WASHINGTON, D.C., July 27, 2020 — The Phase IV relief bill unveiled today contains landmark reforms to the Small Business Investment Company (SBICs) program, designed to fuel a robust recovery for small business impacted by COVID-19. This morning, a bipartisan group of experts in economic development policy, led by the Niskanen Center, sent a letter to Congress applauding the reforms and urging their inclusion in the final relief package.

SBICs are private investment funds licensed by the Small Business Administration (SBA) to expand financing for small businesses. The legislation announced today would establish a $10 billion capital facility at the SBA to award grants to SBICs that invest in small businesses whose revenues were substantially impacted by the coronavirus pandemic, are located in low-income census tracts, or which contribute to the resiliency of America’s domestic manufacturing supply-chain. The SBA, in turn, would be entitled to equity distributions from successful investments, which flow back into the capital facility to both protect against losses and support on-going reinvestment. The legislation makes further reforms to simplify the licensing process for new SBICs, empowering investors to establish funds dedicated to supporting a robust small business recovery in their local community.

“These reforms will be a game changer for small businesses struggling due to COVID-19,” notes Samuel Hammond, Director of Poverty and Welfare Policy for the Niskanen Center. “This crisis has already wrought an enormous toll on the U.S. economy. If thousands of small businesses are allowed fail, the recovery will stretch on for years, if not decades. Where bankruptcy is unavoidable, this same program will enable new, productive businesses to form in the wake.”

In his role at Niskanen, Hammond also oversees the Struggling Regions Initiative, a special project supported by the Rockefeller Foundation to study regional inequality and U.S. economic development policy. “The coronavirus crisis has tragically hurt some workers and regions more than others, exacerbating existing inequalities,” Hammond added. “This legislation will begin to correct that by prioritizing high-wage job growth in low-income communities across the country.”

The full letter and list of signatories can be found below.

July 27, 2020

The Honorable Nancy Pelosi
Speaker, U.S. House of Representatives

The Honorable Mitch McConnell
Majority Leader, U.S. Senate

The Honorable Kevin McCarthy
Minority Leader, U.S. House of Representatives

The Honorable Charles Schumer
Minority Leader, U.S. Senate

Dear Speaker Pelosi and Leaders McConnell, Schumer, and McCarthy,

The COVID-19 pandemic sparked an economic crisis the likes of which the United States has never experienced before, and which we hope will never experience again. Many lives, incomes, and businesses have been lost or disrupted, demanding swift and unprecedented action to merely keep the economy afloat. Yet as Congress debates the next phase of relief legislation, we are encouraged to see a series of reforms to the Small Business Administration (SBA) that look beyond short-term relief, and which set the stage for a robust Main Street recovery.

Since its creation in 1953, the SBA has supported small business development as a core component to the health and dynamism of the U.S. economy. The Small Business Investment Company (SBIC) program, in particular, has expanded access to capital for tens of thousands of innovative small businesses across the country, by helping nudge private investment into the likes of Apple when it was still a fledgling computer startup.

The Continuing Small Business Recovery and Paycheck Protection Program Act before Congress would establish a $10 billion capital facility at the SBA, designed to match SBIC-led investments in small businesses that suffered substantial declines in revenue due to COVID-19, but which have strong prospects of rebounding given adequate investment. While many small business bankruptcies may be unavoidable, the same facility will help propel new business formation in low-income census tracts and within our domestic manufacturing supply-chain,[i] promoting sustainable, high-wage job growth across the country,[ii] including in many of our hardest-hit Black and Brown communities.[iii]

Importantly, the legislation makes long-overdue modernizations to the SBIC application process itself, allowing the Administrator to approve new investment funds quickly, while prohibiting “buyout” strategies that merely scavenge what assets struggling businesses have left. SBICs would be further required to return a share of their profits back to the SBA capital facility, both protecting the SBA from losses and allowing on-going investments to be supported at no cost to taxpayers.[iv]

Before this crisis hit, the rate of new business formation was already at an unprecedented low, having never fully recovered from the Great Recession.[v] This slowed the pace of the previous recovery, as fast-growing small businesses drive the rate of overall employment growth.[vi] Coming out of this crisis, we cannot afford to let thousands of small businesses fail while new business formation only steepens its decline.[vii] We therefore urge you, as a diverse group of experts in innovation and economic development policy from across the political spectrum, to support these reforms in the final relief package, and empower American entrepreneurship to not just lead the recovery, but to help build a stronger and more resilient economy along the way.

Sincerely,

Samuel Hammond
Director of Poverty and Welfare Policy
The Struggling Regions Initiative
Niskanen Center[1]

Dr. Robert Atkinson
President
Information Technology and Innovation Foundation

Jonathan Gruber
Ford Professor of Economics
Massachusetts Institute of Technology

Oren Cass
Executive Director
American Compass

Victor Hwang
Founder & CEO
Right to Start

Carrie Hines
President & CEO
American Small Manufacturers Coalition

John W. Lettieri
Co-founder and President
Economic Innovation Group

Sridhar Kota
Executive Director, MForesight
Herrick Professor of Engineering
University of Michigan, Ann Arbor

W. Bradford Wilcox
AEI/Institute for Family Studies

Julius Krein
Editor
American Affairs

Zach Graves
Head of Public Policy
Lincoln Network

Marshall Auerback
Research Associate
Levy Economics Institute of Bard College

David Adler
Co-editor, “The Productivity Puzzle: Restoring Economic Dynamism”
CFA Institute Research Foundation

Marc Fasteau
Founder and former Chairman
American Strategic Insurance Group

Ian Fletcher
Member, Advisory Board
Coalition for a Prosperous America

Mark Muro
Senior Fellow and Policy Director
Metropolitan Policy Program
Brookings Institution

[1] All affiliations are for identification purposes only.

[i] David Adler, “Financing Advanced Manufacturing: Why VCs Aren’t the Answer,” American Affairs 3, no. 2 (Summer 2019). https://americanaffairsjournal.org/2019/05/financing-advanced-manufacturing-why-vcs-arent-the-answer/

[ii] Mark Muro, June 26, 2019. “How the Small Businesses Investment Company Program can better support America’s advanced industries,” Testimony Submitted to the U.S. Senate Committee on Small Business & Entrepreneurship, Brookings Institution. https://www.brookings.edu/testimonies/how-the-small-businesses-investment-company-program-can-better-support-americas-advanced-industries/

[iii] Senator Marco Rubio, May 27, 2020. “Deindustrialization, racial discrimination, and the case for common good capitalism,” Medium. https://medium.com/@SenatorMarcoRubio/deindustrialization-racial-discrimination-and-the-case-for-common-good-capitalism-dafabef958e2

[iv] Samuel Hammond, 2019. “Bring the Small Business Administration into the 21st century.” Struggling Regions Initiative. https://www.strugglingregions.com/small-business

[v] Economic Innovation Group, 2017. “Dynamism in Retreat: Consequences for Regions, Markets, and Workers,” EIG. https://eig.org/dynamism

[vi] SBA, April 15, 2018. “Small Businesses Drive Job Growth in the U.S.” SBA.gov.https://www.sba.gov/advocacy/small-businesses-drive-job-growth-us

[vii] Lucia Mutikani, April 16, 2020. “U.S. business formation tanks as coronavirus shuts economy,” Reuters. https://www.reuters.com/article/us-usa-economy-businessformation/u-s-business-formation-tanks-as-coronavirus-shuts-economy-idUSKBN21Y35L