Funding Small Businesses: The Payment Protection Plan Initially Missteps
Across the country, small business owners are closing up shop, uncertain of when they’ll be able to reopen—if ever. As COVID-19 swept through the U.S. and shelter in place policies continued for months, the strain began to hit hard. As revenues nosedived, Doug Jardine, owner of the Color My Nails salon in Salt Lake City, UT, banded together with other small business owners to plead with their landlord. “We are just trying to stay alive today as small businesses,” Jardine stressed. His plea was met with a refusal to relax rent payments, with landlords citing a desire to avoid the “business risk of their tenants.” As similar stories emerged throughout the country, policymakers have rushed to ease the financial burden on business owners.
A $484 billion coronavirus relief package was passed by the Senate on April 21 and the House on April 23. It was the fourth coronavirus bill to be passed in seven weeks, bringing the total federal COVID-response bill up to 2.8 trillion dollars. Despite weeks of heated negotiations surrounding the relief package, the House voted to pass the bill with a near-unanimous vote of 388-5-1. However, these successive waves of funding do not come without second-order impacts. Senator Rand Paul (R-Ky.) emphasized on the Senate floor what he saw to be an unsustainable spending trend, highlighting a contentious budgeting issue. The Congressional Budget Office estimates a 2020 budget deficit of 3.5 trillion dollars as a result of the pandemic—the original projection for the year was 1.1 trillion dollars. Thankfully, because the U.S. dollar acts as the reserve currency of the world and investors tend to believe in the ability of the U.S. government to repay debt, there remains sufficient flexibility to accommodate such high levels of debt at the federal level, via the issuance of Treasury bills, notes, and bonds.
According to a summary obtained by The Hill, $310 billion was set aside to replenish the Paycheck Protection Program (PPP), a forgivable loan program intended to help small businesses finance payroll and mortgage costs during the pandemic. Within that, 60 billion dollars was earmarked for community banks and smaller lenders. The PPP had previously been allocated $349 billion in the stimulus package enacted on March 27, but by April 16 those funds had already run out. Given its widespread popularity, there was more than enough political will to quickly replenish it. Perhaps more attention, however, should be paid towards delineating how the funds can be allocated in the first place.
Seeing as rhetoric around the PPP was focused on helping small business owners, it would have been prudent to more clearly exclude large public corporations from being eligible to access the funds. As of May 14, the Small Business Association still has not released a list of PPP loan recipients, drawing ire—and a lawsuit—from a group of media companies. Since the CARES Act, through which the PPP was created, did not ban large publicly traded companies from accessing the funds (provided that they had fewer than 500 employees per location), giants such as Shake Shack were able to snag millions of dollars from the fund. Although Shake Shack later returned their $10 million PPP check, the legislation could have been written to avoid this type of back and forth from the start, directing resources to where they were most needed in a timely fashion. Transparent and thoughtful legislation, as opposed to the goodwill and public relations of corporate giants, should drive small business owners’ access to funding. The requirement for businesses to spend PPP loans within an eight-week period to access loan forgiveness has also prevented businesses from allocating the money optimally, rushing them into spending it all now despite the phased long-term orientation of reopenings.
Emphasis on funding the PPP highlights the perception of small businesses as crucial to the U.S. economy, a key intermediary in distributing income back to Americans. Since the U.S. is not a savings-oriented culture, in the face of a lockdown, over half of Americans do not have sufficient cash reserves to tide themselves over for more than three months. The pandemic will financially hurt the majority of Americans, and will disproportionately disadvantage those who are already exposed to economic risk. According to a Pew Research Center poll from early April, the economic fallout of the pandemic has not been equally distributed. For one, racial demographics are affected differently, with 60 percent of Hispanic American respondents losing wages or jobs; the national average was 43 percent. Black Americans are almost twice as likely to live in places where the pandemic will cause outsize disruption, while those from lower income brackets or lower education backgrounds are also more likely to experience lowered wages or job loss.
Economic justice is foundational in the quest for social justice. At a time when the most vulnerable communities are being hardest hit, government intervention presents an opportunity for much-needed support, although initial execution has faltered. Unfortunately, because the Paycheck Protection Program’s funds were allocated on a first-come, first-served basis, there was a lack of built-in mechanisms to ensure that the funding actually went to those most in need. In fact, this first-come, first-served allocation process meant that businesses who were best positioned to respond quickly were the ones able to receive funding. In addition, self-employed people and independent contractors were disadvantaged from the get-go, as they were only allowed to apply for PPP funding starting April 10, a full week after the opening date for small businesses.
Times of crisis highlight the normative responsibility for the government to protect the needs of individuals and small businesses. While large corporations tend to have sufficient liquidity and cash reserves to tide themselves over, many small businesses may shut down and never be able to reopen. In February, 5.8 million people lacked work. As of early May, that number has soared to 23 million. The silver lining is that 78 percent of those currently unemployed indicated that they expected to return to their old job post-pandemic. If their expectations prove to be overly optimistic however, the economy could face a long-term downwards spiral as sustained levels of high unemployment produce a depressionary effect on earnings. Such forces would retard the possibility of economic recovery. The desire to curb potential disaster explains the extensive pumping of stimulus funds by the U.S. government in addition to significant quantitative easing efforts on the part of the Federal Reserve.
Doug Jardine’s final plea resonated clearly: “We have dedicated our lives and our finances to our businesses… Utah landlords, please help us. Please help our small businesses in the state of Utah.” While Jardine’s pleas appear to have landed upon deaf ears, landlords are not the only ones who can step in and help. The sheer quantity of money Congress has dedicated to coronavirus relief packages shows the government’s willingness to commit capital in support of small businesses. What remains to be done is effective execution. Whether owners like Jardine will be able to weather the pandemic and keep their businesses alive will depend in large part upon future government legislation; let’s hope they learned from the first few rounds.