America is Not Prepared for Financial Emergency
Small businesses have struggled to stay afloat amid the pandemic, shedding jobs and ceding the market to companies massive enough to survive.
The $350 billion Federal Paycheck Protection Program (PPP) was passed by Congress to keep America’s small businesses going, and a second round of funding has added $310 billion. But, while the program has been a boon to big banks, it hasn’t reached many of those it was designed to help. I asked economics writer Bryce Covert, who has covered the tangled mess that is PPP, to explain.
Good intentions
“This program was set up quickly in the hopes of getting money out quickly through existing structures in the face of an unprecedented situation,” Covert told me. The goal was to loan desperately needed cash that would allow small businesses to make payroll and pay rent amid the coronavirus shutdown – loans that would be forgiven if the recipient used the money for retaining existing staff.
The problem came in the mechanism: “In a very American way,” says Covert, “we decided to funnel this through banks, through the private sector not the public sector.” The federal Small Business Administration (SBA) would authorize funds to be loaned to businesses through their commercial banks, for which the government would pay those banks a service fee. But banks exist to pursue profits, not deliver public services. And banks are guided by their own interests when implementing PPP. For example, “banks are getting a larger fee for a larger loan, which incentivizes them to give bigger loans to bigger businesses … companies that have access to credit and don’t need the loans,” rather than prioritizing the smaller businesses the program was meant to save.
Banks can’t lose, people can’t win
If the U.S. had followed the model of countries that deliver the funds intended to prevent economic collapse directly to businesses, PPP would have been run by the IRS. But the capacity isn’t there, says Covert, because “Republicans have been cutting back the IRS for years, so it was understaffed before the crisis.” That leaves banks in a win-win situation, reaping rewards while assuming no risk. Their loans will be repaid by either the government or the business owner, while “shielding themselves from liability ” via confusing loan agreements, which were drafted by the banks in the absence of clear SBA guidelines. This leaves “small business owners holding the bag.” Uncertainty over the rules for forgiveness left many of the struggling small business owners Covert interviewed reluctant to take the loans and assume the risk of defaulting.
We could have nice things
There are better ways of doing stimulus. Covert notes that France and the Netherlands make direct grants to businesses to cover payroll. Like the U.S., their economies have slowed dramatically, but government intervention has ensured far less severe job losses. That maintains consumer spending power, avoids the bureaucratic expense and logjams of a surge in unemployment claims, and allows for a quicker recovery.
Also, amid coronavirus uncertainty, the economy needs open-ended life support. But the U.S. model is to legislate one-time spends insufficient to the scale of the problem, which then require that Congress pass follow-up stimulus legislation dependent on further protracted political wrangling.
The battle is on
Congress is currently working on round four of its stimulus effort, though no one knows whether it will include more PPP money. Half of the latest round of PPP funding was loaned out within five days and is expected to run dry soon. And the big fight this time around will be over federal funding for state and city governments whose budgets are collapsing. A better bailout is possible, but only if elected representatives are pressed by their constituents to do the right thing.
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