How Can the Trillion Dollar Congressional Package Not be Enough?

Unfortunately, as massive as the Congressional relief package it may not be enough to meet the economic tsunami.  More importantly, it may not be quick and direct enough. Putting the pieces of the economic and legal elephant together, we see the following problems

First, small businesses need immediate liquidity.  They don’t need stimulus in the traditional macroeconomic sense; that will have to wait until the pandemic ends.  Business need a lifeline just to survive the lockdowns and social distancing.  

Second and most importantly, businesses need to keep as many employees on payroll.  The country can’t rely on overwhelmed state unemployment systems. We need as many small firms to survive so that the economic restart is quick, and we need to preserve the vital employer/employee relationship.  There are lots of frictions with hiring people who have been laid off. That’s true in a normal economy. It is exponentially more true now with businesses confronting the darkest economic storm clouds in 80 years and concerns about the pandemic coming back in waves.

Third, banks don’t have the infrastructure to meet this demand.  They also need to worry about staying afloat themselves. There are calls to loosen regulations governing bank lending and risk-taking.  But these need to be truly limited in scope and duration – targeted at banks not engaging in fire sales. We weaken the safety and soundness banking system at the peril of a rolling financial collapse.  One cautionary tale: at an early in the global financial crisis, policymakers saw the then-still-solvent Freddie Mac and Fannie Mae as providing lifelines to the mortgage market.

So the government needs to respond.  But here is the fourth point, the massive multi-trillion dollar bill just passed by Congress is sorely needed, but it is not nearly enough.  Much of the relief is too slow, too indirect, and too leaky.

  • Support for state unemployment claims is desperately needed, but we need to keep employees off unemployment.  And state unemployment systems cannot possibly handle the tsunami of claims – 3 million plus and counting – quickly.

  • Much of the government support does not have requirements that businesses retain employees.

  • Much of the government support to small businesses will come through the Treasury Department and Small Business Administration.  But small businesses need money quick without a lot of red tape or administration.

  • But these government loans are funded by Federal Reserve loans.  By statute the Federal Reserve needs to have security for making loans even if funneled through the Treasury.  The Federal Reserve is not in the business of making grants. With good reason, it does not want to be in the business of making credit decisions and picking winners and losers in the entire economy.

  • Moreover, there are deep concerns about businesses, particularly large corporations using billions in government aid without having to retain workers, but instead using money to fund executive compensation, stock buybacks, and dividends to shareholders.  There are concerns about oversight of which businesses are receiving money and what conditions are placed on government loans. Cronyism is a real concern

We need to square the circle and make sure money flows directly to small businesses to keep employees on payroll.  We need to slash time to make government payments to households and workers. And we need accountability and government oversight.

How do we keep small business afloat, make support as massive, quick, and direct as possible?

Cutting the Gordian Knot: Direct Payroll Support

We need to cut the Gordian knot with government injections straight into employer payrolls on the condition that these monies go straight to employee wages.  How this is done matters just as much as how much is appropriated. Congress can require that the Treasury Department, IRS, and Social Security Administration use the existing social security withholding system to reverse the flow in the plumbing of social security withholding.  The government can then inject monies straight into small business payrolls and condition the amounts on being paid to employees. These injections could be structured as grants or long term, very low interest loans.

This could mean the impact is bigger than just deferring or temporarily suspending withholding.  Suspending FICA tax withholding only adds approximately a 15% boost to wages. This approach is also far quicker than tax credits.

Our approach does not solve all the income and cash flow needs of small businesses.  Business owners may need to still negotiate with landlords and suppliers. Our approach also needs to be supplemented with direct support for hourly workers and the self-employed, particularly in the gig economy,

But the simplicity of our approach avoids the need for a vast apparatus to ensure accountability, with extensive covenants, loan underwriting, and government oversight.  Other commentators have made similar callsDenmark and Boris Johnson’s government in the U.K. have rolled out similar programs.  

It is it time for the heavy artillery.  The alternative is that a just-in-time economy has a just-in-time Depression.