This is the third article in a series examining major economic policy responses to the pandemic that targeted small and midsize businesses. The first article looks at the Paycheck Protection Program, and the second looks at the Main Street Lending Program.
The economic collapse that accompanied the onset of the pandemic in March 2020 was an altogether new challenge for policymakers and economists.
The Paycheck Protection Program was implemented with remarkable speed, but had flaws that could be improved.
This is particularly the case when it came to addressing the needs of small and midsize businesses, and their millions of workers.
Now, nearly three years into the pandemic, we can use the experience of these programs to understand what worked and be better prepared for the next health or financial crisis.
A prime example is the Paycheck Protection Program. While policymakers put it in place with remarkable speed, resulting in direct assistance to firms in need, it was not without problems.
The program was leaky in some respects, prone to disbursing scarce resources to businesses that did not need the aid or those that gamed the system.
In contrast, the Main Street Lending Program took more time to launch, posing a major challenge to plugging the hole blown in the commercial sector because of government-mandated shutdowns.
While the scope of the Main Street Lending Program was commendable—more than $17 billion to small and midsize firms—demand was muted in part because of the lengthy delays in getting the program off the ground.
In light of the recent experience with federal programs during large exogenous shocks, how should the policymaking community consider proceeding in the future? We offer some recommendations below.
Rethink the PPP
First, we would recommend separating the functions of the Paycheck Protection Program into two parts: one for maintaining employee income streams, and one for loans for small businesses that will not have access to the bond market.
We would recommend separating the PPP into two parts: one for employee income streams, and one for loans for small businesses.
The PPP was a well-intended compromise for employee and proprietor assistance. Only a fourth of the benefits accrued to workers for whom it was intended, with the bulk going to the proprietors, landlords and suppliers.
And because of the shared risk between the government and private lenders—no matter how small—the PPP benefited businesses with larger revenue streams that were more attractive for lenders.
While we applaud the novel efforts to provide timely bridge financing and direct forgivable aid to small and medium-size firms, it would be wise to have plans on the books to provide that aid to smaller firms at the outset.
The most efficient method of wage support would be through direct payments by the Social Security Administration.
Although it is understandable that aid to individual workers is going to receive the primary attention, it is critical that the political authority not neglect the commercial community. The commercial community and the American workforce are complements of each other, not substitutes.
Loans to businesses would be through the Small Business Administration. Loans to suppliers would be through the SBA or the successor to the Main Street Lending Program at the Federal Reserve.
Improve data collection
Second, policymakers at the Fed and Treasury need to invest in the collection of information that could easily be converted into a program term sheet and scaled for thousands of businesses.
Like the work done at the Pentagon, CIA and State Department, the Fed and Treasury should be provided funds on an annual basis to conduct exercises of crisis management.
Focus on labor
Third, if the purpose of the PPP was employee retention and preserving the skill level of the workforce, European and U.K. models may offer better solutions.
A recent paper by the International Monetary Fund concludes that Europe’s more aggressive use of job retention schemes kept around 4 million workers in their jobs. The report noted that during 2020, U.S. employment fell by 6.2% and the unemployment rate increased by 4.4 percentage points.
That compares to an employment decline of only 1.4% in the European Union and a minimal increase in the unemployment rate of 0.4 percentage points.
In contrast to Europe, the United States experienced a plunge in employment that took two years to recover from. U.S. payrolls have only recently topped the December 2019 peak despite a quick rebound in the economy.
This lag was compounded by voluntary displacements from the labor force and the lingering effects of the health crisis, all of which contributed to the tightening of the labor market and higher wages.
The case for government aid
Finally, the pandemic experience offers arguments for the efficacy of aid to businesses and the efficiency of direct aid to households during times of economic distress and market failure.
Fearing an economic collapse, Congress passed the $2.3 trillion CARES Act in March 2020. Led by Majority Leader Mitch McConnell and signed by President Donald Trump, households, small businesses and large businesses received roughly three quarters of the funds, with the last quarter allocated to health providers, states and municipalities, the airline industry and others.
The entirety of the CARES Act and subsequent aid programs dwarfed the PPP and Main Street outlays.
Economic growth rebounded quickly after vaccines became available. And bankruptcies, both business and personal, dropped during the pandemic.
The takeaway
There have been legitimate arguments over the size of the CARES Act and subsequent aid packages, and as we noted, the PPP program was leaky. And there are arguments over the role that such aid played in contributing to excessive demand and the high level of inflation.
But these arguments must also consider that the economy has closed the output gap, poverty has retreated, and wage inequality has narrowed. All of this is because of the resurgence of the private sector after a rather large fiscal and monetary boost from the federal government.
Without that action, an economic catastrophe would have been at the American doorstep. The U.S. political authority would be wise to take the lessons learned during the pandemic and translate them into policy and planning ahead of the next crisis.
