The Small-Business Aid Program Has Been a Fiasco

https://www.nytimes.com/2020/04/21/opinion/paycheck-protection-program.html

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When the federal aid package for small businesses known as the Paycheck Protection Program was announced last month, it seemed to offer a lifeline for modest enterprises in dire need of help because of the coronavirus crisis. Passed by a bipartisan majority in Congress, the program offered $349 billion in forgivable loans — essentially bridge loans — to provide the liquidity needed until the economy recovers. Unlike big-industry bailouts, which generate both moral hazard and public anger, the plan held out the attractive promise of providing relief for the smallest shops on Main Street.

But despite good intentions, the program has been a fiasco. It has replicated much of the existing unfairness of the United States economy and has created more resentment than relief. Intended to help the small businesses that give the country much of its character and livelihood, it has helped, more than anyone wants to admit, big chains and medium-size enterprises.

What your average neighborhood preschool needs now is $35,000 or so. But though 74 percent of the approved loans as of April 16 have been for $150,000 or less, 45 percent of the $349 billion in small-business relief has gone to loans over $1 million, and nearly 70 percent has gone to loans over $350,000. The widely reported fact that Ruth’s Chris Steak House, a big chain, got $20 million in forgivable loans is a symbol of what has gone wrong, for that money could have saved a lot of preschools. According to data self-reported by small businesses, 92 percent of applicants have gotten nothing at all.

As Congress negotiates funding to replenish the program, it should not blindly add more money to a flawed scheme but instead address the fact that it is failing to help those who need it most. There is an easy fix: Congress should set aside at least half the money for “real” small businesses: those with 25 or fewer employees. And if Congress fails to do so, banks and other lenders should reserve the money themselves.

I have been involved with the Paycheck Protection Program by running a pro bono project, staffed by Columbia University law students, to help out what we call microbusinesses, or those with 15 or fewer employees. Our clients are what you might think would be the program’s beneficiaries: restaurants, preschools, surf shops, coffeehouses, pet day cares, nail salons and so on. Most of them have had a similar experience with the program: They applied early, to no avail; they applied again and got conflicting signals — only to learn on Thursday that the money was all gone. They are perhaps more disappointed than angry, but the frustration and despair is palpable, aggravated by a suspicion that the game was rigged from the outset.

The Paycheck Protection Program may have been well intended, but in practice it had three major flaws. First, it lumped all businesses with fewer than 500 employees in a single category, which pitted them against one another in a first-come, first-served competition that set chains like Potbelly and Ruth’s Chris Steak House against nail salons and yoga studios, with predictable results. Yes, Potbelly and its employees are facing hard times as well, but there are many other options for larger businesses, such as, going forward, the Federal Reserve’s $600 billion Main Street Lending Program.

Second, the program depended too much on the banks and their discretionary decisions about whom to help. We don’t recruit doctors during a medical crisis and say, “Feel free to help your friends first.” But we’ve done that with the banks, and they have responded by exercising favoritism. Larger businesses with good relationships with banks have gained access to an express line, some receiving large relief loans in less than 24 hours. Nearly everyone else ended up in a giant slush pile, like unread manuscripts at a literary agency — a mountain of broken dreams.

To be sure, there have been exceptions. Outside of big cities, small businesses with close relationships with local banks got their loans relatively quickly. But most small businesses in the United States are served by big, consolidated banks that barely know their customers and for whom a stack of relief applications has no emotional valence.

The third major flaw with the program is that its relationship with unemployment aid is unclear and confusing. Small businesses shouldn’t be hiring or firing people just to gain benefits.

Since Thursday, Republicans have been seeking more funding for the Paycheck Protection Program and blaming Democrats for holding up the process. But it is foolish to add money to a program that isn’t working as intended.

In addition to reserving at least 50 percent of the money it allocates to businesses with 25 or fewer employees, Congress should allow microbusinesses to spend less on payroll and more on other expenses to stay solvent and to give them more time to spend the money. The program’s relationship with unemployment aid needs to be made clearer. And in collaboration with the Small Business Administration, Congress should make it easier for financial technology companies like Intuit, PayPal, Square and Kabbage to process loans. These companies aren’t perfect, but unlike big banks they have a natural incentive to help smaller clients.

Finally, if Congress fails to take these actions, banks and other lenders should, on their own initiative, reserve money for microbusinesses, where the money goes further.

The last time we faced a major economic crisis, in 2008, the awareness that financial aid and bailouts went disproportionately to the wealthy and well connected fostered a widespread resentment that remains with us. We can and should do better this time — by starting at the bottom.

Tim Wu (@superwuster) is a law professor at Columbia University, a contributing Opinion writer and the author, most recently, of “The Curse of Bigness: Antitrust in the New Gilded Age.”

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