On Government Intervention in the Small-Firm Credit Market and its Effect on Economic Performance

Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. In this paper we empirically test whether the Small Business Administration's main guaranteed lending program—the 7(a) program—has a greater impact on economic performance in low-income markets than in others. This hypothesis is predicated on our previous research (Craig, Jackson, and Thomson 2007b), where we investigate aggregate SBA guaranteed lending. In that research we found that the overall impact of SBA guaranteed lending on economic performance is significant and positive in low-income markets. Using local labor market employment rates as our measure of economic performance, we find a quantitatively similar positive impact of SBA 7(a) guaranteed lending. This impact on economic performance is also significantly larger in low-income areas than in other areas. This result suggests that the 7(a) program, which is the largest SBA guaranteed lending program, is also the main contributor to the positive impact of SBA guaranteed lending on local market economic performance.