Getting Numbers and Logic Straight on Loan Guarantees

The Washington Post apparently does not like the Department of Agriculture's loan guarantee program for small businesses. That is the main piece of information that one can get from its lengthy article on the program.

The Post tells us that "since the 1970s" the loan guarantee program has incurred $1.5 billion in losses on $14 billion in guarantees. Is this bad, a loss rate of less than 11 percent? Sounds much better than Citigroup and the Wall Street boys do on their SIVs, CDOs, and other exotic instruments. Since the point here is to promote development not make money, this loss rate is not obviously a scandal as the article implies.

The article provides several examples of clearly inappropriate and/or fraudulent loans. It is not clear what this is supposed to mean. The program has been around for thirty years, is there any doubt that some of the loans have been misdirected? Does the Post have data on the percentage of loans that were inappropriate? If it does, it did not share it with readers.

The Post also reports the remarkable news that sometimes loans for one business lead to job loss at other businesses. It quotes an unfortunate movie theater owner whose tax dollars help to support his competitor. Guess what? This happens all the time. When we build a new highway, we take away business from all the people who depended on the previously existing road system. That's the way the economy works.

But the worst offense in this story is how badly it misrepresents the dollars involved. It tells us that cost of jobs created under the program can be very high, referring to a $1.3 million loan that created just 5 jobs, a cost of $260,000 per job. Let's check that math. This is a loan guarantee, not a grant. So, how much did the guarantee save the business? Let's say it reduced the interest rate it would have paid by 6 percentage points, a huge reduction. That would mean it is equivalent to a grant of $78,000 per year, or $15,600 per job.

Finally, what about the cost of the program itself. The Post tells us that it has guaranteed $14 billion in loans over more than 30 years, or less than $500 million per year. This is equivalent to approximately 0.017 percent of the current budget or about $1.70 per person. And, this is the value of the loans, not the actual cost to the government, would essentially be just the losses on these loans.

I really have no idea of whether this is a good or bad program. The problem is that the Post article provided no basis to really make this determination and given the size of the program, it certainly did not merit a major front page article.

--Dean Baker