Sen. Elizabeth Warren (D–Mass.) says it can be very difficult to start a business, especially for ethnic minorities, in the United States. She’s right, but she has also supported policies that have made that problem worse.
Warren recently proposed creating a grant program for entrepreneurs of color, something she says will help reduce the disparity in wealth between racial groups in the United States. Her plan calls for the federal government to provide no-strings-attached startup capital to minority businesses, particularly ones run by people with low household wealth. On the campaign trail, Warren argues that “every American should have a fair shot at starting a business,” and says that her $7 billion grant program would help level the playing field.
Warren is right about a good bit of this. The racial wealth gap is real, and minority-owned businesses do face unique barriers to entry; strengthening entrepreneurship is one way to close the gap.
But policies Warren has pushed in the past have made it harder for small businesses to form and grow, hurting minority entrepreneurs’ ability to create wealth and build futures for their families.
Maybe the best example is the Dodd-Frank Act, passed by Congress in response to the financial crisis that brought about the Great Recession. While Warren wasn’t yet a senator when the law passed in 2010, she advocated for the law and helped lead its administration at the newly-created Consumer Finance Protection Bureau. Dodd-Frank is massive, and some provisions have had an outsized effect on community banks and limited access to credit for small businesses—in particular, the requirement that banks with over $50 billion in assets undergo a series of stress tests has slammed community banks, forcing closures and consolidation.
Access to credit is a critical issue for small businesses and startups of all stripes. For minorities in the United States, it can be particularly difficult to get a loan for a small business. In a 2016 study, the Federal Reserve Banks of Cleveland and Atlanta found evidence of discrimination by financial institutions against minority businesses, but the bigger program is that black and Hispanic Americans tend to have lower net worths, lower credit scores, or a lack of credit history altogether. That makes it harder to get enough credit to start a business.
Warren recognizes this problem: She points out that the average African-American small business owner starts with $35,000 in startup capital, a third of what the average white entrepreneur starts with, and African-American entrepreneurs receive only 3 percent of the outside investment white entrepreneurs receive. But regulations in the Dodd-Frank banking law actually make it much harder for aspiring small businesses to get loans.
According to the Federal Reserve Bank of Dallas, loans to small businesses as a share of commercial and industrial loans has fallen by 9 percent since the passage of Dodd-Frank in 2010. And when banks cut back on small business loans, they’re likely to reduce loans to marginal borrowers—people with lower credit scores, oftentimes minorities.
It’s a problem that the minority-owned business community has been talking about for years. Shortly after Dodd-Frank’s passage, Javier Palomarez, the United States Hispanic Chamber of Commerce president, wrote in The Washington Post about how regulations squeezed out countless minority entrepreneurs with thin credit histories, for whom access to credit is their “single largest challenge.”
While tightening of the credit system was intended to reduce the risk of default, he wrote, it also “creates difficult burdens for individuals who are not high risk, but simply have low credit scores or a thin credit history.”
More recently, the nonprofit group Prosperity Now highlighted the stories of African-American entrepreneurs across the South. Their stories are telling. People like Kayla (a pseudonym), a household service entrepreneur, lack the credit history to get a loan to expand her business, which would mean hiring employees and taking cleaning contracts with larger clients. Or entrepreneurs like “Jeremy,” a used car dealership owner who had to turn to online lenders to finance car purchases, because traditional banks weren’t on board with the risks associated with a used car dealership.
Warren’s approach is welcome in some ways. But before proposing an expensive new loan program for minority-owned businesses, she needs to realize that the problem she intends to solve was created, in part, by excessive regulations reducing access to credit, and pushing out marginal borrowers who lack a long credit history.
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