$27 Million in Loans, but Who Pays for It?
Yesterday, the Missouri Watchdog ran an article by Brian Hook about the State Small Business Credit Initiative, which will make $26.9 million in federal funds available for small business loans in Missouri. The article includes some statements by me about the differences in private and public investment. I argue that government does not vet potential investments as carefully as an individual lender does.
Government officials don’t have the ability to identify the highest uses of these funds because those officials are too far removed from the signals that the market provides. And, even if they could identify them, they are too bogged down in bureaucracy to respond quickly.
On the surface, providing loans to small businesses seems like a good thing, but when you look closer, this policy is yet another example of the government picking winners and losers in the marketplace. The governor can implement other strategies that would grow the economy better, such as reducing excessive occupational licensing requirements in Missouri, lowering the overall tax burden, and eliminating the bureaucratic barriers to starting a business.
Additionally, supporters of programs like this one tend to argue that, because federal dollars fund the program, taxpayers in Missouri needn’t worry about the cost. This money doesn’t come out of thin air. There is no such thing as a free government program. Like all other forms of government spending, federal dollars come from the pockets of taxpayers, who can’t spend it themselves in the private sector. Furthermore, as a commenter on the article points out, programs that are funded by the federal government often come with strings attached, and therefore reduce the state’s sovereignty.
There’s also the great point, made by Henry Hazlitt on this matter: http://www.fee.org/library/books/economics-in-one-lesson/#0.1_L7
His argument (probably lifted from Bastiat like all his other great stuff) is that the people who get government secured loans tend to be precisely the people who are worse credit risks. Plus the increased taxes to fund the loans deprive the loanable funds markets of the means to loan to the creditworthy people who would have been loaned to if the government had not gotten involved in the first place. It’s awful.
Comment by Josh Smith — March 28, 2011 @ 10:59 a.m.
@Josh–I am working with my bank on something that looks somewhat similar to this, and I find the opposite to be true.
Instead of the subsidy going to a poor credit risk, the loan was going to happen from the bank anyway, but now I may get a lower (subsidized, seemingly) rate.
On the QT, of course.
Comment by Papillon — March 28, 2011 @ 2:23 p.m.
Even if the money goes to the same people it would go to without government involvement, even this example shows the damage the hand of government can cause. You get a reduced rate, and taxpayers (seemingly) foot the bill. The interest rate is the time value of money plus a risk premium in case of default.
Subsidizing a loan is little different from subsidizing a car or a house or a steak. It’s great for the person getting the thing, and just fine for the seller as well. Who loses? Every taxpayer whose tax dollars are appropriated, ostensibly for necessary government services such as police and courts, and instead go to someone’s consumption of cars, homes, steaks or loans.
Comment by Josh Smith — March 28, 2011 @ 2:31 p.m.
Agreed, but I was trying to demonstrate that the gov can participate in the ‘Free Food for Millionaires’ program, not just ‘Handouts For People Who Shouldn’t Be Getting A Loan In the First Place’ initiative.
Comment by Papillon — March 28, 2011 @ 3:15 p.m.