Washington needs a far greater sense of urgency about small business.
It is hard, fact-based economics. Unlike any past U.S. economic downturn, this one is aimed squarely at distancing people from interacting and contracting a virus – where they interact personally, at close quarters or join together in large groups. These are primarily either small service businesses, or events and large gathering spaces that small businesses service.
Over 98 percent of all US businesses have fewer than 100 employees, and they employ one-third of the workforce; bump that size up to 500, and you have over 47 percent of workers. It is primarily these businesses that have closed their doors to prevent the spread of the virus. Typically operating on less than one month’s cash, these businesses cannot keep their employees on the payroll when revenues decline or disappear altogether. As their workers lose their incomes, they cut down on spending – which spreads the economic pain with alarming speed through the entire economy.
In short, small businesses are to this economic crisis what banks were to the last one.
There is no doubt that helping small business is hard. Contrast these days with the financial crisis. At that time, fixing the financial crisis meant at its core propping up the banks. There are fewer than 5,500 banks in the US. There are more than 5,500,000 small businesses (with fewer than 100 employees). Working with one small business is as complicated as working with one bank, especially because most small businesses are much less financially sophisticated than banks.
And the Congress did act quickly. But by the scale of the need, Washington has barely stepped up to the plate. Its Paycheck Protection Plan loans are underfunded, and though the demand for loans clearly is admittedly unprecedented, the Small Business Administration has not made it work. How can small business hope to get the cash it needs with insufficient funding and flawed delivery mechanisms? Panicking, unprepared business owners are rushing to the SBA door because they fear being squeezed out. Owners, employees and creditors who could have been reassured by a government backstop are instead abandoning existing and previously sound businesses.
If the nation is to reopen and restart its economy once the pandemic recedes, it needs businesses to reopen and restart. While our national, state and local leaders and leaders in the private sector are beginning the analysis of when this can happen responsibly as the curve of disease flattens, the most important immediate demand is sustaining small businesses for a reopening. On that crucial front, the jury is still out, but appears highly skeptical.
Policymakers must move on three fronts:
First, the decision-makers in Washington must state now, clearly and emphatically, that they will provide full funding for the PPP loan program, so that all eligible applicants know, along with their employees, suppliers and creditors, that these businesses can get their loans, pay their bills, and come back when the public health crisis is over. Make it clear that the first $350 billion was just the down payment, and more funds will be added as needed. Holding the program as a hostage for other priorities is not acceptable. The Congress years ago could solve one problem on the leaders’ words that they would quickly address another.
Second, and as quickly as possible, the program must be strengthened. It should be scaled up to meet the emerging need by extending the covered base period for wages beyond two months as necessary. It needs a totally new, technically sound administrative infrastructure and strong leadership. In particular, the federal government needs to get over its “not invented here” phobia. Private financial institutions have dealt with massive volumes of financial transactions for years, including clearing credit applications in minutes. Rather than reinventing all of that, federal managers should put the private sector on the case. Many expert firms would step up to serve their country. So-called “affiliation” rules must be repaired so that all small businesses that are parts of larger enterprises, and independent contractors and staffing companies, get the same relief. The CARES Act pledged unemployment compensation for “gig” workers; the Department of Labor must build the rules for them at light speed, because they need help desperately. When this new bill is passed, it must prevent fraud, but it must move urgently.
And third, the Federal Reserve must make good on its lending facility to guarantee and package business loans. At some point, the PPP will have done all it can with its relatively standardized terms, and some small businesses will need loans tailor-made to their remaining needs. The “Main Street” lending facility must have the full support of the Treasury and the Congress, with all the funding needed to make good on inevitable loan losses as the economy bottoms out.
A response to the current crisis without full focus on small business would be like a response to the 2008-2009 financial crisis ignoring banks. Our Washington policymakers are wasting time while the timbers of the economy burn. They must reopen the economy as soon as possible, but in the interim must focus on the main impact of the problem—and its solution.