Big Government and Affirmative Action: The Scandalous History of the Small Business Administration

Published by EH.NET (April 2002)

Jonathan J. Bean, Big Government and Affirmative Action: The Scandalous

History of the Small Business Administration. Lexington, KY: University of

Kentucky Press, 2001. xii + 224 pp. $29.95 (cloth), ISBN: 0-8131-2187-6.

Reviewed for EH.NET by William M. McClenahan, Jr., Robert H. Smith School of

Business, University of Maryland at College Park.

Jonathan J. Bean has authored a well-written book about a troubled government

agency. Big Government and Affirmative Action: The Scandalous History of the

Small Business Administration makes a significant contribution to our

understanding of the postwar growth of the federal government. Few historians

have devoted serious study to small federal agencies or the rapid expansion of

federal credit facilities from the 1960s through the 1980s. Big

Government addresses both. It is a logical extension of Bean’s earlier

work, Beyond the Broker State: Federal Policies toward Small Business,

1936-1961 (1996), where he chronicled how members of Congress “used crisis

rhetoric to secure government assistance for small business during the Great

Depression, World War II, and the Korean Conflict.” With the creation of the

Small Business Administration (SBA) in 1953 out of the ruins of the

scandal-plagued, final years of the Reconstruction Finance Corporation, federal

policy toward small business entered a new, albeit no less troubled, phase.

Big Government chronicles that history in a concise manner — less than

140 pages of text, including an introduction, conclusion and eight chapters.

The lively narrative progresses chronologically: the first seven chapters

address the agency from its creation through the 1970s, while the last chapter

quickly covers the Reagan, Bush and Clinton years. Bean’s history is premised

on the assumption that the modern American state should and does serve as a

broker between organized interest groups. However, the SBA does not fit well

into this model of a brokered state. Small businesses have never been a strong

interest group in Washington. In fact, Bean argues that the post-New Deal

brokered state (and the rise of unions and taxes) was anathema to most small

business owners. Not until the emergence of the National Federation of

Independent Business (NFIB) in the late 1970s has there been a “small business

lobby.” The NFIB reflected this historic distrust of government and it remained

indifferent to the fate of the SBA as scandals swirled around it and the Reagan

administration briefly sought its elimination in the mid-1980s.

Small business advocacy has never fit the mold of the “iron triangle” of

interests (the agency, relevant congressional committees, and the affected

private sector) that has underpinned the growth of government in the postwar

period. Support for the agency was centered in broad, but shallow, public

sentiment that favored small enterprise and the members of Congress who needed

to pay homage to this totem. During the life of the SBA this sentiment has

drawn strength from shifting rationalizations. Through the 1970s it validated

public and congressional antitrust concerns. Since the 1980s this historic

sentiment has been reinforced by “small is beautiful” arguments that small

enterprises were the primary engine of American growth and job creation.

Consistently, the strongest support for the agency has been Congress, and

especially the Small Business Committees. Bean notes that the SBA became a

useful conduit for constituent work of these committees. Furthermore, the SBA’s

decentralized field offices were staffed by individuals “often as loyal to

their district congressman as to the agency.” The explosion of the use of loan

guarantees after the late 1960s masked the true cost of SBA programs. In the

magical land of federal finance prior to 1990, such guarantees concealed and

deferred the true cost to the taxpayers, and only direct loans “counted” toward

the agency’s budget.

According to Bean, this explosion of loan guarantees vis-a-vis direct loans,

had the long-term effect of converting the nation’s banks from SBA opponents,

to fervent supporters, who along with Congress were able to stop Reagan

administration efforts to kill the agency. Concerns of the banking community

about possible federal competition that had been raised in the early years of

the agency, melted as expanding SBA guarantees federalized the risk of small

business finance. The increasing reliance on loan guarantees reduced the need

for SBA staff (especially headquarters staff), as private banks assumed

significant processing burdens.

Bean also notes that the symbolic value of the SBA’s commitment to small

business was compromised by its porous standards for what constituted “small.”

Congress mandated a definition of small that embraced almost “99 percent of the

business population, from sole proprietors to corporations with thousands of

employees.” In 1966, this definition was malleable enough to allow American

Motors (with $1 billion in sales and 30,000 employees) to qualify for federal

contractual set-asides, with the blessing of congressional small business

committees. Yet, the SBA’s mandate to assist small business was flexible enough

to embrace financial racial preferences beginning in 1964. Such preferences

increased rapidly with the expansion of the section 8(a) federal contractual

preference program after 1968. But, this program was plagued by agency

mismanagement, political favoritism and corruption. According to Bean, “The

consequences of the 8(a) program were perverse. A few well-connected firms

received the bulk of the set-asides, while others received nothing. Obsessed

with quotas, the SBA provided little practical assistance; indeed, its minority

enterprise officials, many of them former civil rights activists, lacked

business experience. Not surprisingly, most 8(a) firms never developed into

viable enterprises. In a classic case of robbing Peter to pay Paul, the SBA

took contracts from some of the least advantaged white companies and gave them

to minority firms.”

Finally, the caliber of leadership at the SBA has been inconsistent at best. It

reflects inappropriate appointments; presidential indifference; the SBA’s

reputation as a political dumping ground; and the limited attractiveness of

long-term federal service in the postwar period.

William M. McClenahan, Jr. teaches business law and public policy at the

University of Maryland-College Park. His forthcoming publications include

The Market, the State and the Export-Import Bank of the United States

(Cambridge University Press), co-authored with William H. Becker; and The

Voice of the Marketplace: A History of the National Petroleum Council

(Texas A&M University Press), co-authored with William H. Becker and Joseph H.

Pratt.