1. Money

Token Political Rant - AIG Bailout vs. Small Business Policy

By September 19, 2008

OK, I rarely talk politics here -- actually, I never talk politics here, aside from my occasional non-partisan libertarian side comment.

But this AIG thing has me tweaked. Earlier this week, the U.S. Government bailed out the failing financial institution to the tune of $85 billion dollars, taking an 80% ownership stake in the company in the process. Issues of government ownership of a bank aside, the "for" argument basically says that this is a necessary step to stabilize the U.S. economy.

Will the AIG buyout help stabilize the economy? In the short term, maybe. That's actually not my argument against it.

Consider this...

$85 billion is...

  • About $280 for every man, woman and child in the United States.
  • About $800,000 per AIG employee.
  • $170,000 for each of the 500,000 small businesses that closed in the U.S. last year.

Now let's think about that last one. According the U.S. Small Business Administration, small businesses:

  • Represent 99.7 percent of all employer firms.
  • Employ about half of all private sector employees.
  • Pay nearly 45 percent of total U.S. private payroll.
  • Have generated 60 to 80 percent of net new jobs annually over the last decade.
  • Create more than half of nonfarm private gross domestic product (GDP).
  • Hire 40 percent of high tech workers (such as scientists, engineers, and computer workers).
  • Are 52 percent home-based and 2 percent franchises.
  • Made up 97.3 percent of all identified exporters and produced 28.9 percent of the known export value in FY 2006.
  • Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.

And yet, most small businesses are constantly struggling to get the capital they need to launch and grow their businesses. This is especially true when the founders have poor personal credit, as so many displaced corporate workers and other potential entrepreneurs do now.

So which do you think would have greater economic impact? $85 billion for AIG? Or $85 billion to support small business?

But guess what? Since taking office, President Bush has cut the SBA's budget and staffing more than any other federal agency. Today, the agency's budget is less than half of what it was when Bush took office. Not only that, in the past few years, several investigations have shown that billions of dollars in government contracts have been reported as small business awards, but actually went to Fortune 1000 corporations (see ASBL and SBA for more details).

I'm not suggesting a handout. Frankly, many of those 500,000 business closures probably deserved to close being run how they were. But that support could come in all kinds of forms -- short-term financing, training, business development, etc.

And while the AIG bailout was a direct loan, the SBA loan program is just guaranteed by the government, not directly financed by it. In other words, $85 billion of guarantees to the participating lending institutions could support an order of magnitude more than that in federally-backed loans. Or perhaps more appropriately, a fraction of that amount could guarantee $85 billion in financing to small businesses (last year, charged off loans cost the SBA about $9 billion on disbursements of $150 billion).

Bottom line: $85 billion for AIG may help stabilize the economy, but I believe that same money spent on real support for small business would have far greater, longer-lasting impact.

If you're not outraged, you're not paying attention. Make this an issue in the coming election. Learn where the candidates stand on small business issues. Write your representatives. Tell them we won't stand for multi-billion-dollar corporate bailouts while small businesses, the lifeblood of the U.S. economy, become increasingly disenfranchised by the federal government.

And most of all...vote! (Don't forget to register!)

September 19, 2008 at 1:13 pm
(1) Greg says:

ABSOLUTELY! Or… perhaps consider, a few months ago, while stating bailing out over-mortgaged home owners was not “government’s role,” Congress put up $85 billion in “bridge loans” to those home owners losing their homes.

September 19, 2008 at 1:50 pm
(2) entrepreneurs says:

Great somewhat-related post over at Mashable:

Six Effects the Wall Street Meltdown Will Have on the Tech Industry

September 19, 2008 at 3:22 pm
(3) Taylor Willingham says:


What do you know about income comparisons b/w large Wall Street firms and small businesses. I’ve long been astounded by the large bonuses paid out – for what? AND the large salaries paid to CEOs vs. those working in the trenches. And now these guys are in financial trouble. Hmm, wonder how much cushion they might have had if they’d been more responsible about bonuses. Don’t have the research to back this up, but would love to see some data regarding this…sounds like a good assignment for Gretchen Morgenson.

September 19, 2008 at 3:28 pm
(4) Rex Hammock says:

Scott, I agree with you, but not really for the same reasons. The AIG “bailout” may be called a loan, but I don’t know of any small business owner who would want to hand over 80% of their ownership in the company and have to give up management of the company in exchange for such a loan. The AIG deal is a loan in name only. It’s, in effect, a nationalizing of a big corporation by the U.S. government — sorta like when Venezuela takes over an oil company. Anything of value at AIG — and there is plenty — will be sold and the money will go to the government.

Actually, I think the AIG bailout is a good model for government bailouts. For instance, if the auto manufacturers want us to bail them out with “a loan,” let’s make them hand over a majority stake in the company and give us the ability to replace the management and board. Those terms would be incentive enough for any company to manage their company’s more responsibly.

Another thing:

Perhaps we would have been lots better off if the government wasn’t in the business of guaranteeing housing loans — or small business loans at all. That’s merely a rhetorical question, I have no idea what the anwers is — heck, I don’t even know the questions with this mess. And I do understand greatly the benefit to our economy and society of home and small business ownership.

I also believe this. The notion that a financial insitution or insurance company — or any kind of business — can be “too big to fail” needs to be examined when the dust is settled on all of this. If that is the case, then perhaps we need to articulate with new laws just what that means. Is Wal-mart, with its 2+ million employees too large to fail? If something started to unravel there would the government bail it out to save 2 million jobs? If so, I want to know about it now.

If companies become so big that government has to keep them from failing, then they perhaps should apply to become quasi-public institutions subjected to different standards of operation and transparency.

Scarey thought.

September 19, 2008 at 4:14 pm
(5) entrepreneurs says:

Actually, Rex, I agree with you completely (hence the comment “Issues of government ownership of a bank aside…”).

My question, and I think a reasonable one, is what makes our government think they can run a reorganized AIG any better than the previous management? It’s not like anyone in our government has a good track record of running a profitable business. Heck, even the USPS, one of the few agencies that could justifiably be made self-sufficient, loses a few billion a year!

You’re right — it’s a better model than some previous bailouts, and if I thought it was going to yield a good return, I might think differently about it. But neither party — AIG nor USG — has a good track record on which to base any optimism about the deal.

September 19, 2008 at 6:36 pm
(6) Rex Hammock says:

re: what makes our government think they can run a reorganized AIG any better than the previous management?

I could give a funny answer, but I’m sure someone would think I was being serious. I agree w/ you very much.

Like w/ other bankruptcies, the govt. will outsource a lot of the oversight and breaking up of the companies. No govt. employees will actually be running things at the operational level of those companies. Ironically, it will be investment bankers and lawyers and accountants — the same folks who helped get those companies into the crapper — who will get big buck commissions handling the off-loading of all the assets of these companies.

September 21, 2008 at 12:49 am
(7) Lahle Wolfe says:

Did you hear a crash? It was the sound of my chairing falling back as I stood to applaud this post.

You are dead-on right! Here’s to more token political rants from you!

September 22, 2008 at 8:22 am
(8) John S veitch says:

Your OUTRAGE is appropriate Scott, but I think it’s misdirected. The real outrage is with the TWO political parties which BOTH played roles one major and one minor in making sure this financial disaster would occur.

Given that this is election year that leaves the voters of the USA with a significant problem. From way over here in New Zealand it looks like GW Bush should have killed the Republican Party, they should be deserted at the polls for a dozen different reasons, the present crisis being only the icing on the cake.

The problem is that the Democrats don’t deserve your vote either. OK they are minor villains perhaps, but fully part to both the war in Iraq and to the present financial collapse. If the USA hadn’t been run like a private club for Democrats and Republicans for as long as anyone can remember there would be well formed and obvious third parties waiting in the wings. But they don’t seem to be present. As a democracy the USA leaves much to be desired. For me that is the key problem and that is something the people in the USA can change NOW.

Once in your lifetime there comes an opportunity to use your vote to make a very significant difference. Not voting Republican and not voting Democrat either could be that difference. If enough people join a voter rebellion and vote informal, or for any of the small parties, anyone you like who is neither Republican or Democrat, what would happen?

The Republicans would get wiped out. That’s what they fully deserve. The Democrats would become the government, but with a fraction of the vote they expected, a WAKE UP CALL. And the public would identify some third forces they like. Public recognition of some new people who going forward will have credibility by reason of voter support is a game breaker. When enough people are thoroughly pissed off with business as usual and enough of you have the courage to switch you vote, remarkable things are possible. I do know because 24 years ago I saw it happen in New Zealand.

The two big parties here still don’t understand what happened, but in essence the public took their vote and used it in a strategic way to make a difference. You CAN do that.

September 22, 2008 at 10:06 am
(9) entrepreneurs says:

I agree with you 100% John. At the national level, the nature of our two-party system means that we have no real choice — the candidates are just two sides of the same coin. And the two parties have successfully perpetuated the idea that a vote for a third-party candidate is a vote for the other two-party candidate that you want less (i.e., if you’re a progressive, a vote for Nader is a vote for McCain; if you’re a right-leaning libertarian, a vote for Barr is a vote for Obama, etc.).

The media doesn’t help. Google “presidential candidates” and you’ll find the #1 search result at The Washington Post only lists the two major candidates. Fortunately, the next result, Project Vote Smart, lists them alphabetically, putting Baldwin and Barr at the top. Still, for the most part, third-party candidates are disenfranchised from the entire process by the media.

Honestly, I don’t think it’s going to happen at the presidential election. I wish it could, but I don’t think it’s realistic in our current context. I think the root of the problem is our House of Representatives.

By virtue of the fact that both our houses of Congress are organized based on geography, it is nearly impossible for an independent or third-party candidate EVER to win a seat. Out of 100 senators, only one (Bernard Sanders) is a true independent (one more, Lieberman, is an “independent Democrat”, whatever that means). In the House of Representatives there are zero – zero – independents or third-party members.

The fact of the matter is that in this day and age, demographic, psychographic and ideological differences are FAR more important than geographic ones. Geographic representation plays to special interests — pet projects that boost local economies. Meanwhile, any non-centrist views (on both sides) — the green movement, gay rights, “natural law”, strict constitutionalism, socialism, separatism, etc. — get ZERO representation at the national level.

It’s a radical idea, but I think it’s time for the House of Representatives to change to a party-based system like most parliaments around the world have. We may have been the first democratic republic, but we haven’t done a very good job of adapting our model to the times.

Leave a Comment

Line and paragraph breaks are automatic. Some HTML allowed: <a href="" title="">, <b>, <i>, <strike>

©2014 About.com. All rights reserved.