To rescue an economy falling off the highest cliff since the Great Depression, the US Congress threw out a $1.2 trillion safety net as the COVID-19 pandemic began in 2020 in the form of two lending programs for US employers. While the credits certainly helped, their design missed the mark, according to Harvard’s Samuel Hanson and Adi Sunderam and Chicago Booth’s Eric Zwick.

One rescue measure, the Paycheck Protection Program (PPP), ran too hot and wound up distributing precious funds to recipients who were least in need. The other, the Main Street Lending Program (MSLP), was too cold: its more onerous terms with no avenue to loan forgiveness drove businesses away, and only 3 percent of its budget left the Treasury by the time it expired in December 2020.

The economy would have been better off had Congress designed the rescue package as a business-continuity insurance program run by the Internal Revenue Service, the researchers argue. They developed a framework for policy makers to apply in the next financial crisis and argue that such a program to support small businesses in an economic catastrophe could be a valuable complement to unemployment insurance.

Congress was right to be concerned about helping employers survive, the researchers find. After the dust settled, the Bureau of Labor Statistics reported that 1.6 million employers were subject to government-mandated shutdowns in spring 2020, affecting 26 million workers. In addition, 4.7 million establishments with 72 million workers, or 57 percent of private-sector employment, saw reduced demand, the data show. While navigating these shutdowns, the average business faced overhead costs equal to 70 percent of payroll and 200 percent of cash flows, Hanson, Sunderam, and Zwick estimate.

The government feared that cascading business failures would tax society in other ways, through persistent unemployment, bankruptcy court logjams, and a dearth of vital services. So Congress approved $600 billion for the PPP, which used banks to distribute loans that were fully backed by the Small Business Administration with flexible terms that minimally punished nonpayment, if at all. By December 2020, 80 percent of the PPP funds were in borrowers’ hands.

But the PPP turned into “a tax rebate to top-1% owners equivalent to more than a full year of their typical business tax burden in return for a positive, but relatively small, impact on aggregate employment,” the researchers find. In its haste to distribute the funds, the program said yes to just about any borrower quick enough to ask while funds were available. And more sophisticated, better capitalized businesses got there first.

Small businesses had big fixed costs 

As coronavirus took hold in the US, some companies faced crippling overhead costs. Using pre-pandemic data for comparison, researchers estimate the costs to be, on average, about 70 percent of labor payments and 200 percent of cash flows.

The $600 billion MSLP required participating banks to assume 5 percent of each loan’s risk and imposed stricter underwriting and loan-forgiveness rules. Hanson, Sunderam, and Zwick argue that there is a better mechanism for delivering money to borrowers most in need on terms fair to both taxpayers and business owners.

They propose a business-continuity insurance program to be used in extreme conditions when severe external shocks threaten business failures—not in cases of what they call “garden variety recessions,” or even the 2008–09 global financial crisis. Considering the crucial role of small and midsize businesses in employing millions of Americans, the researchers advocate targeting such aid at privately owned enterprises with as much as $100 million in annual revenue. But they would exclude publicly traded companies “for whom the welfare benefits of support are likely small.”

“We view the goal of a business support program as helping private firms cover the cost of their fixed and hard-to-renegotiate obligations,” they write. Basing their estimates on corporate tax data, the researchers say such costs may run as high as $40 billion–$60 billion a week across all corporations, excluding financial companies. The program should be run by the IRS, they argue, because it has direct contact with business owners and familiarity with their cash flows.

During the crisis, the framework should include repayment terms that are “soft,” not hard and fast like those for traditional debt. Once the shock subsides, there should be a tax-based repayment system, which could be structured as a special corporate tax surcharge that would be “like having the government make preferred stock investments in firms affected by the crisis,” they write. They reject involving private banks, seeing the government as the best avenue to reach the widest possible audience and potentially recoup some of the support paid out.

“We are less sanguine about the value of traditional fiscal policy levers targeting firms, such as investment or payroll tax credits,” the researchers write, partly because those tools don’t address sharp declines in demand. “Social insurance targeting firms in need is the better medicine.”

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