Here we go again. Another $310 billion in funds were just added to the $349 billion Paycheck Protection Program (PPP) created by the Coronavirus Aid, Relief, and Economic Security Act. That’s on top of the billions of dollars that went to the other disaster loan and grant programs for small businesses, and it’s likely to be just another down payment for what is to come. This approach for relieving economic dislocation in the small-business sector is obviously and unfortunately unworkable, both in theory and especially in practice.
A better, more helpful alternative would be to extend a government-backed line of credit to everyone with a checking account—to individuals and small businesses alike.
Many reports have detailed the PPP’s disastrous rollout: the Department of Treasury changing interest rates on borrowers; banks changing their fees; the agency in charge of it, the Small Business Administration, unresponsive to questions from business owners; extensive waiting periods after applications have been submitted, and more. Meanwhile, there is legitimate anger over funds that wound up going to large corporate franchise operators, while actual small businesses are unable to get past the red tape. And, as if that was not enough, the SBA had to inform around 8,000 companies that applied to its Economic Injury Disaster Loan program that their financial information may have been shared with other applicants.
You can think of our proposal as giving every individual and business with a bank account low-cost overdraft protection in the form of a credit line. This will enable them to continue to meet obligations, including rent and utility bills, despite a short-term loss of income.
To implement a government-backed line of credit for each checking account, banks would first calculate 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 that account owner to overdraw the account by that amount, at an annual interest rate charge of 1 percent, 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. Regulators, including the Federal Deposit Insurance Corporation, could require every bank to participate. The compliance cost would be relatively low since banks would only have to write computer code to calculate the size of the credit line to which each checking account is entitled, to track the overdrafts and interest accruals, to report to borrowers on bank statements, and to report to the Treasury on accounts that default in June 2022.
This approach has many advantages:
First, it’s extremely simple. It doesn’t require the federal government to write rules about forbearance for all types of contracts. It doesn’t involve the creation of any new government program or the expansion of existing ones. And it doesn’t put beneficiaries at the mercy of bureaucracies unable to properly and effectively administer new programs. As we’re seeing right now, all of these more conventional options lead chiefly to chaos without providing much lasting relief to businesses.
The policy we propose would also avoid the arbitrary exclusion of thousands of businesses—like commercial cleaners, home-repair companies, and hair salons—simply because of the way the SBA interprets the conventional legislation aimed at helping small businesses. It would also be immune to the usual attempts by members of Congress to add their unrelated demands to a bill about small-business relief, slowing down the process. Even more, we would not have to worry that the money is going to politically connected companies.
Second, the repayment requirement, possibly augmented with a strong incentive to comply, allows this solution to be both simple in its design and implementation and flexible. People can use their credit lines to pay their rent, mortgages, car payments, employees, or other bills. Those who don’t want to get into debt or who believe they have better options don’t have to use this line of credit.
Third, this solution 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 multitrillion-dollar programs put in place under the CARES Act.
Finally, our proposal allows for our economy to adapt to new circumstances, rather than only rewarding individuals and businesses that remain as they were prior to the crisis. There are businesses trying to ramp up hiring even while others are laying off workers, and public policies should allow individuals to respond flexibly to new constraints and opportunities, rather than condition aid to businesses (as the PPP does) on their retention of workers—regardless of how much those workers are needed.
The government’s current approach is unworkable. Our solution is simple and flexible, and it effectively limits the adverse effects of a few months of reduced economic activity. In practice, this is not a cure for economic damages caused by a shutdown that lasts many months, because no such cure for a very long shutdown exists. Still, our proposal provides a quick remedy for those in financial distress now while limiting the ultimate cost to taxpayers in the future.