Bloomberg Business Week

January 27, 2012

In mid-January, President Obama announced a plan to merge six government agencies, including the Small Business Administration. The merger, he argued, would save $300 million per year over the next decade and eliminate 1,000 to 2,000 positions, as employees of the merged agencies quit or retire and are not replaced. Several members of Congress on both sides of the aisle responded that the proposal was worthy of careful examination.

The SBA helps small business owners in three main ways. It provides guarantees on bank loans to small businesses, which reduce the lending risk, thus improving owners’ ability to get capital. It also helps with access to federal contracts by training business owners in government contracting and ensuring that federal agencies adhere to congressionally mandated small business set-asides. And it gives small business owners advice on how to run their companies better.

Compared with the multiple disadvantages to small business of eliminating the 3,400-person SBA as a separate agency, the benefits are small, even with the President elevating SBA chief Karen Mills to a cabinet-level post. Although the odds are low that Congress would give the President the authority to merge the agencies in a Presidential election year, small business advocates should push back against his proposal.

FIVE AGAINST ONE

Mergers make sense when the organizations being combined can achieve synergies. When they can’t, the cost of combining efforts and the greater bureaucracy that larger organizations entail make the mergers not worth the effort. The agencies the President proposes combining with the SBA—the U.S. Trade Representative, the Overseas Private Investment Corp., the U.S. Export-Import Bank, the Trade and Development Agency, and the parts of the Commerce Dept. focused on business and international trade—all have a common mission: the promotion of U.S. exports. By contrast, the SBA’s mission is “to aid, counsel, assist, and protect the interests of small business concerns.”

Only about 1 percent of U.S. small businesses export, 2009 Census statistics show, which makes it hard to see where the synergies exist between multiple government agencies designed to promote exports and one designed to help small businesses. Even if the President succeeds with his plan to double U.S. exports by 2015, which is questionable, we still won’t have many small businesses exporting. It’s difficult to see how a lot of them could, given the industries they are in. No matter how good your restaurant, barbershop, landscaping business, or insurance brokerage is—you aren’t likely to export much of anything.

The merger would eliminate the main advocate for small business in Washington. Big business has different objectives than small business. If you combine several agencies focused largely on big company issues with one focused on small company issues, most of the attention of the combined agency will be on big business’s needs.

NO LOVE FOR THE LITTLE GUY

Look at what happened during the financial crisis to see how small business would be hurt by the lack of an advocate. If the SBA did not exist, for example, which agency would have argued for policies to get banks to lend again when credit markets froze in 2008? An agency focused on the concerns of large companies wouldn’t have worried about small business bank loans. It would have advocated, instead, for policies to fix the bond market, since big business obtains much of its credit by issuing bonds.

Or consider the SBA’s efforts to ensure that federal agencies adhere to rules on small business set-aside contracts. Why would the new combined federal agency, whose mission would mostly address big business issues, spend much time ensuring small business’s access to federal contracts? After all, the big companies that would lobby the agency would likely push it to weaken small business set-asides.

Big organizations are often bureaucratic and inefficient. You don’t need to be a PhD economist with a dissertation on diseconomies of scale in administration to realize that creating one big government agency devoted to business and trade isn’t likely to make the government more nimble and responsive to the needs of business than six smaller ones are. Given what it’s like for a small business owner to deal with Washington bureaucrats in relatively small government agencies, one can only imagine what it would be like for them to deal with the larger and (almost certainly) more bureaucratic new agency.

Priced on a per-small-business basis, the SBA is a bargain. An estimated 27.5 million small businesses were operating in the U.S. in 2009, the most recent year data are available. Merging six government agencies, and getting rid of the SBA as an independent agency in the process, will save only $300 million per year. That works out to $11 per business per year. Surely having one part of the government focus on the interests of small companies generates that much value.

Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.