The Trump administration’s program of providing funds to small businesses to keep their workers on the payroll has been under attack almost since its inception. Yet the Paycheck Protection Program is arguably the best designed and most effective program launched by the federal government to support the economy ravished by the coronavirus.
The basic problem facing the economy right now is that a lot of economic activity has come to a halt, but people still need access to resources like food, shelter, toilet paper, and the internet. The usual means of acquiring that access is through income earned in exchange for economic activity, producing goods or providing services. For a lot of people, that just isn’t possible right now because we have shut down their businesses or demand for those goods and services has collapsed due to social distancing.
That’s a recipe for economic calamity. People will suffer because they cannot afford the things they need. The absence of their spending will mean others lose income, making the economic contraction more severe. Spending and investment will further collapse as people attempt to financially fortify themselves against the loss of jobs, income, and savings. Even if we wrapped up our fight with the coronavirus ahead of schedule, we would likely have suffered a deep depression that would leave deep and lasting scars on our economy and society.
So what to do? There are two basic approaches:
- Free stuff. We could have created a nationwide rationing system that would have attempted to allocate everyone his or her share of needed goods while putting all financial obligations on pause, eliminating the need for income.
- Free money. We could have had the government step in and pay everyone an income, eliminating the need to provide goods and services.
For the most part, we’ve chosen the free money option. There are lots of reasons in economic and political theory why this was an attractive choice, but the main reason we chose it is that it is the least disruptive. It allows us to continue to organize ourselves through market mechanisms. We’re used to getting paid, paying for things, and using money to distribute goods and services. And we do not really like the idea of bureaucrats running everything.
We’ve got a lot of free money programs. There’s the old-fashioned unemployment benefits that we super-charged with an extra $600 a week. There are Coronabux directly deposited into bank accounts. The Fed dropped its target for overnight bank funding to zero. Student loans got put on hold. Many workers who did not already have paid sick leave got it.
The most elegant of these is the Paycheck Protection Program. As the name of the program makes clear, this is really an income provision program. Its goal is to allow people to keep earning income from their jobs even if they either cannot keep doing their jobs or their employer cannot afford to keep paying them because the business has slowed or closed altogether. And just like in the pre-coronavirus economy, our income is produced through employment.
That has additional benefits. When we’re through with the shutdowns and we want to open our economy once more, having businesses already staffed with employees gives us a headstart. Keeping the organizational infrastructure — people working together, organized through firms — of our economy intact will make the rebuilding process easier. We won’t be starting from scratch.
That also helps the businesses, of course. This is an especially attractive feature because so many businesses are facing financial ruin due to the crash in demand as their customers socially isolate or because they have actually been ordered to close for the protection of public health. Letting restaurants, hotels, and even cruise lines fail because so much of the economic brunt of the coronavirus happens to fall on them strikes a lot of people as unjust. And forcing companies out of business to protect everyone else may even amount to what the constitution considers a taking that would require compensation.
The government could, presumably, just send checks to businesses. But the process of evaluating millions of applications for various amounts of assistance would likely require the creation of a huge new bureaucracy. That’s unnecessary because we already have the organizational infrastructure in place for evaluating requests for business funding: the banking system. So the Paycheck Protection Program is structured as loans from banks, guaranteed by the government, that are forgivable if businesses use 75 percent of the funding to pay their employees for the next several weeks (the rest can be used to pay rent, utilities, and other expenses).
Because Americans are rightfully suspicious of the role big corporations now play in our economy, the program was structured so that the money would go primarily to businesses with 500 employees or fewer. The maximum amount of the loan was capped at $10 million, which meant that it would not likely do much good to very large businesses anyhow. If it seems a bit unfair to structure a program that protected the employment of people at a business with 400 employees but not those at a business with 1,000, that issue was overwhelmed by America’s deep-seated anti-monopolistic passion.
When the program was first announced, many worried that businesses might not take the money if it came with too many strings attached or if it looked like the government might have ways of backing out of the promise to forgive the loans. The process could also be too burdensome if there were too much paperwork. Or the money could arrive too late. So the program was streamlined to get the money out quickly, without too much red-tape and without too many strings attached.
Banks also worried about the program. The government was asking them to vet the borrowers and, eventually, service the loans. Many bank executives remember that in the aftermath of the financial crisis, the government sued banks for selling government-sponsored entities loans that went bad. Those loans were supposedly sold to investors and backed by Fannie Mae and Freddie Mac, but the banks wound up having to buy them back and pay billions in fines. What if a bank made a loan to a borrower who turned out not to be eligible? Or a borrower who used it to fund a terrorist cell or drug dealing enterprise? There is a non-trivial risk when making a government-backed loan that, if it goes bad, the government will say you should never have made the loan in the first place. It may even accuse you of fraud for trying to collect when the loan to the fraudster goes bad.
Banks seem to have mainly made themselves comfortable with making the loans by deciding to deal primarily with their pre-existing customers. Businesses that already were borrowers had already cleared the usual “know your customer” rules, making it far less likely that the money would go to things like fraud, money laundering, or terrorism. That triggered backlash against the banks and the program from businesses that were not at the front of the line for the funds. Fairly or not, some claimed that the pre-existing customers were likely more financially sophisticated and may even less in need than the company looking to get a bank loan for the first time.
Despite predictions that the program would fail either because businesses would not take the money or banks would not make the loans, the money definitely did make it to American businesses. Even while the mainstream media continued to echo complaints of those who did not get funding and reported that the program was somehow gummed up with funds trapped out of reach, banks funded $349 billion of loans. Faster than anyone expected, the entire original tranche of money authorized by Congress was gone.
The newest source of controversy has arisen from reports in the Associated Press, the Wall Street Journal, and elsewhere that several publicly traded companies received Paycheck Protection funds. The trouble seems to have begun when Shake Shack, a company with thousands of employees and a market cap in the billions of dollars, received $10 million. At least 100 publicly-traded companies got a total of $340 billion of Paycheck Protection money, according to the Wall Street Journal. The AP also found that some foreign-owned companies had received funding. The Journal reported that 18 companies getting funding employed more than 500 people and 26 had reported more than $100 million in annual revenue in their last fiscal year.
None of these grants appear to be in violation of the rules. The eligibility criteria were expanded to explicitly allow for foreign-owned businesses with U.S. employees or businesses with more than 500 employees in industries hard hit by the crisis.
The media-generated outrage at these larger companies getting the funding, however, is misplaced. The main goal of the program is to preserve the income of the employees by incentivizing their employers not to lay them off. The critics seem to be saying we shouldn’t have the program that seeks to protect the job of employees at large restaurant chains like Potbelly, Shake Shack, Ruth’s Chris Steak House, and Taco Cabana. If anything, the employees at public companies or large chains are likely more at risk of getting fired because the senior management of those companies is answerable to shareholders and likely keenly aware of the need to cut costs at a time when revenue crashes.
Perhaps some of these companies do not need the money. But they also do not need all their employees. The Paycheck Protection Program was not built to bail out deserving companies or those especially in need. It is not a program of picking winners and losers. It is a worker protection program.
Hopefully, the outrage will fade once Congress approves the next round of funding for the program. That should allow some of those who felt their business was shut out of the first round to receive aid — although perhaps not all. Based on the early signs of demand, it is likely that the program will need even more funds in the not-so-distant future.
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