the Departments of Education and Energy.

And, of course, the Small Business Administration. As federal agencies go, the SBA is small potatoes. The cost of running it and its programs is about $1 billion this year. For the past few years, Ronald Reagan has been trying to eliminate the agency, transferring a few of its most popular programs to the Commerce Department, selling off its loan portfolio, and relying on the private sector to pick up the slack in terms of financing small business. Yet even in the context of unprecedented Presidential popularity, a huge budget deficit, plummeting interest rates, and a thriving economy, the SBA, wounded and demoralized, still manages to hang on.

The agency's survival is a metaphor for the nearly complete political paralysis that has set in along the Potomac. The daily dispatches dutifully record the twists and turns of the budget battle that has been going on now for years -- of "climactic" White House meetings, break-through compromises, and resolutions of reconciliation. But in the end, nothing is agreed upon except passage of continuing appropriations to keep various government agencies going for another month, or three months, or even a year. The President is pitted against the Congress, Congress is divided against itself, and the bureaucracies and interest groups continue to dig the trenches a little deeper and pile the sandbags a little higher around threatened programs like the SBA.

The Administration's attitude toward the agency was summed up last year by budget director David Stockman, who called the agency "a billion-dollar rat hole" that "indiscriminately sprays a faint mist of subsidized credit into the weakest and most prosaic nooks and crannies of the nation's $4-trillion economy." Stockman's thrust was that SBA programs diverted capital from good credit risks to bad, and represented an unnecessary government intrusion into the private capital markets for the benefit of less than 1% of the nation's small businesses. "If the SBA disappeared," argued Office of Management and Budget spokesman Ed Dale, "hardly anybody would even notice it."

Unfortunately for the Administration, however, they noticed. "They" include the 3,000 employees of the SBA. "They" are the lobbyists of the U.S. Chamber of Commerce, the National Federation of Independent Business, and small-business organizations in every state, whose members look to the SBA, if not for financing, at least for the bureaucratic recognition of their importance to the economy. The opposition also includes bankers, who find that loans guaranteed by the SBA can yield higher profit margins than conventional loans. Last but not least are the Small Business Committees of the House and Senate, whose primary reason for being is to improve the standing of their members with small-business people back home. Without an SBA to oversee, the committees would have virtually no jurisdiction.No SBA, no committees.

Ironically, the Administration's assault on the SBA comes at a time when it has somewhat improved the agency's operation. Time was when the SBA was truly "a multibillion-dollar slush fund for Washington-wise operators," as one critic has called it. SBA loans went to all manner of sharpies who used the cash, according to a newspaper report, to buy yachts and finance live sex acts on a Times Square stage. By and large, that level of abuse has been curbed. But a study by the OMB last year still uncovered an abundance of loans to car washes, bars, restaurants, beauty shops, and bowling alleys -- often in areas saturated with similar enterprises whose owners had found financing without government subsidy. Even physicians and dentists got in on the act, obtaining $126 million in 1984. Lawyers lagged badly behind with only $11 million.

Most shocking have been the failure rates. As recently as 1983, one in every four SBA recipients were delinquent on loans. Defaults, cumulatively, have cost the Treasury $1.4 billion since 1972. Now, because of tougher requirements, default rates on new loans have dropped from an historic average of 18% to less than 10%.

The man who takes some credit for such improvements, and sees room for more, is former SBA administrator James C. Sanders, a California insurance executive who says Stockman's crusade against the agency took him by surprise. Unable to convince the Administration to retain the better programs in a trimmed-down, independent SBA, Sanders resigned this past March. The day after his departure, half his regional administrators were sacked for opposing the Administration's SBA shutdown proposal.

Among the programs Sanders wanted to rescue was a network of 500 Small Business Investment Companies around the country. SBICs use both public and private funds to provide one-fifth of the nation's venture capital. Since they began in 1958, they have pumped $6 billion into some 70,000 businesses, generating a big payoff for a relatively modest government investment. Such programs, Sanders argued, "make economic sense to Main Street America."

The folks at Apple Computer, Federal Express, and Cray Research no doubt agree: all of them received SBIC financing. John F. Carlson, for example, Cray's executive vice-president, told the Senate Small Business Committee that an SBIC loan was "a make-or-break" component of the financing that spawned the nation's top supercomputer manufacturer. He continued: "The taxpayer's investment of less than $500,000 . . . is currently yielding a direct revenue return of over $30 million per year in corporate and personal income taxes."

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