The Small Business Act of 1953

This says, "The essence of the American economic system of private enterprise is free competition."

Photo unavailable The Motor Carrier Act of 1935

One purpose of that is to "eliminate wasteful and destructive competition."

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The purpose of this website is to object to the economic subsidization at the expense of the taxpayer of small businesses by governmental entities. There are two reasons given for the objection. First, the subsidization is in most cases economically inefficient. Second, the cost of the subsidization is born in one way or the other primarily by the worker. Two laws will be heavily relied upon in order to demonstrate these reasons. First is the Small Business Act of 1953, which will be denoted as the "SBA" throughout the remainder of the website. (The Small Business Administration will also be denoted as the "SBA" when it is clear from the context to which is being referred.) The second piece of legislation is the Motor Carrier Act of 1935, which will be denoted as the "MCA" throughout the remainder of the website. Simply put, the SBA was enacted to provide financial assistance to small businesses. The language of the act itself explains why the assistance is provided:

The essence of the American economic system of private enterprise is free competition. Only through full and free competition can free markets, free entry into business, and opportunities for the expression and growth of personal initiative and individual judgment be assured. The preservation and expansion of such competition is basic not only to the economic well-being but to the security of this Nation. Such security and well-being cannot be realized unless the actual and potential capacity of small business is encouraged and developed. It is the declared policy of the Congress that the Government should aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterprise, to insure that a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government (including but not limited to contracts or subcontracts for maintenance, repair, and construction) be placed with small-business enterprises, to insure that a fair proportion of the total sales of Government property be made to such enterprises, and to maintain and strengthen the overall economy of the nation. (Emphasis added.) 1

The SBA provided for the creation of the Small Business Administration to implement the assistance. Further discussion of the SBA is postponed until after discussion of the MCA.

The MCA, among other things, regulated entry into the trucking business. The Motor Carrier Act made it difficult for new trucking companies to enter the market by imposing entry regulations requiring firms to obtain ICC certificates of convenience and necessity to operate in interstate markets. Firms already in operation were "grandfathered" into the industry. New trucking firms, however, were required to undertake a complicated, expensive, and sometimes lengthy application process. Incredibly enough, one of the express purposes of the act was to "eliminate wasteful and destructive competition." Obviously, the economic rationale for the two laws - the SBA of 1953 and the MCA of 1935 - are diametrically opposed, at least on the surface. By now, the reader should have smelled a rat. The rest of the website will be spent revealing it.

Small Business

As has been stated previously, the purpose of the SBA is to support small business. The primary means by which the SBA supports small business is by encouraging lenders to provide loans for small businesses, be the small business new or previously existing. The SBA encourages lenders to provide loans to small businesses by "backing," or "guaranteeing" the loan. This means that if the small business is unable to pay back the loan, the SBA will repay the amount of the loan plus interest to the lender. When a small business owner or a prospective small business owner goes to a bank for a loan, there are two possibilities: either 1) his application will be approved; or 2) his application will not be approved. The SBA is wholly unnecessary for the first possibility - if the small business owner's application for a loan would be approved without the intervention of the SBA, then why must the SBA guarantee it? With regard to the second possibility, the SBA does guarantee the loan in at least some instances, even though the bank feels that the risk of non-repayment is too high to make the loan without the guarantee. Indeed, part and parcel of the SBA's mission is to provide loans to small businesses "that might not otherwise obtain financing on reasonable terms and conditions." 2 The question thus arises, "Why should the SBA, and ultimately the taxpayer, back a loan that the bank considers too risky to make?"

Issues of loan riskiness aside, the purported necessity of small businesses to ensure full and free competition is difficult to understand for at least several reasons. One basic reason is that SBA constitutes government involvement in a market, and that involvement necessarily renders that market not free, in direct contravention of the "essence of the American economic system." Another basic reason is that a small business, by definition, has no control over price in the model of perfect competition. 3 Perhaps the most compelling reason is that the statement of purported necessity ignores the economic principle of "economies of scale."

In microeconomics, "economies of scale" are the cost advantages that businesses obtain due to large size, output, or scale of operation. They generally result from the decreased cost per unit of output that accompanies increased output since fixed costs are spread out over more units. Here is an extremely simplistic example of the concept. Suppose that the machine to manufacture widgets costs $100.00 (this is a fixed cost), that the raw material plus labor to manufacture a single widget costs $10.00 (these are variable costs), and that there are no other costs involved. Manufacturing one widget would cost $110.00 - and that's $110.00 per widget. Manufacturing two widgets would cost $120.00, but only $60.00 per widget. Manufacturing ten widgets would cost $200.00, but only $20.00 per widget. You get the idea. It is generally acknowledged that economies of scale result in allocating resources to their best use more efficiently, a situation that is perhaps the single best argument in favor of capitalism. 4 It seems that all agree that small businesses are economically inefficient where large economies of scale are present.5 In sum, the reason proffered by Congress for enacting the SBA is unsatisfactory, and obviously so.

Let us turn now to other reasons commonly given to support government aid to small businesses. Three common ones are: 1) unfair competition - large firms sell below cost (subsidized by previous profit) to drive small firms out of business; 2) job creation; and 3) barriers to entry. 6 The short and obvious answer to the first purported justification is that [such practices] will drive a government aided small business out of business the same as they will an unaided small business - it will just take a little longer. The obvious solution here is to actually enforce the laws prohibiting this practice. The short and obvious to the second justification is that elimination of jobs in the small business sector of the economy will result in the addition of jobs in the large firm sector. Granted, the number of jobs eliminated in the small business sector will usually exceed the number of jobs added in the large firm sector, but the jobs added will be more lucrative from the employees' standpoint. In any event, if job creation were really a primary concern, conversion to communism would result in zero unemployment. The fact that nobody even considers such a move demonstrates that job creation is at most a low priority. Indeed, the increased number of jobs due to the proliferation of small businesses looks a lot like the disguised unemployment of the formerly communist regimes.

What the Small Business Act of 1953 and the Motor Carrier Act of 1935 Have in Common

What's been said thus far should at the very least cast doubt upon the economic reason given by Congress for the SBA, especially when considered in conjunction with the rationale behind the MCA. There is no way to reconcile the express goal of the MCA - "to eliminate wasteful and destructive competition" - with the ultimate goal of the SBA - "full and free competition" using economic concepts, at least not pertaining to competition. Indeed, from an economic standpoint, the goals are diametrically opposed. The obvious and undeniable conflict between the two indicate that the proffered purposes are pretexts, especially since there is the usual purpose that appears if one is willing to look beneath the surface.

So what is the real purpose? The question is perhaps best answered by considering who wins and who loses under the Motor Carrier Act and who wins and who loses under the SBA. As will be seen, this approach is the only way the express purposes of the SBA and the MCA can be reconciled with each other. The big loser under the MCA of 1935 was the American employee. (Shall we call him Joe the Plumber"?) What made the worker the big loser was that the MCA of 1935 severely decreased of the worker's bargaining power by effectively eliminating the possibility of a secondary boycott from within the trucking industry.

Here's how the potential of a secondary boycott enhances the bargaining power of a given bargaining unit. One example should suffice to demonstrate the concept. Suppose the employees at a factory of a certain manufacturer engage in a strike. Under the terms of the National Labor Relations Act, the manufacturer is entitled to replace the striking employees with other workers (replacement workers) in order to attempt to continue his manufacturing operations. The replacement of the striking employees would of course be futile if the manufacturer were unable to obtain the raw materials needed to manufacture his product. To prevent exactly this situation, the workers at the plant producing the raw material are now prohibited from striking with the purpose of inducing their employer to cease doing business with the manufacturer, and employees in the transportation industry are now prohibited from either refusing to transport the necessary raw materials to the manufacturer or refusing to transport the finished product from the manufacturer to its sales outlet. In effect, the bargaining power of the employees at the original manufacturing plant is thus restricted to the burden that replacing them would impose.

Under the National Labor relations Act in 1935 the secondary boycott was legal. The fact that not many occurred was due in no small part to two facts: 1) most of the truckers of that era were Teamsters; and 2) it was the policy of the Teamsters' International to discourage sympathy strikes (one form of a secondary boycott). Indeed, not only did the Teamster brass not sanction sympathy strikes, it made the seldom used threat of revoking the charter of any local Teamsters union that engaged in one. 7 What certainly was one effect of the MCA of 1935 can now be seen. By restricting entry into the trucking firm industry, Congress was in effect guaranteeing that most truckers would continue to be Teamsters, and therefore that a minimum of secondary boycotts engaged in by the trucking industry would occur. Make no mistake about it - this was the overriding purpose of the MCA of 1935! Now it can be seen that the primary effect of the MCA of 1935 was to reduce the bargaining power of the average worker. The relative increase in the bargaining power of the average Teamster pales by comparison.

Most forms of the secondary boycott became illegal with the passage of the Taft-Hartley amendments to the NLRA in 1947. Thus, when the MCA of 1980 essentially deregulated the trucking industry, the secondary boycott was illegal. Accordingly, the need to insure that Teamsters were the only truckers over the road was no longer necessary. The delay between Taft-Hartley (and Landrum-Griffin, which closed a loophole) can be explained partly as assuring that nobody was going to meaningfully challenge the constitutionality of the proscription against the secondary boycott, as well as the fact that NAFTA was on the horizon. (For a meaningful challenge that was never made, see http://cpproblems.com/firsta.html. It says here that the interpretation given at that site is undoubtedly correct. Note that in the Cruikshank case noted therein, no discussion whatsoever of the nature of the right to assemble was briefed, and no discussion of the nature of the right to assemble appeared in the court's decision to reject the assertion that the Colfax Freedmen were exercising their right to peacefully assemble.) A moment's thought yields the result that NAFTA was a shot in the arm to the trucking industry. The Teamsters benefitted by getting a smaller percentage of a much larger pie.

Photo unavailableThe SBA of 1953 undermines the earning power of the average employees in at least three ways. Firstly, it reduces the bargaining power of the average employee by effectively reducing the size of bargaining units in whatever industry the small firm enters. This assertion becomes obvious by looking at the big picture - every widget manufactured by a small firm is one less manufactured by a large firm, and it takes fewer employees for the large firm to manufacture fewer widgets. Recall that the bargaining power of a given unit now depends primarily upon the cost of replacing the employees that comprise it. Obviously, it is more difficult to replace a large number of employees than a small number. A reduction in the size of the bargaining unit therefore implies a decrease in bargaining power. Secondly, when legislation pertaining to the workplace is being considered, small business owners complain about their inability to afford its effects. A prime example of this is the talk of requiring the employer to bear the cost of health insurance. The professional whiners - i.e., the small business owners - successfully whined about their inability to afford, seemingly impervious to the fact that in the typical case their house is bigger than is Joe the Plumber's, there car is newer and better in the first instance than Joe the Plumber's, and more of their kids go to private schools than do Joe the Plumber's. Thirdly, the wages of small business employees are used for comparison purposes in contract discussions with big businesses, and the big business employee's wages suffer accordingly.

There is no question that the overriding purpose of the SBA of 1953 was to diminish the bargaining power of the average employee. The big winner is the large firm, which gets a slightly smaller slice of the pie but at a greatly reduced price. The banks also win - the guarantee of repayment completely eliminates the element of risk, and they essentially profit by the interest on the loan, and all for nothing on their part. (Note that any assertion by the banking industry of lost opportunity cost also militates against small business loans guaranteed by the SBA.) The small business owner also wins. He gets to play the game with someone else's money, and if he structures his affairs well is able to live quite comfortably even if his business ultimately fails. The big loser is the average employee, whose reduction in bargaining power has been duly noted. The irony of the situation is that the same employees whose bargaining power is reduced are required to help foot the tax bill when the small business owner defaults on the loan and the government steps in to repay it.

(Although not really pertinent to the SBA, it should be noted that there are other ways that small businesses receive unjust and economically inefficient benefits from governmental entities. One example is the trend in cities to have certain zones designated as "historic districts." The significance of the designation is that owners of shops within the designated districts are given money to improve their buildings so long as the improvements are in accord with the historical theme. Typically, an amount put up by the small business owner is matched by the municipality. The economic result is that both the volume of the small business and the resale value of the small business's real property are increased at the taxpayer's expense. That situation is not as good an example of an economic externality as pollution, but it will do. And then these people have the audacity to post signs that say "buy local," which is usually synonymous with "pay more." To add insult to injury, many times the local business sells products made someplace other than America.)

There is no evidence to support the assertion that small business is necessary to the economic well-being and security of the nation. Indeed, what evidence there is indicates the contrary. Small businesses existed long before the SBA of 1953, and in fact have been around since the colonial era. Their existence has never prevented the numerous recessions, depressions, great depression, etc. They have never caused a significant change of price - indeed, part of the definition of "small business" is that it is no control over price. 8 The jobs that they create are generally inferior to those in large firms (just listen to the whine), and very often shorter in duration than are jobs with large firms. (Then blotch on the resume. If politically correct, then diversified experience. If politically incorrect, then indicative of lack of stability.)

So how does the SBA remain the law? Certainly one way is that Uncle Sam has played what Johnny Cochran called "the race card." Section 2(f)(1) of the SBA states in part:

With respect to the Administration's business development programs the Congress finds-
(A) that the opportunity for full participation in our free enterprise system by socially and economically disadvantaged persons is essential if we are to obtain social and economic equality for such persons and improve the functioning of our national economy;
(B) that many such persons are socially disadvantaged because of their identification as members of certain groups that have suffered the effects of discriminatory practices or similar invidious circumstances over which they have no control;
(C) that such groups include, but are not limited to, Black Americans, Hispanic Americans, Native Americans, Indian tribes, Asian Pacific Americans, Native Hawaiian Organizations, and other minorities;
(D) that it is in the national interest to expeditiously ameliorate the conditions of socially and economically disadvantaged groups;
(E) that such conditions can be improved by providing the maximum practicable opportunity for the development of small business concerns owned by members of socially and economically disadvantaged groups;
(F) that such development can be materially advanced through the procurement by the United States of articles, equipment, supplies, services, materials, and construction work from such concerns....

Anyone who opposes the SBA thus runs the risk of being accused of having the ulterior motive of racial prejudice. The risk is particularly acute where the dissenter is neither an economist nor a labor lawyer, and thus less capable of demonstrating economic grounds for objection, be they based upon efficiency or bargaining power. Photo unavailable Being labelled as racially prejudiced can carry some serious consequences. In 1956, the Menninger Story was published, and in it appeared the opinion of perhaps the preeminent psychiatrist in America that racial prejudice is a form of mental illness. 9 This is particularly interesting in light of Samuel Cartwright's designation in 1851 of a slave's urge to run away from his master as a mental illness called drapetomania. (It would seem that either the psychiatric profession endorses whatever makes the moneyed class happy, or else thinks black people are just fine and that everyone ought to own one. What a bunch of tory rot!) In an era where electro-shock therapy was in vogue and lobotomies were not uncommon, Menninger's opinion constituted a most substantial deterrent to any prospective dissent.

Congress has also enacted provisions catering expressly to women. The current version of section 2(h)(1) states:

With respect to the programs and activities authorized by this Act, the Congress finds that-
(A) women owned business has become a major contributor to the American economy by providing goods and services, revenues, and jobs;
(B) over the past two decades there have been substantial gains in the social and economic status of women as they have sought economic equality and independence;
(C) despite such progress, women, as a group, are subjected to discrimination in entrepreneurial endeavors due to their gender;
(D) such discrimination takes many overt and subtle forms adversely impacting the ability to raise or secure capital, to acquire managerial talents, and to capture market opportunities;
(E) it is in the national interest to expeditiously remove discriminatory barriers to the creation and development of small business concerns owned and controlled by women;
(F) the removal of such barriers is essential to provide a fair opportunity for full participation in the free enterprise system by women and to further increase the economic vitality of the Nation;
(G) increased numbers of small business concerns owned and controlled by women will directly benefit the United States Government by expanding the potential number of suppliers of goods and services to the Government; and
(H) programs and activities designed to assist small business concerns owned and controlled by women must be implemented in such a way as to remove such discriminatory barriers while not adversely affecting the rights of socially and economically disadvantaged individuals.

Section 2(h)(2) continues:

It is, therefore, the purpose of those programs and activities conducted under the authority of this Act that assist women entrepreneurs to-
(A) vigorously promote the legitimate interests of small business concerns owned and controlled by women;
(B) remove, insofar as possible, the discriminatory barriers that are encountered by women in accessing capital and other factors of production; and
(C) require that the Government engage in a systematic and sustained effort to identify, define and analyze those discriminatory barriers facing women and that such effort directly involve the participation of women business owners in the public/private sector partnership.

These pro-woman provisions are easily seen as an attempt on the part of Congress to gather political support for the continued life of the SBA. Just note the comparison between female and male voters for presidential elections since 1980. In every one of these elections, a larger percentage of eligible women voted than did eligible men and the number of female voters has been greater than that of men. In fact, in 2008, the number of female voters exceeded the number of male voters by a substantial percentage. Furthermore, the gender gap, at least with regard to presidential elections, the "gender gap" in 2012 reached a record of twenty points. These numbers add up to a serious amount of political clout for female America, and Congress has pandered to it. Perhaps more impactful is that in the event that he overtly opposes the SBA, the poor dumb bastard in the each-of-my-three-jobs cartoon will find himself working at a fourth job on what he thought was his day off. That fourth job would be his relationship.

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Footnotes

1. 15 U.S.C. 631(a).
2. Robert Jay Dilger, Senior Specialist in American National Government, Congressional Report, Small Business Administration 7(a) Loan Guaranty Program, May 1, 2013, citing U.S. Small Business Administration, Fiscal Year 2010 Congressional Budget Justification, p. 30
3. Ken Heather, Understanding Economics, Prentice Hall, 1994, at 115.
4. See, e.g., See, for example, http://www.amstat.org/sections/bus_econ/papers/thesisfinaljia.pdf ; and http://www.acehardware.com/shop/index.jsp?categoryId=34641526 .
5. See, e. g., Heather at 135.
6. Id. at 131-32.
7. Donald Garnel, The Rise of Teamster Power in the West, University of California Press, 1972, at p. 61.
8. Heather at p.115, 131
9. Walker Winslow, The Menninger Story, Doubleday & Company, New York, 1956, at p. 300

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