Conventional wisdom suggests that small businesses are innovative engines of Schumpetarian growth. However, as small businesses, they are likely to face credit rationing in financial markets. If true then policies that promote lending to small businesses may yield substantial economy-wide returns. We examine the relationship between Small Business Administration (SBA) lending and local economic growth using a spatial econometric framework across a sample of 3,035 U.S. counties for the years 1980 to 2009. 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%.
Of course, the "conventional wisdom" is wrong, regardless of how often politicians repeat it. Small businesses account for a tiny share of employment. They typically have no growth aspirations, so it's not surprising that, conditional on age, small businesses do not account for much job growth (also). The authors note this. So your prior should be that the Small Business Administration does not do much for job growth or economic growth generally. At the very least, a necessary condition for achieving this goal would be to focus on young businesses. But I'm not advocating any specific policies here.
The present study reviews some literature, which finds effects of SBA loans on job/income growth ranging from negative to slightly positive. The authors then report their own county-level regressions finding a negative effect on per-capita income growth.
A 10% increase in SBA loans per capita (which is about $3.43 for the average county in our sample) is associated with a cumulative decrease in income growth rates of about 2 percentage points.
I would call this a large effect, but it's consistent with my priors. If the SBA is subsidizing credit for firms without growth prospects, it's just causing misallocation. But I think few people are going to be persuaded by the paper's identification strategy. The idea is to use spatial variation while controlling for a lot of stuff, and that's probably as good as anybody can do. It's definitely a worthwhile stylized fact. But SBA loans aren't random. What if the SBA gives special attention to counties with bad economic prospects? Since some entrepreneurs start businesses because their job prospects are bad (for whatever reason), areas that attract SBA attention could be areas that are heading downhill. I have also heard from some bankers that SBA paperwork can be cumbersome; one banker told me that their branch had to have an SBA specialist, while a banker at a different branch said they tried to avoid SBA loans entirely. So there could be selection effects along that dimension as well. I should read the other papers in this literature, but these authors don't provide a lot of detail about how the SBA makes decisions.
From what I gather, this paper is an improvement on the literature primarily because it has better controls and richer spatial variation. It's useful evidence to be sure--I hope it gets some attention--but it would be great if we could find a smoking gun.