Organizations and Markets

SBA Loans Reduce Economic Growth

6 October 2014 at 11:37 am Peter G. Klein 1 comment

| Peter Klein |

That’s the conclusion of a new NBER paper by Andy Young, Matthew Higgins, Don Lacombe, and Briana Sell, “The Direct and Indirect Effects of Small Business Administration Lending on Growth: Evidence from U.S. County-Level Data” (ungated version here). “We find evidence that a county’s SBA lending per capita is associated with direct negative effects on its income growth. We also find evidence of indirect negative effects on the growth rates of neighboring counties. Overall, a 10% increase in SBA loans per capita is associated with a cumulative decrease in income growth rates of about 2%.” As the authors point out, SBA loans represent funds that also have alternative uses, and SBA-sponsored clients may not be the most worthy recipients (in terms of generating economic growth).

The results are largely robust and, perhaps more importantly, we never find any evidence of positive growth effects associated with SBA lending. Even when the estimated effects are statistically insignificant, the point estimates are always negative. Our findings suggest that SBA lending to small businesses comes at the cost of loans that would have otherwise been made to more profitable and/or innovative firms. Furthermore, SBA lending in a given county results in negative spillover effects on income growth in neighboring counties. Given the popularity of pro-small business policies, our findings should give reason for policymakers and their constituents to reevaluate their priors.

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