“All growing economies are alike; each distressed economy is distressed in its own way” (apologies to Tolstoy).
The COVID-19 recession won’t be cured by economists’ usual remedies. No simple tonic of interest rate cuts, tax cuts or tax rebates will do the trick. Nor have financial markets failed to function—we may not like the outcome, but the markets appear to be responding appropriately to the risk and uncertainty faced by the economy.
Our first line of defense when recession looms is monetary policy. The Fed opened its medical bag last week and vowed to try everything found inside to help the patient. The markets were unimpressed with a salve of interest rate cuts. A quantitative easing “spa treatment” was no better received. These are important steps to reassure financial markets but won’t reverse the decline. Reducing the cost of borrowing can encourage firms to build a new factory, hire another worker or expand into a new line of business. But with the economy caught in the coronavirus chokehold, a reduction in the cost of borrowing is like taking Tylenol for severed limb.
Congress and the White House pursued bolder action through fiscal policy. The $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act applies a tourniquet to stop the bleeding and adds an IV drip of morphine to dull the pain.
Fiscal policy attempts to boost the economy by putting more money in the pockets of consumers, encouraging them to spend more—on home repairs, a new car, or a vacation. Controlling the COVID-19 spread has forced business closures, leaving consumers with fewer places to spend money (if they have it to spend). CARES Act fiscal policy tries to slow the bleeding.
One key provision, the Paycheck Protection Program, provides cash to small businesses contingent on freezing employment at current levels. It’s a low-interest loan with generous forgiveness terms.
While aimed at “small” businesses, only about 100 of the nearly 25,000 businesses in metropolitan Rochester employ more than 500. These large businesses employ about 20 percent of all individuals, leaving firms accounting for more than 370,000 workers eligible to benefit from the PPP (estimates based on 2017 County Business Patterns).
Exceptions in the law permit larger companies to qualify depending on business sector. Dog and cat food manufacturers, for example, qualify with as many as 1,000 employees! (OK, most food manufacturing has higher limits, but that one caught my eye.) The limit for wholesalers, by contrast, is below 500. “Small” in other sectors is defined by revenue. See the SBA’s eligibility table or this size standards tool for more details.
This program is big ($349 billion big). Briefly, qualifying firms—including most nonprofits—can get a loan equal to 250 percent of their average monthly payroll. There are strings, of course. The firm can’t lay off workers between Feb. 15 and June 30. Firms that have already done layoffs are encouraged rehire employees. Employee compensation over $100,000 is not covered. For many participants, the PPP loan will be simply forgiven. All existing SBA-certified lenders will be authorized to expeditiously process PPP loan applications, starting today.
The PPP math just won’t work for some firms—layoffs may be unavoidable. Many firms have begun to lay off workers, as we learned the last two weeks from the meteoric rise in initial claims for unemployment insurance. At a cost of $260 billion, the CARES Act adds $600 per week to an individual’s unemployment benefits for up to four months and expands eligibility to the self-employed and independent contractors.
The CARES Act also provides$250 billion for tax-free, direct grants to individuals ($1,200 per adult and $500 per child under age 17). Again, aimed at slowing the rate of decline in consumer spending, these $1,200 checks will allow some families to keep eating and paying rent. This is still tourniquet and morphine, however.
The U.S. Department of Commerce’s Economic Development Administration will have $1.5 billion to support economic development grants in communities responding to the crisis.
Growth policies must wait until the patient can get out bed and start rehab. There is some long-term assistance in the bill: The Manufacturing Extension Partnership will waive $146 million in currently-required cost sharing and will receive $50 million to boost the support that the 51 MEP centers provide to the nation’s manufacturers. Expansion of other “health and wellness” policies will have to wait until the global economy gets discharged from the COVID-19 hospital.
The CARES Act is a massive bill with many parts. A summary of the provisions of the act has been posted by the National Law Review.
Yes, this is a LOT of debt and there will be more to come. Given the depth, breadth and length of the potential downturn, we have little choice. Just as my mother used to say about getting old, “It’s better than the alternative.”
Kent Gardner is Rochester Beacon opinion editor. All Rochester Beacon coronavirus articles are collected here.
Unfortunately, it appears they are bungling the rollout. Banks can’t process PPP applications, relief checks may be delayed for months, and unemployment is totally overwhelmed. So much for the tourniquet. We are still bleeding.
Thanks Kent. Your review gave me a far better understanding than anything else I’ve read. Altho I have my doubts, I hope all this money works. I worry that putting Humpty Dumpty back together again will not be easy, especially with the current skill set of the major players.