The United States has responded to the recession caused by the COVID-19 pandemic with massive and unprecedented support for businesses. New federal business subsidies in 2020Q2-2021Q1, including the Paycheck Protection Program (PPP), Economic Injury Loan Advances (EIDL), and targeted assistance for sectors such as airlines and restaurants, totaled $600 billion, or about 2.7% of potential GDP, while the expanded EIDL added an additional $200 billion in support. The Federal Reserve has authorized purchases of up to $750 billion in corporate bonds through the New Corporate Credit Facilities (CCFs) and up to $600 billion in long-term, low-rate loans interest to mid-sized businesses through the new Main Street Lending Program (MSLP). .
It is important to try to isolate the role and effectiveness of direct government support to businesses from the circumstances of the COVID-19 recession. The global macroeconomics and business survival have fared much better during the pandemic than initially feared or historical experience would have predicted. Videoconferencing technologies, testing protocols and rapid vaccine development have allowed many businesses to partially or fully reopen sooner than expected. These factors, in addition to the political response, created a rapid economic rebound that allowed companies to deal with short-term cash shortfalls rather than fundamental insolvency.
Evidence of business support
- Overall, the corporate sector has fared much better during the COVID-19-related recession and recovery than during previous downturns. Business bankruptcy filings fell in a recession year for the first time since 1980 and remained below their pre-pandemic level through 2021. Sales recovered much faster during the pandemic than during the 2007-2009 recession.
- There is no credible evidence that the larger PPP loans have had a substantial positive effect on employment in the short or medium term. The evidence for the effectiveness of smaller business loans is more mixed.
- While the Employee Retention Credit and Airline Grants had features designed to tie disbursements to payroll, the fungibility of the funds raises the possibility that they may have benefited shareholders instead.
- The EIDL program has provided 3.6 million loans totaling $194 billion through November 2020 and another $124 billion in the following year. Compared to PPPs, these loans have the advantage of providing immediate liquidity but at a much lower cost to taxpayers. Furthermore, EIDLs were potentially better targeted, as only companies with long-term viability expectations could apply.
- Federal Reserve interventions in the corporate bond market can clearly play a stabilizing role. Although the CCFs only used about $15 billion of their $750 billion capacity, evidence suggests that they significantly reduced bond yields in the spring of 2020.
- The Fed’s direct support for bank lending had little direct impact as banks remained relatively healthy. If banks had had tight balance sheets as they did during the 2007-2009 recession, such a policy might have been helpful.
- Large companies initially reacted by mobilizing significant external financing on the private markets. These companies have taken on debt by tapping into existing credit lines and increasing bond issuance and retaining equity by pausing share buyback programs. This increase in funding allowed these companies to weather the initial drop in net income.
Lessons learned from supporting businesses during COVID-19
The variety of support policies enacted during the COVID-19 recession as well as the unusual course of a lockdown-induced recession pose serious confounding issues for concluding a causal link between business relief programs and the economic trajectory. The speed at which support programs have been rolled out during the COVID-19 pandemic has been admirable. However, given the rapid deployment, it is not surprising that some of the programs were not well designed to achieve maximum impact. Policymakers should not automatically interpret the rapid recovery from the pandemic as proof that business relief programs have strong economic benefits; policymakers should not blindly redeploy the 2020 toolkit.
Numerous in-depth studies have found that programs intended to support businesses and jobs have relatively small effects, suggesting that other factors, including the nature of the recovery from temporary lockdowns and general household support, probably played a bigger role. There may be circumstances in which small business loan programs like EIDL or bond market stabilization programs like CCFs could prove useful – for example, in cases where other household supports are less generous – but they must be deployed wisely.
Small business support, like the PPP, could have been limited to significantly smaller businesses. For example, the employment cap for program eligibility could have been set at 50 or 100 employees, instead of 500, without harming the overall impact of the program. Support for large companies, such as publicly listed airlines, should be treated with skepticism as these companies have access to many forms of financing and can be effectively dealt with through the bankruptcy system. While the Federal Reserve can clearly support banks and corporate credit markets, the question of whether it should do so involves careful consideration of the reason for the disruption in credit markets.