Advocates of loan guarantees claim that this subsidy is a success when the recipient company remains in business. This is a superficial and misleading way to view loan guarantees. Indeed, loan guarantees are among the most pernicious ways that governments distort markets and harm American families and businesses alike. Here are seven reasons why.
1. Loan Guarantees Deny Capital to More Competitive or Less Politically Favored Companies
As anyone looking to start a business or buy a home in recent years can attest, acquiring a loan can be very difficult. Loan guarantees make that process even more difficult because the government essentially pulls capital out of those limited reserves and dictates who should receive it. While sure-bet companies can still get a loan, those that are more on the margin may lose that opportunity.
Consider a lender that is reviewing loans for two companies. Both are long shots with promise, but one has the backing of the federal government. Obviously, that company is more likely to receive a loan, because the government mitigates the financial risk even if the business is no more promising.
2. Loan Guarantees Deny Americans Access to Technologies and Services
Capital is in limited supply. A dollar loaned to a government-backed project will not be available for some other project. This means that the higher-risk, higher-reward companies that drive innovation and bring new services and technologies into the marketplace may not get support, while companies with strong political connections or those that produce something that politicians want do.
Over time, this approach to investment retards progress, leaving Americans with a plethora of politically connected companies that meet government interests better than they do the needs of American businesses and families.
Read More at heritage.org . By Jack Spencer.