Is there a better way to save the U.S. economy and head off rampant unemployment amid the coronavirus pandemic?
The massive $2.2 trillion stimulus package deploys a patchwork of aid programs including $1,200 stimulus checks, enhanced unemployment benefits and federally-backed, forgivable loans for small businesses to pay workers and other expenses even while they’re shuttered.
Yet some experts say the government could have chosen a more elegant path: Simply pay companies directly to fund their payroll expenses while sales have vanished, as several European countries are doing. Such a system would cover virtually all affected businesses and for longer periods than the loans, proponents say. It also may have avoided the millions of layoffs that already have pummeled U.S. households, allowing the economy to bounce back more swiftly.
“Subsidizing furloughs … is the most efficient and effective way to deal with this tremendous crisis,” says Angela Cornell, clinical professor of law at Cornell Law School. With the current system, “I have concerns that businesses will fall through the cracks and workers are going to fall through.”
Some worker advocates and lawmakers, like Sen. Josh Hawley, R-Mo., are still calling for Congress to provide wage subsidies to pay workers and minimize job losses, especially if the crisis persists into the summer or beyond.
Others say the existing set-up of small-business loans and unemployment insurance is the most workable option for the U.S. and could even dole out more money to struggling businesses than direct wage subsidies.
The Treasury Department did not respond to a message seeking comment.
Under the stimulus package’s Payment Protection Plan (PPP), businesses with fewer than 500 employees can apply for loans of up to $10 million to fund payroll and other expenses that are fully guaranteed by the Small Business Administration. Firms must keep their employees or rehire them if they’ve already laid them off. And as long as 75% of the money is used for wages, eight weeks of the operating costs don’t have to be repaid. The rest of the loan carries just a 1% interest rate.
But the early rollout of the $350 billion program on Friday was marred by glitches, with SBA servers overwhelmed by the deluge of requests and some banks imposing limits on loan volumes or on who can apply.
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Some small firms are wary of loans
The PPP’s success also hinges on the willingness of small businesses to seek out the loans and banks to process them. Economist Gregory Daco of Oxford Economics believes many small firms will be hesitant.
“You have no clarity on whether this (pandemic) will last three, four, five or 10 months,” he says. Plus, he says, sales could be significantly reduced even after businesses reopen (possibly by summer, according to health officials). “Maybe I don’t need to rehire as many people.”
Ami Kassar, CEO of MultiFunding, a small-business loan adviser, says enterprises have little to lose by applying for the loans. After the crisis is over, they can still let go of workers who they don’t need without penalty.
But Naomi Pomeroy, the chef and owner of Beast, a restaurant, and Expatriate, a bar, both in Portland, Oregon, laid off her 30 employees last month and worries about the implications of rehiring them while business prospects are still cloudy.
“We don’t want to get into a situation where we’re paying our staff and then we have to lay them off again because we’re still not open” if the widespread closures of restaurants, stores and other businesses lasts more than two months. That could leave her on the hook for the remainder of the loan. She’s also concerned about the program’s requirement that loans be repaid within two years.
Pomeroy, a founding member of the Independent Restaurant Coalition, is calling on Congress to extend the portion of the operating costs that’s forgivable to three months and the term of the loan to 10 years.
Will the jobless return to employers?
Still another dilemma is that about 10 million Americans already have sought unemployment benefits the past couple of weeks, signaling that at least that many have been laid off or furloughed. Oxford Economics predicts a total 26 million job losses by May. For the PPP to work, many of those laid off must agree to return to their former employers.
Some may balk. RBC Capital Markets notes that up to 70% of the jobless Americans will be earning more from the enhanced unemployment benefits than they did from their paychecks.
A rapid economic recovery depends on keeping workers and businesses linked – or reconnecting them – so firms aren’t scrambling for employees and workers aren’t hunting for new jobs when the pandemic eases.
“Every time a worker separates from an employer, it makes it that much harder to have a quick rebound,” says Samuel Hammond, director of poverty and welfare policy for the Niskanen Center, a think tank.
Following Europe’s lead
Worker advocates like Hammond says the U.S. could have followed European countries that are directly subsidizing wages, keeping workers on payroll so they’re not laid off in the first place. The British government is covering 80% of workers’ salaries if companies retain them, up to 2,500 pounds, or $3,100, a month. The German government is paying 60% of wages. France, Spain and the Netherlands have similar programs.
German wage subsidies programs during the Great Recession of 2007-09 held the country’s increase in the number of unemployed people to 9% compared to a 56% jump in the U.S., according to a study by the Illinois Economic Policy Institute and the University of Illinois at Urbana-Champaign.
Dean Baker, co-founder of the Center for Economic and Policy Research, says such systems are much easier to set up in Europe, where electronic payments between governments and businesses are more widespread.
“This is the American version of that,” Baker says of the SBA loans.
Hammond, however, says the payroll taxes that U.S. employers pay the government could be electronically reversed to provide what essentially would be payroll tax credits to the firms.
Yet setting up such a system may not necessarily be simpler than arranging for the SBA loans. says Jay Shambaugh, director of the Brookings Institution’s Hamilton Project, which seeks to promote prosperity for Americans.
“It’s not clear to me that just paying everyone’s payroll would be that much easier” and thus could have been done quickly enough to keep small businesses from laying off workers, Shambaugh says.
He also notes the SBA loans are paying 100% of wages for small businesses for two months, as well as other operating costs. Wage subsidies in Europe typically cover most, but not all, payroll costs and generally don’t pay other expenses, though Hammond says the U.S. could easily close those gaps.
He adds, however, that it may be too late for the government to shift from small-business loans to wage subsidies. Sen. Mitch McConnell, R-Ky., said Tuesday he’ll bring to the Senate floor this week a measure that would increase funding for the PPP.
Hawley, the Missouri senator, disagrees. He says wage subsidies could finance the payrolls of small businesses that don’t receive the SBA loans, as well as larger companies. Sen. Bernie Sanders, the Democratic presidential candidate, also favors the strategy.
“Workers should not be forced into unemployment because of the government’s health measures prompted by this crisis,” Hawley says. “Workers should be able to keep their jobs, and be ready to get back to work as soon as practicable.”
Contributing: Ledyard King