Fortunately, the U.S. Senate stepped up on Thursday to do more.
Senate Republicans released a trillion-dollar economic recovery proposal that includes $1,200 direct payments to many Americans, reduces the tax liability of large corporations and provides support for ailing industries like airlines. A crucial part is a plan by Senator Marco Rubio of Florida for government grants and loans of up to $10 million to eligible small- and mid-sized businesses, conditional on those businesses retaining their employees during the crisis.
There is much to commend in Rubio’s bill. Notably, it would provide grants to eligible businesses to cover all payroll expenses incurred between March 1 and June 30. A full grant would only be available to businesses that did not lay off workers. The program uses commercial banks, which would allow small businesses to work with bankers they already know and trust. The bill also contains provisions to expedite the delivery of capital to businesses.
This kind of help for smaller businesses is desperately needed to prevent a collapse of key services, including restaurants, shops, cafes and hotels. Providing payroll grants is a critical step in keeping service workers in their jobs, and in stopping the economy from losing the skill, networks and specialized knowledge these businesses have built up.
As the legislative process continues, the bill can be improved. A critical step would be to ensure that government grants would extend to non-payroll expenses, such as rent. Rubio’s office confirmed to us that this is the intention of the bill, though the legislative text is unclear. On Twitter, Rubio described the grants — “forgivable loans,” in his words — as extending to mortgages, leases and rent.
In addition, the size of the program needs to be significantly increased from its current $300 billion. Rubio’s financing doesn’t fully meet the scale of the problem. With help from Dun & Bradstreet Inc, we calculated that the program needs to be four times bigger. It will take $1.2 trillion to replace 80% of the revenue of businesses with fewer than 500 employees for three months in industries except for manufacturing, health care, education, finance and insurance. We estimate that to fully replace the revenue would cost $1.5 trillion.
The government would recoup some of that money in other ways. Financial support to businesses is financial support to workers — we would require businesses not to lay off workers in exchange for the grants, though workers would be free to quit — and by keeping workers in their jobs, the government would spend less on unemployment insurance, Medicaid, food stamps and similar programs. The government will also collect more tax revenue than it otherwise would.
It’s important to replace revenue and not just payroll expenses because many of these businesses operate with thin profit margins. Focusing on payroll won’t be enough to prevent mass layoffs and business closings.
Why grants and not loans? The services sector is different from manufacturing. When the spread of the coronavirus abates and service businesses reopen, they won’t return to a backlog of orders. If they have shut down for three months, those three months of revenue are permanently lost, never to return. A loan, even an interest-free one, would have to be paid back. Many low-margin businesses would have to resort to layoffs, or even close up shop, rather than incur this additional expense after losing one quarter of their annual revenue.
It’s important to get businesses the help they need. Populist frustration boiled over after the 2008 financial crisis in part because of the perception, right or wrong, that the people who were suffering the most did not receive adequate assistance from the government, while banks and other big businesses did. Congress is rightly focused on aid to households. But businesses are taking a major hit. Many are already closed and laying off their workers, and they urgently need assistance.
It’s reasonable to worry that the big spending programs now in play in Washington are sure to increase the federal deficit. But we don’t believe that concern should deter lawmakers from supporting small- and medium-sized businesses at the necessary level. Providing inadequate support would result in its own economic-cleanup costs that would be deficit-financed. This situation underscores the need for a healthy government balance sheet during strong economic times. The existence of large deficits before the coronavirus crisis does not argue against the need for deficit spending to address it.
Likewise, we are not worried about moral hazard. Small businesses are in peril not because of bad decisions, or the emergence of a stronger competitor in the market, or the invention of a new technology. They are not fighting for their lives because of inadequate insurance against common risks. Instead, they are closed due to political decisions in the face of a once-in-a-century pandemic. Government should communicate clearly that outside of this extraordinary circumstance, businesses should not expect this type of financial assistance.
Economic forecasters expect a significant contraction in the second quarter of 2020. But economic growth could return in the third quarter. Aggressive government action could keep economic damage confined to the spring, the unemployment rate relatively lower and the typical duration of an unemployment spell relatively shorter.
Rubio’s bill is an important step in that direction. It recognizes that combating economic damage from the sudden halt in economic activity caused by the pandemic requires more than mailing checks, providing aid to states and strengthening the social safety net. It requires helping businesses directly, and helping their workers through them.
But bolder action than Rubio has proposed is required. The coronavirus has delivered what could be a knockout blow to small business. The government needs to get them back on their feet by replacing the revenue they would have generated in normal times.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”
Glenn Hubbard is dean emeritus and Russell L. Carson Professor of Finance and Economics at the Columbia Business School. From 2001 to 2003, he was chairman of the Council of Economic Advisers.
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