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The Path to Widespread Prosperity is Never Paved With Other People’s Money

Here’s a letter to USA Today:

The Small Business Administration’s student-loan program that Laura Vanderkam applauds for its alleged promotion of entrepreneurship is simply a pee-wee version of the malignancy that caused our current economic woes (“Entrepreneurs are public servants, too,” Nov. 30).

By encouraging young people to start businesses with loans backed by taxpayers, the risk-adjusted upside to each of these “entrepreneurs” is made artificially larger than the risk-adjusted downside.  Any such “entrepreneur” captures the gains from his or her success as fully as does a genuine entrepreneur (one whose loans aren’t subsidized) but, unlike a genuine entrepreneur, is able to socialize his or her losses – that is, to pass the bill for most of the losses onto taxpayers.  Government backing of these loans, therefore, causes too many excessively risky businesses to be launched.

Not only does this program unnecessarily increase tax burdens by obliging taxpayers to pay for losses that would not have otherwise occurred, it also diverts scarce resources from being used in ways that are economically justified and sustainable into ways that are unjustified and unsustainable.  That cleaning up the mess of such resource misallocations can be troublesome is shown by today’s lingering recession.

Donald J. Boudreaux