Saving Main Street from the Covid Recession
Coronavirus stimulus efforts have disproportionately helped big business. But it doesn't have to be that way.
After six months, it is still difficult to assess the exact amount of damage wrought by Covid-19 on the American economy. Tens of millions of American workers were laid off or furloughed; many have no hope of getting back the jobs they once held. These layoffs, and the inability of the federal government to get money into the hands of Americans, could lead to a national wave of evictions. The Centers for Disease Control recently issued an eviction moratorium which would extend renter protection until the end of the year, but this has not stopped evictions from taking place in the states and municipalities where they’ve already resumed. Nor does it deal with the underlying issue of people being unable to pay their debts. These moratoriums will not extend to mortgage holders, with commercial real estate development firms being particularly vulnerable as offices stay shuttered and storefronts close.
It is clear that these varied effects of the Covid-19 pandemic have already and will continue to wreak havoc on the United States. Assessing the exact economic impacts and first-, second- and third-order effects of these Covid-induced layoffs, evictions and mortgage failures will require time. What is apparent today, roughly six months into the pandemic, is that there are clear winners and losers in the Covid economy.
A resurgent stock market has masked an economy in tatters. The divergence between the top end of the stock market (with gains concentrated among the top companies) and the real economy has puzzled observers in recent months. How can stocks be reaching new heights when we hear horror stories of people whose lives and livelihoods have been ruined? Millions of Americans have lost their health insurance, an increasing number of American children are malnourished, and a generation of graduates faces the worst job market since the Great Recession. Despite all this, the S&P 500 Market Index reached an all-time high on September 2. Much of the bull market has been powered by the staggering growth of Amazon, Apple, Alphabet (Google), Facebook and Microsoft.
During the stock market run of late March and early April, financial commentators were discussing the shape of the inevitable economic recovery. The most popular ideas were a “V-“, “W-“ or “Swoosh” shaped recovery. More recently, financial commentator Peter Atwater has introduced a more fruitful analytical concept to describe the effect of Covid on the economy: The K-Shaped Recovery. Some sectors and industries and firms have benefitted immensely from the ‘new normal’, while others face a grim future. Big technology companies have done better than ever before, with Amazon leading the way. Amazon’s stock is up more than 50% in 2020, with the company having its greatest ever earnings in the quarter that saw the most economic contraction since the Great Depression. Jeffrey Preston Bezos is now a $200 billion dollar man. At the same time, the employers and employees in the leisure and hospitality industries (which disproportionately employ minorities and women) are faced with a grim outlook for the future, with revenues down and unlikely to return to 2019 levels any time soon.
Small businesses, which employ over half of American workers, have been devastated by the pandemic. Across the country, Americans see cherished local businesses closing their doors permanently; rough estimates have found that over 100,000 closed businesses will never reopen. Countless others face a decline in revenue and longer-term questions about their financial sustainability. Despite insistence from President Trump that the economy is recovering, the divide between Big Business and Mom and Pop shops has never been starker. Hedge fund manager Bill Ackman described the situation in a recent interview with the Wall Street Journal: “The stock market is comprised of the biggest and strongest companies… It’s not representative of the entire economy. If there were a stock market index of private, small businesses, it would likely be down 50% or more.”
It didn’t have to be this way. It is understandable that a large technology company like Amazon would do well during a pandemic. It also makes sense that traditional brick-and-mortar businesses would struggle to adjust. Despite these realities, the federal government’s economic actions since the beginning of the pandemic have only exacerbated the divisions between big and small business.
A recent ProPublica investigation titled “The Big Corporate Rescue and the America That’s Too Small to Save” compared the ways that large corporations and small businesses have fared since March. The federal government has taken three main steps in dealing with the pandemic: sending $1,200 checks to Americans, boosting unemployment assistance from March through July, and providing loans to needy businesses through the Paycheck Protection Program. The first two actions put much needed money in the hands of recently unemployed and uninsured Americans, while the latter was established to give small firms access to capital when banks were unwilling to lend.
These fiscal policies have been matched by monetary policy from the Federal Reserve, which announced in late March that it would be buying corporate bonds for this first time. These actions assured investors and helped large corporations raise money after the credit crunch of the spring. Notably, Amazon raised $10 billion in the corporate bond market at record-low interest rates. While small businesses lose access to the credit needed to pay their employees and stay open, the Federal Reserve has assured investors that it would step in to keep the value of stocks and bonds high.
Meanwhile, access to the Paycheck Protection Program (PPP) has been spotty for small businesses. In April, the New York Times reported that big banks like J.P. Morgan Chase had prioritized their wealthiest clients in securing small business loans. While only one in fifteen retail banking clients had successful loans, those who held accounts in Chase’s private bank (requiring at least $25 million) were much more successful. Subsequent investigations have found large PPP loans going to the politically connected; companies connected to Trump allies Brad Parscale and Rudy Giuliani each received hundreds of thousands of dollars.
While the PPP paid out to the private clients of J.P. Morgan, and the Fed’s bond buying program helped the biggest companies, the federal government’s effort to get capital to small businesses has failed miserably. The Treasury’s Main Street Lending Program, established as part of the CARES Act in March to provide up to $600 billion in low-interest loans, was only rolled out in July. Since then it has only loaned $1.2 billion. Recent reporting by Bloomberg on the program described a chaotic situation, with one executive of a medium-sized firm saying: “We can’t even get out of the box and submit an application. This whole thing is kind of a joke.”
Without an end in sight to the pandemic, Americans are faced with hard questions. Will small businesses, the beating heart of the American economy, be given the same access to liquidity granted to their multinational competitors? Or will we continue to slide downward on the bottom half of the K-slope, watching the rich ecosystem of local businesses crumble around us while Amazon and others hoover up the crumbs? The next administration must make up for the failings of the current one by developing a robust program to keep small businesses afloat for the duration of the Covid crisis. This will require a multi-pronged approach: more cash for families and individuals to keep consumer demand high, forgivable loans or grants for small businesses in need of liquidity, and funding to state and local governments to prevent catastrophic layoffs and irreparable damage to public services underpinning Main Street.
Many would see such an expansive spending program as anathema to conservative principles. Flighty deficit hawks like Rand Paul have stonewalled any attempts to use fiscal policy to prevent further economic damage, despite clear admonitions from the Federal Reserve about the need for Congress to pass a more robust fiscal response. But we must ask: what exactly do these conservatives want to conserve? Small businesses play a vital role in their communities, adding intangible value beyond that found on their balance sheets. Rebuilding small town America and pursuing a localist ethos, a rhetorical battle cry of conservatives everywhere, has become secondary to corporate giveaways to the friends of the powerful.
This thinking, on the part of Senator Paul and others, reflects the continuing ideological power of “Zombie Reaganism” among Congressional Republicans. A growing rhetorical tendency to invoke populist principles has not been followed by a commitment to populist policies. Instead, hostility toward any government spending is combined with silence about corporate tax cuts, subsidies, and the other schema that help the rich avoid paying their fair share. This ethos has shaped the fiscal response to the Covid pandemic, with Trump advisors like Larry Kudlow going on television to speak out against further stimulus checks or any other aid which might help stave off further economic contraction.
Atwater, the economics professor who coined the ‘K-Shaped Recovery’, described the government response as being shaped by the “trickle-down bias that policymakers have embraced since the early 1980s… While it is still early [in the pandemic], it seems like we are seeing the same two elements play out today. Very little seems to be flowing, let alone trickling, from those on the arm of the K-Shaped Recovery to those on the leg. Meanwhile, policymakers have all but pulled the rug out from under small businesses and those service workers upended by the outbreak.”
Figuring out how to save these small businesses doesn’t require reinventing the wheel. The United Kingdom and France have implemented wage-replacement programs, in which the government pays a percentage of workers’ wages. While this sort of program would be more difficult to implement in the United States, it demonstrates the imaginative economic policymaking needed to protect the economy. Every dollar spent to keep workers employed and businesses alive staves off further economic contraction and human suffering.
The fact is that the government has already created, and spent, several trillions of dollars in the name of Covid relief. Most of that was liquidity pumped into the bond market, an unprecedented move in monetary policy which disproportionately benefits the wealthiest individuals and institutions. Hundreds of billions in tax breaks were also granted to the uber-rich through lesser-known provisions in the CARES Act, with one estimate finding that the tax deficit produced by these would cost nearly as much as the bill for the $1200 checks delivered to tens of millions of Americans in March.
When we pass further relief, we must ensure that the money is distributed in a way that preserves the small firms who employ most of the American workforce, not the big corporations whose fates are increasingly detached from that of the United States. Democratic Senators Dick Durbin and Tammy Duckworth recently sent a letter to the leadership of the Federal Reserve and the Treasury, asking them to “make the necessary improvements to the [Main Street Lending Program] to ensure we save as many of these businesses as possible.” Expanding access to low-interest loans through this program should be the first step to saving Main Street. Small businesses should be given the same access to cheap credit afforded big firms, or the mom-and-pop shop will become yet another unnecessary casualty of the pandemic.
D.J. Smith is a PhD candidate in Politics and International Studies at the University of Cambridge. His research explores the history of anti-globalism and the American conservative movement. Follow him on twitter at @dsantiglobalism.
This article was supported by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors.