Gregory Bull/AP Photo
A flower shop in San Diego has managed to stay open. How many will not, because government aid is not intended to save small businesses?
First Response
When the first round of the Paycheck Protection Program (PPP) started in early April, the government couldn’t fit the enormous demand through the system. $350 billion was dispensed within two weeks. Then, well-intentioned progressive watchdogs decided to get irate, calling out a program design flaw. Chains with less than 500 employees at each location were eligible for PPP, and plenty took advantage. With the program oversubscribed, the theory went that mid-sized firms with access to capital markets were cutting the line, and depriving the local family-owned restaurant or corner store from aid.
The PR frenzy spurred the Treasury Department to refine the rules, suggesting that all loans over $2 million would be audited and that genuine hardship must be shown. As a result, nearly all of the “undeserving” companies highlighted gave back the money. In a world with expected high demand for the second round, that cash would be cycled through to other businesses, neither increasing or decreasing the amount of payroll workers assisted. But a funny thing happened along the way: owners figured out that the PPP doesn’t do much for their personal survival.
They should have gotten the hint when it was called the Paycheck Protection Program. It was effectively a pass-through grant to workers, to keep them on the payroll for two months, whether they came in to work or not. Only one-quarter of the loan amount could be used for anything other than salary, or else the loan would remain a loan, and the last thing small businesses with no revenue and an uncertain future want right now is additional debt.
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As the Wall Street Journal pointed out late Friday, PPP loans are now just sitting there. The first round went out the door in two weeks. Today, two weeks after the opening of round two, about 40 percent of the funds are left. The Journal attributes this to three developments.
First, a lot of the initial demand came from companies trying with multiple financial institutions to obtain the first-come first-served loan (full disclosure: the Prospect received a PPP loan with the fifth institution we tried, so I can confirm that was a thing). Second, the shaming of public companies and big chains dampened demand for large loans; the average loan size at the end of April was $79,000, down from $206,000 in the first round. And third, “owners have concluded that the [PPP] doesn’t meet their needs.”
Some have had trouble hiring back staff because unemployment is temporarily a better deal. More important, as word traveled that 75 percent of the loan had to go to payroll, businesses with high rent or a lot of fixed expenses realized PPP would not assist their survival. For example, every restaurant and bar in New York, or Boston, or San Francisco. The lack of clarity over how loans will be made forgivable is also threatening demand, because small businesses like this don’t want to take on debt.
I would add a final piece. It’s May 11. The lockdowns began in mid-March. At most, the really tiny businesses had about three weeks of reserves. Demand may be slipping because demand has died.
Again, it’s called the Paycheck Protection Program. The goal was to protect paychecks, not businesses. The requirement for forgiveness of the loans that 75 percent be spent on salary isn’t quite in the text of the CARES Act; that’s an approximation of the language that Congress inserted. But the legislation does make clear that the grants are available for those keeping payroll continuous.
You may see that as a dumb goal, considering the paycheck protection was temporary, and it operated at cross purposes with the unemployment boost, which was also temporary but bigger. Congress was dictating to keep people on payrolls and also to take people off payrolls at the same time. But whatever the case, you can’t expect a business owner to judge an offer of relief without thinking about its effect on the business. If PPP won’t help save them from ruin, they’re not likely to take it. Why would they?
I thought mediating the PPP through self-interested banks would cause it to fail; actually mediating it through self-interested business owners was the problem for take-up.
Of course, this makes the witch hunt over “undeserving” businesses taking the loans more monstrous. Before, canceling larger firms was just going to redistribute funds to smaller ones; now it’s just taking larger firms out of the programs and not redistributing the money at all. It’s just getting a bunch of workers fired. So, for example, hotel chains are giving back the money. And their workers include, you know, low-wage housekeepers. Many of whom, let’s face it, are undocumented and won’t be eligible for unemployment. So this jihad took money away from them.
In the short-term, that dynamic might put more government money into the economy, if everyone from a larger firm that gives back the PPP gets fired, and goes on unemployment, and gets a bigger paycheck. Over the longer term, of course, by making the small business program unusable for small businesses, it means fewer businesses out there hiring when this is over, and paying rent, and buying supplies from vendors, and all the economic activity associated with a business. It means it’s harder to get a job. It means more momentum toward a Depression.
Why wasn’t “saving the business” a goal of the small business program? Why would anyone consider it a better world to have workers on payroll for two months than to have a surviving small business sector? Marco Rubio, the architect of this program, has a ton of explaining to do.
Gimme Your Retirement Money
There’s been another round of deficit worrying, this time out of the White House. But fear not, they have a plan. The Hoover Institution and the American Enterprise Institute (led by Andrew Biggs, the leading opponent of social insurance programs) have floated a scheme, which administration economists are perusing, that would let Americans take up to $5,000 in checks now in exchange for having their Social Security benefits delayed by an equal amount in the future.
This is the ultimate “robbing Peter to pay Paul” move, and Alex Lawson at Social Security Works rightly condemned it. “Trump’s advisers are pushing a plan that would force people to choose: Go hungry today or work until you die,” he said. “Any plan that raids Social Security is a moral abomination.”
I expect this kind of thing from AEI and the Hoover Institution. But last week, Wharton professor Natasha Sarin, a protégé of Larry Summers who, as we have reported, is advising the Biden campaign, co-authored a research paper that would do exactly the same thing: use a portion of future Social Security benefits on current needs. The benefit, according to the abstract, is that this approach “does not increase the overall liabilities of the federal government.” Oh good.
Biden has called for an immediate $200 a month increase to Social Security. His adviser wants to cannibalize it. Biden already has a pretty shaky history on Social Security. If he wants to retain any trust at all, Natasha Sarin shouldn’t be his adviser any more.
Today I Learned
- The horrors of working at Dollar General during the pandemic. (NBC News)
- The U.S. turned down an offer to manufacture millions of masks domestically in January. (Washington Post)
- Axios ended up having to correct this report about House Democrats’ marker on the next response bill, but it still includes an odd section that’s obsessed about hypothetical people not getting “too much” relief. Seems like the wrong thing to worry about. (Axios)
- Meanwhile, factories are turning temporary furloughs into permanent closures. Seems like a bigger problem. (Wall Street Journal)
- Sanitation workers fired in New Orleans after protesting safety conditions, replaced with prison labor. (WWL-TV)
- Chris Hayes talking with Isaac Chotiner about the crisis is good. (The New Yorker)
- Seinfeld has been part of my corona de-stressing process, so this is sadly relevant: RIP Jerry Stiller. (New York Times)
