Covid-19: Small business alone needs $1tn now

Restaurants and shops are closed across the US to try to slow the spread of the coronavirus. The Federal government has started to address the resulting economic pain with an emergency declaration by President Donald Trump releasing $50 billion for public-health measures and congressional passage of a multi-billion dollar relief bill providing some paid sick leave and extended unemployment benefits, among other assistance.
Fortunately, the US Senate stepped up to do more.
Senate Republicans released a trillion-dollar economic recovery proposal that includes $1,200 direct payments to many Americans, reduces the tax liability of large corporations and provides support for ailingindustries like airlines.
A crucial part is a plan by Senator Marco Rubio of Florida for government grants and loans of up to $10 million to eligible small- and mid-sized businesses, conditional on those businesses retaining their employees during the crisis.
There is much to commend in Rubio’s bill. Notably, it would provide grants to eligible businesses to cover all payroll expenses incurred between March 1 and June 30. A full grant would only be available to businesses that did not lay off workers. The programme uses commercial banks, which would allow small businesses to work with bankers they already know and trust. The bill also contains provisions to expedite the delivery of capital to businesses.
This kind of help for smaller businesses is desperately needed to prevent a collapse of key services, including restaurants, shops, cafes and hotels. Providing payroll grants is a critical step in keeping service workers in their jobs, and in stopping the economy from losing the skill, networks and specialised knowledge these businesses have built up.
As the legislative process continues, the bill can be improved. A critical step would be to ensure that government grants would extend to non-payroll expenses, such as rent. Rubio’s office confirmed to us that this is the intention of the bill, though the legislative text is unclear. On Twitter, Rubio described the grants — “forgivable loans,” in his words — as extending to mortgages, leases and rent.
In addition, the size of the programme needs to be significantly increased from its current $300 billion. Rubio’s financing doesn’t fully meet the scale of the problem. With help from Dun & Bradstreet Inc, we calculated that the programme needs to be four times bigger.
It will take $1.2 trillion to replace 80% of the revenue of businesses with fewer than 500 employees for three months in industries except for manufacturing, healthcare, education, finance and insurance. We estimate that to fully replace the revenue would cost $1.5 trillion.
The government would recoup some of that money in other ways. Financial support to businesses is financial support to workers — we would require businesses not to lay off workers in exchange for the grants, though workers would be free to quit — and by keeping workers in their jobs, the government would spend less on unemployment insurance, Medicaid, food stamps and similar programmes.
The government will also collect more tax revenue than it otherwise would.
It’s important to replace revenue and not just payroll expenses because many of these businesses operate with thin profit margins. Focussing on payroll won’t be enough to prevent mass layoffs and business closings.
Why grants and not loans? The services sector is different from manufacturing. When the spread of the coronavirus abates and service businesses reopen, they won’t return to a backlog of orders.
If they have shut down for three months, those three months of revenue are permanently lost, never to return. A loan, even an interest-free one, would have to be paid back. Many low-margin businesses would have to resort to layoffs, or even close up shop, rather than incur this additional expense after losing one quarter of their annual revenue.
It’s important to get businesses the help they need. Populist frustration boiled over after the 2008 financial crisis in part because of the perception, right or wrong, that the people who were suffering the most did not receive adequate assistance from the government, while banks and other big businesses did. Congress is rightly focussed on aid to households. But businesses are taking a major hit. Many are already closed and laying off their workers, and they urgently need assistance.

—Bloomberg

Michael R. Strain is an American economist. He is the John G. Searle Scholar and the director of economic policy studies at the American Enterprise Institute. He is also a research fellow at the IZA Institute of Labor Economics, and a columnist for Bloomberg Opinion

Glenn Hubbard is an American economist and academic. He served as the Dean of the Columbia University Graduate School of Business from 2004 to 2019, where he remains the Russell L. Carson Professor of Finance and Economics