Small Business Bailout is a Bailout for Health Care Reform

If the shackles for small business looming in this year’s health care omnibus represent “injury” for entrepreneurs, the Federal Reserve’s decision today to channel lending their way represents “insult.” While the Obama Administration hopes the $30 billion allocated for small business loans will be characterized as a small business bail-out, this is an obvious effort to bail-out this year’s health care reform, a failure since even before it passed.

We are in the mist of a devastating economic tailspin caused by indiscriminate mortgage lending. Effective taxes buried throughout the health care reform bill will soon prove incredibly expensive for small business owners. Yet far be it for Big Government to mitigate entrepreneurs’ plight by relieving them the responsibility to carry overgrown government spending on their backs.

Instead, the Obama Administration has passed a small business bail-out. While the Administration correctly characterizes small business as “critical to job growth,” Federal Reserve chairman Ben Bernanke backed a $30 billion fund to encourage community bank lending to small businesses while refusing to comment on interest rates.

Rising tides lift all boats. When the government bails out big business, it must also bail out small businesses if the economy is to survive. Yet this bail-out will only help small buoy employment in the short run. Banks implement categorical lending restrictions for a reason. Under the rules of this summer’s lending pool, however, banks must lend entrepreneurs funds regardless of customary automatic rejections based on the companies’ industry, location, or other immediate disqualifiers.

Even before the Administration passed the health care bill, industry experts decried the legislation as doomed to failure. Indeed, the bill squeaked by the Senate only through a sneaky, extraconstitutional “deem and pass” measure that surprised both sides.

Yet the Obama Administration has never willingly accepted defeat when success is only a loophole away. Health care reform passed through just such a loophole, though many of its provisions lie dormant until 2014, long after this Administration’s political accountability has ended.

By encouraging small business formation, the Administration effectively bails out its own bill. Small business owners are subject to footing much of the expense of insuring Americans, and only through pushing the burden onto these willing entrepreneurs is “reform” sustainable.

Yet after big business enjoyed a series of bailouts, small business owners took a very hard hit. When the marginal cost of retaining an employee does not exceed the amount of work that employee can perform, small businesses quickly feel the pinch and must consolidate.

Requiring small business owners to shoulder the expense of employees’ health care dramatically increased the cost of keeping each employee. Yet rather than take the rational step of relieving small businesses of that responsibility, the Federal Reserve has decided to bail the system out now, at a price that will include interest in a few years.

Just as many homeowners believed their assets were above reproach when considering taking a mortgage, entrepreneurs must consider whether there is some rationale to banks’ customary practice of categorically denying loans to certain types of business ventures.

Whenever Keynesian government lending expands to encourage a specific type of interest-based spending, the economy experiences some degree of backlash. It makes little sense to address mortgage-based backlash by burying looming business loan-based backlash set to implode in four years.

It would be a harsh irony for the second round of interest-based bankruptcies to coincide with the very program they were designed to bail out.

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