Adding to the high probability of failure is that, like most government programs, the loan/grant design of the PPP is a one-size-fits-all model, making it hard to serve every firm in need. Yet the application process was complicated and tedious enough to create nightmares for many borrowers.
In addition, the two original goals set by legislators ended up being at odds with one another. The program imposed restrictive conditions on how borrowing firms could spend the money and specified how many employees the firms had to keep on the payroll to receive loan forgiveness. These restrictions made it harder for some firms to survive, while passing a large tab on to taxpayers.
Finally, because the PPP provided an opportunity to get free money to companies independently of their needs, many larger firms — some that still qualified as small and others that did not — with little or no liquidity issues decided nevertheless to take advantage of the loan opportunity. The consequences were predictable. The gold rush to get a loan created long lines and waiting periods for borrowers with pressing needs. It made accountability and oversight nearly impossible. And it created outrage when the public learned that the companies that received the biggest loans were large and well-connected.
A better lifeline / Assuming that it is a proper role of the federal government to help firms survive during the pandemic, there is a better way to achieve that goal. According to the SBA, in the United States there are 28 million businesses — 99.9% of all firms — with fewer than 500 employees. Of those, 81% have no employees; they are sole proprietors and for tax purposes do not exist as businesses in the eyes of the federal government. They also have no Federal Employer Identification Number. To help these many diverse firms in different industries, geographic locations, and markets requires that eligibility be as flexible and as wide as possible.
Toward that end, economist Arnold Kling has suggested giving every individual and business with a bank account a credit line in the form of low-cost overdraft protection. This would be backed by the government, thereby taking the risk burden from the bank. Money borrowed under this initiative would have to be repaid, but the loan could be used for any purpose, a feature that simultaneously reduces the exposure of taxpayers because it eliminates the need for detailed oversight on how the funds are spent. The line of credit would enable borrowers to continue meeting their obligations, including rent and utility bills, despite short-term losses of income.
In our recent paper, “A Government-Backed Line of Credit Would Help Small Businesses More than Current Relief Efforts,” Kling and I explain in detail how this proposal would work. First, regulators, including the Federal Deposit Insurance Corporation, could require every bank to participate and calculate for each bank account the revenue stream that went into the account as deposits for the months of January and February 2020. The owner of the account would then be eligible for a credit line allowing the account owner to overdraw the account by that amount, at an annual interest rate of 1%, to be assessed on the amount of the outstanding overdraft each month. For instance, a small business with $200,000 in receipts deposited over those two months would be eligible for a $200,000 line of credit. Likewise, an individual who got four paychecks of $1,000 each over those two months would be eligible for a line of credit of $4,000.
Repayment of the line of credit to the banks by individuals and small businesses would be due in June 2022. Beyond that point, Treasury would remit any unpaid balances to the banks and assume responsibility for collecting from the holders of delinquent accounts. The compliance costs would be relatively low because banks would only have to write computer code to calculate the size of the credit line to which each checking account is entitled, track the overdrafts and interest accruals, report to borrowers on bank statements, and report to the Treasury on accounts that default in June 2022.
The proposal has some features that make it a better alternative to the PPP.
It is simple in design and implementation. It does not require the federal government to write rules about forbearance for all types of contracts. It does not involve the creation of any elaborate new government program or the expansion of existing ones. And it does not put beneficiaries at the mercy of bureaucracies unable to properly and effectively administer new programs.
And it is universal. Everyone gets a line of credit: small and large businesses, 3,000-employee and no-employee firms, companies and individuals. The result is no arbitrary exclusion of thousands of businesses — like commercial cleaners, home-repair companies, and hair salons — simply because of the way the SBA or the banks interpret the legislation. It also takes away the incentives for members of Congress to cater to special interests — farmers, Native American tribes, “green” firms — by requiring that a certain share of the funds be allocated to them.
In addition, this approach is flexible. People can use their credit lines to pay their rent, mortgages, car notes, employees, and other bills. Companies can use the funds to reorganize their businesses, invest in health measures for their customers and employees, and pay their workers. Better yet, it allows firms to adapt to new circumstances that are inevitable in a dynamic economy, rather than rewarding individuals and businesses to remain as they were prior to the crisis. There are businesses trying to ramp up hiring even while others are laying off workers. Public policies should allow individuals to respond flexibly to new constraints and opportunities, rather than condition aid (as the PPP does) on businesses’ retention of workers regardless of how much those workers are needed.
Those who do not want to go into debt or who believe they have better options do not have to use this line of credit. Those who think they may need to borrow money later do not have to rush to banks out of fear that government funds will be exhausted.
The success of the proposal, however, rests on a nonnegotiable feature: borrowers must repay their loans. It is the repayment requirement that allows this solution to be both simple, universal, and flexible. It also assures that the cost to future taxpayers will be low. The government is not obligated to bail out every single person or every single business. Taxpayers only have to make good on the loans that go into default. But if incentives to repay are strong enough, the default rate would be quite low and, hence, the taxpayer costs would be minimal compared to the costs of the hundreds of billions of dollars spent on PPP.
Looking at this proposal from a pure libertarian angle, it can be criticized as more technocratic and costly than government doing nothing. Also, it is not a cure for the economic harm caused by shutdowns that last many months because there is no cure for such a shutdown. However, this proposal does provide a quick and workable solution for those in financial distress now while limiting the intrusiveness and cumbersomeness of government today and the costs to taxpayers tomorrow.
