The Corner

Politics & Policy

Predictable Unintended Consequences

Here is a testimony about how the Paycheck Protection Program and the Unemployment Insurance expansion make it for businesses in the restaurant industry:

Last week funding for the Payroll Protection Program dried up. Our estimate is that 50% of restaurants in Texas weren’t able to get capital.

One reason is that many small restaurants don’t have relationships with big banks, in part because restaurants aren’t a high-receivables industry. This makes it more difficult to obtain funding. Many small banks were hesitant to get involved, fearing they’d be left holding the bag when funding ran out and large lenders prioritized their clients. Without capital to stay in business, owners are left to choose between firing their employees and furloughing them.

If you terminate workers, you cut expenses. But to qualify for loan forgiveness, PPP requires that you hire them back. Owners have no idea, however, when they’ll be allowed to reopen. They also wonder if customers will be eager to come back. That means most restaurants can’t gamble on staffing back up to prepandemic levels.

On top of that, the Cares Act created a perverse incentive not to work, as restaurant operator Kurt Huffman pointed out in these pages. Because the Cares Act pays an additional $600 a week in unemployment benefits, many restaurants will find it difficult to get employees back on the job. And if they don’t, restaurants can’t receive loan forgiveness.

Leaving aside the fact that this was all too predictable, Arnold Kling and I have a short paper out that proposes an alternative to PPP. We believe it is better. It was Kling’s idea, and I think it is brilliant. It boils down to this: extend a line of credit to everyone with checking account. The line of credit is simple and flexible. It doesn’t need to go through SBA and jump through silly requirements to qualify. It can be used for anything. It takes care of the 81 percent of small businesses that are one-man show businesses.

This solution requires repayment several years down the road. This feature is key to keeping the solution flexible and simple (everyone with a checking account gets it to use for anything they need). It also guarantees that those who need it use it now, while giving the luxury to those who may need it later to wait without fear of funding drying out. No, it will not solve the problem of our economy staying closed like we are now for another six months, but no solution can fix that. Read more about it here.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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