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As the U.S. economy limps out of recession, lending to business is showing no sign of revival. And that should worry us all. According to the Federal Reserve Bank data, business receivables outstanding held by finance companies were less than $470 billion in July, down 22 percent from 2008. New securities issued by corporations are running at an $830 billion annualized rate this year, down from $2 trillion in 2008.

But that’s only the beginning of the bad news for small business. To an unprecedented degree in peacetime U.S. history, the federal government dominates the allocation of credit in the economy. As a consequence, politically favored constituencies — real estate, banks, higher education, exports and the green industry, not to mention government itself — are getting all the capital they want (indeed, more than they can profitably use), while everyone else feeds upon the scraps.

The federal government plays an increasingly intrusive role in the American economy. Federal expenditures account for almost one quarter of the gross domestic product. Meanwhile, government is expanding its regulatory reach over the shrinking portion of the economy not subsumed by government, most recently by means of the Affordable Care Act and the Wall Street Reform and Consumer Protection Act. Less visibly, as I document in my book, “Boomergeddon,” the leviathan state employs a variety of tax incentives, loan guarantees and monetary tricks to ensure that favored industries gain preferential access to capital.

Uncle Sam has been force-feeding the housing sector like a stuffed goose, even as the other animals on the farm starve. Even before the global financial crisis, the housing industry benefited from deductible interest on loans and federal guarantees for debt issued by Freddie Mac (OTCQB:FMCC) and Fannie Mae (OTCQB:FNMA). When the housing bubble popped, the Obama administration doubled down by committing $7.4 trillion to more loan guarantees, purchases of mortgage-backed securities, a bailout of Fannie and Freddie and an initiative to rework mortgages for stressed homeowners.

The banking sector has been another beneficiary of federal favoritism. Over and above the hundreds of billions of dollars funneled to banks by means of the Troubled Asset Relief Program, much of which has been repaid, the Federal Reserve subsidizes the industry on an ongoing basis through its interest rate policies. Thanks to the Fed’s near-zero interest rates, banks can borrow money for nothing and reinvest the funds longer-term in super-safe 10-year Treasuries, around 2.5 percent, pocketing the difference. Easy as pie. Since early 2008, banks have increased their holdings of U.S. securities from $1.1 trillion to more than $1.5 trillion: $400 billion that could have been invested in the private sector. The implied subsidy worth tens of billions of dollars yearly drops straight to the banks’ bottom lines.

Another privileged sector is higher education. Uncle Sam has guaranteed roughly $850 billion in loans to college students — an indirect subsidy of the higher education industry. The endless supply of credit to students has allowed colleges and universities to jack up tuitions far faster than inflation over the decades. While the higher ed establishment swells in size like a bad bruise, college grads are becoming a new indebted class in American society.

Municipal governments are another congressional pet. State and local governments have long benefited from the ability to issue tax-free municipal bonds, which lowers the cost of capital not only for building roads and extending sewer lines but also for underwriting convention centers, ballparks and other facilities that hardly rank among the core services of government. But in the recent recession, that advantage was not enough. Congress created a new vehicle for funneling scarce capital to municipal projects: Build America Bonds. The bonds are not tax free, but the feds does pay 35 percent of the interest, resulting in lower interest charges to local government. By the end of 2010, bankers estimate, $150 billion of the bonds will have been sold.

Whenever Congress wants to bestow benefits on a particular industry without having an embarrassing subsidy showing up as a line item in the budget, a favorite tactic is to create a loan guarantee program. Thus the export-import bank puts the faith and credit of the U.S. government behind big U.S. exporters, while the Department of Energy expedites the flow of capital into everything from nuclear power plants and alternate energy facilities. If you export jet airplanes or build wind power farms, you win the lottery. If not, you must scrounge for money from a smaller pool of capital.

Who looks out for small business? Well, President Obama has proposed setting aside $30 billion to help fund small businesses, but the sum would replace only a fraction of the cutbacks in bank lending. Moreover, the proposal reinforces a noxious precedent: that the pool of investment capital is something that power brokers in Washington can carve up and dispense as they please. Beneficiaries become supplicants, forced to hire lobbyists and contribute PAC money to keep their fix coming. The politically powerless — small business, foremost among them — fight for the leftovers.

Disclosure: No positions

Source: Small Businesses Fighting for Scraps