“The New Stimulus Bill Won’t Deliver — Not In The Long Term”
At the time of this writing, the on and off, then on again negotiations for a bi-partisan compromise on a bill to extend stimulus to our flagging economy are still in process. And, after the latest remarks by Federal Reserve Chairman, Jerome Powell, on October 5th, legislators are forced to acknowledge that the anticipated V-shaped recovery – in other words, a very sharp and rapid up-turn — is in peril. As especially hard hit industries announce new layoffs, while COVID cases accelerate, temporary layoffs are becoming permanent. And, many warning signs are flashing bright red. Apart from the 19.8 million unemployed – including 7.2 million, who are in fact unemployed but not counted because they failed the test to be actually looking for a job in the four weeks leading up to the October 2nd Bureau of Labor Statistics report, food insecurity has doubled overall since the pandemic, and tripled among households with children, according to a recent study by Northwestern University. Mortgage delinquency rates have spiked as have delinquencies for rent payments with 14.7 million households – 25% of households surveyed in the Census Bureau’s most recent Household Pulse survey — having little to no confidence in their ability to pay rent next month. And, small businesses, the key drivers of GDP growth, new employment, revenue, and innovation, even with the Paycheck Protection Program (PPP), are running out of cash again, as the recovery takes longer. Out of the estimated 30.7 million small businesses in the U.S., 20-25% of the total (6 to 8 million), may already be closed permanently. While immediate assistance is needed for millions of American families and small businesses, the economy risks a lifeless recovery and anemic longer term growth, should Congress not address the persistent disadvantages of small business, and find a way to revive this vital economic sector for the long term. Furthermore, the long-standing gap in the repair of U.S. infrastructure, provides an aggressive head wind to any recovery. These factors only contribute further to a widening income gap between the top 10% and everyone else. Yes, it is a “perfect storm”.
So, what is Congress to do? Regarding potential immediate action, the latest congressional activity suggests that the House and Senate are much closer in spirit with respect to their current legislative agendas, than in the past, although large gaps remain. And, neither bill – from the House or the Senate – addresses structural changes to our economy or institutions that would attempt to resolve the disadvantages of small business, the underlying deterioration of infrastructure in our nation, as noted in an earlier July 1st blog, and actually create net incremental new jobs. On the positive side, the House bill does take a number of steps in the right direction. And, other legislative actions by the House portend a bold infrastructure agenda that the Senate leadership has not taken up.
As reported in the July 1st post, the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, passed by the House on May 12, 2020, had still not received attention by the Senate. On July 27th, the Senate did introduce its own bill called the Health, Economic Assistance, Liability Protection and Schools (HEALS) Act. This Act, which is cobbled together from ten separate bills from different Senators, went nowhere. Then on October 1st, the House passed a stripped down version of the HEROES Act, dubbed “HEROES” 2.0. It is this House bill that appears to be garnering more attention. What can we hope for and what are the differences between what has passed in the House and introduced in the Senate?
Noting that the HEALS Act from the Senate, and the HEROES Act 2.0, are the bills currently in limbo, here are the highlights of what stimulus has been passed, and what has been proposed:
|Provisions||CARES Act signed into law Mar 27th
|HEROES Act passed by the House May 13th
|HEALS Act introduced by Senate Jul 27th
|HEROES Act 2.0 passed House Oct 1st
|Stimulus Checks to Individuals and Households||$1,200 to single filers earning under $75k per year, $2,400 for joint filers under $125k. Reduced $5 per $100 of income above limits. Plus, $500 for all dependents 16 and under. College students 24 and under are not eligible||Same as CARES, except for dependents. It includes $1,200 for dependents, maximum of three||Same as HEROES, except for dependents. It includes $500 for dependents, no age limit||Same as HEALS|
|Enhanced Unemployment Benefit||$600 per week in addition to state benefits. Expired July 31st||Same as CARES with expiration extended to January 2021 for most workers, through March 2021 for gig workers, independent contractors, part-time workers and self-employed||Initially $200 per week. Then up to $500 per week to match 70% of lost wages when added to state benefits. Extension applies as follows, $200 per week bonus through September 2020. Then 70% matching of lost wages. Extends federal benefits until Dec 31||Same as CARES with expiration extended to Jan. 31, 2021, with a transition period extending until March 31, 2021. Also allocates $925 million to help states process claims|
|Small Business Paycheck Protection Program (PPP)||Allocated $659 billion total in forgivable loans for small businesses, who must use 75% on payroll to be eligible for forgiveness. $130 billion remains, but expired August 8th||Expanded eligibility, eliminated 75% payroll requirement and extended application period to December 31st||Additional $190 billion, expands eligibility, allows businesses to request a second loan, eliminates the 75% payroll requirement and expands approved uses of funds for loan forgiveness||Additional $30 billion and allows second loans to small businesses with fewer than 200 employees that have experienced a 25% reduction in quarterly revenue. It excludes publicly traded firms from eligibility for second loans and puts limits on businesses with more than one physical location. It also streamlines the forgiveness process|
|Employee Tax Credit||Tax credit on 50% of up to $10,000 in wages||Increases tax credit to 80% of up to $15,000 in wages||Increases tax credit to 65% of up to $30,000||Enhances tax credit established in CARES Act|
|Bonuses for Employees That Start New Jobs Or Are Rehired||N/A||N/A||Return-to-work bonus up to $450 per week||N/A|
|Eviction Protections and Moratorium||Banned late fees until July 25th and evictions until August 24th on properties backed by federal mortgage programs (Fannie Mae, etc.), or that receive federal funds (HUD, etc.)||Expanded to cover nearly all rental properties in the U.S., extended eviction moratorium an additional twelve months, allocated $200 billion for housing programs and another $100 billion for rental assistance||N/A||$59.1 billion allocated for rent relief and other housing services. Please note that an eviction moratorium has been established by the CDC order on July 2nd|
|School Openings||N/A||$58 billion for grades K-12, $42 billion for higher education||$70 billion for K-12 that open for in-person classes, $29 billion for higher education, $1 billion to Bureau of Indian Education, $5 billion for State discretion||$182 billion for K-12, $39 billion for higher education, $57 billion for childcare|
|Liability Protection From Coronavirus Illness||N/A||N/A||5 year liability shield to prevent schools, businesses, hospitals, from being sued over coronavirus related issues||N/A|
|Coronavirus Testing, Tracing and Treatment||N/A||N/A||$16 billion||$75 billion|
As noted above, the only provision that the House has moved closer to the Senate on is Stimulus Checks to Individuals and Households. However, seven of the nine provisions, do show that both bodies of Congress would provide funding for those provisions, thus leading the way to establishing common ground. Where it is unlikely for compromise is:
- Liability Protection From Coronavirus Illness – The Senate wants to protect all businesses from lawsuits due to Coronavirus illnesses.
- Eviction Protections and Moratoriums – The House is looking for rent relief and housing services.
- Bonuses For Employees Who Start New Jobs – The Senate wants to reward people to go back to work.
Of these three, Eviction Protections, in which the House bill provides for rent relief and other housing services, is in my opinion, the most important and it is unfortunate that Senate leadership does not recognize that millions of Americans, currently out of work and with no other sources of savings or income, will not be able to pay back their landlords if and when the pandemic finally ends.
It is also my opinion that the Small Business Paycheck Protection Program (PPP) should more closely follow the House’s provision which attempts to limit funding to those businesses which account for the most jobs, employers of 200 or less employees, and which have the least access to alternative means of financing. Given the earlier abuse of the program by public companies, that slipped through the opaque guidelines, and the access that larger companies with established and preferential status at banks received, the vast majority of small businesses remain underfunded or not funded at all. Minority-owned businesses were hit twice as hard. To punctuate this point, 99.5% of small businesses, defined as businesses with fewer than 500 employees, employ 200 or less employees. That’s over 30.5 million businesses, employing 50.2 million people, or 85% of total employment in the small business sector. To drive employment up, the economy simply has to have small businesses, which create 2/3rds of net new job growth and drive innovation, leading the charge. Growth of this sector is a national imperative. Should the House’s provisions be adopted, a final bill will take a small step in the right direction by focusing on the 200 or less employers and also setting aside funds, up to $15 billion, for community lenders, specifically Community Development Financial Institutions (CDFIs) and others that cater to underserved borrowers, who missed out on PPP on the first go around.
Is this enough? Not really. These massive funding programs do little to nothing to provide net new job growth. That is, job growth over and above pre-COVID levels. Currently Congress’ measures are simply adding jobs back to the economy that went missing when the pandemic hit.
And, let’s put all of this into stark perspective. The Federal Reserve’s balance sheet has increased by $2.8 trillion between March 2, 2020 and September 28, 2020, more than any time in the past 12 years. Further, as a percent of GDP, the Fed’s balance sheet is at 35%, a number not seen since World War II. Well, this is war frankly and on more than one front. Most of this increase – $2.6 trillion – was a result of securities held outright by the central bank, including direct bond purchases of private sector companies. Liquidity for large public companies to raise more capital has never been more favorable in my living memory. As outlined in an April 22, 2020 blog post, the largest beneficiaries of both Congressional stimulus and Federal Reserve stimulus – a total of $4.4 trillion – are large corporations and the wealthy, receiving a total of $1.725 trillion, or 40% of this total, versus 14% for the small business sector and 14% for direct payments to individuals and families, including sick leave and unemployment benefits.
The prioritization, as shown above, is stunningly upside down from both an immediate as well as a long term need. Feed the wealthy and well-funded – Starve families and small business. Oh yeah, that’s a plan. From the longer term perspective, completely absent from the proposed legislation are proposals to reconfigure the Small Business Administration and/or its services, and any attempt to address our Nation’s deteriorating infrastructure. As cited in the earlier referenced July 1st post, the U.S. is ranked 13th in the world in terms of the quality of its infrastructure and faces a $2.1 trillion funding gap. Without addressing this gap, subpar economic performance and rising costs for citizens and businesses are inevitable. Further pressure on the income gap should be expected. While bills that address infrastructure are at the ready in the House, none have been considered by the Senate as yet. If both the small business and infrastructure crises are addressed, net new jobs and a reinvigorated economy are sure to follow and surpass pre-COVID levels of growth, in my humble opinion, for the benefit of all sectors. While legislation that actually does something about these underlying dampers to our economy is highly unlikely until after the election given our currently very partisan political environment, a new Congress, must/should tackle them. Here are some suggestions.
The Small Business Administration
- Create a cabinet post for the head of the Small Business Administration. This would elevate the position to one of national importance, which it deserves, and might also stem the leadership churn that the SBA has suffered over the past 20 years.
- Appoint leadership to the SBA that actually has small business experience. Bureaucrats, career corporate executives and politicians have absolutely no idea how entrepreneurs think, nor what they really need. Further, the argument that leadership must have experience running a big business or agency in order to run a large agency, is totally bunk. Entrepreneurs think constantly about how to scale their business. And, they have to think about how to do that with the least amount of capital and time. There is no better resource than a successful entrepreneur to tackle an agency such as the SBA.
- Right size the SBA budget to the size of the economic sector that it represents.
- Update SBA computer systems and software into the 21st century, especially for lending/funding or grant programs.
- Update reporting to capture more timely data and create a Small Business Pulse Currently reports are nearly two years old, which hampers responsiveness of the SBA and its financial partners to real world problems and issues.
- Skinny down programs to focus on the most successful ones such as SCORE, Small Business Innovation Research Program (SBIR), Small Business Technology Transfer Program (STTR) and Veteran oriented loans and grants such as Veterans Advantage. And, for gosh sakes, give SCORE a budget so that it can have greater impact. SCORE currently has a miserable marketing budget and has extremely limited resources to support local volunteer efforts or to incentivize or pay for the next suggestion.
- Attract entrepreneurs to mentor and advisory programs such as SCORE by partnering with private sector accelerators and incubators and identifying SCORE alumni that can give back and be part of the program as mentors. Currently, most SCORE volunteers are retired corporate executives. These individuals have very valuable experience and wisdom. But it’s not in small business. Imagine going to an advisor who has never experienced what you have.
- Update lending guidelines to match modern day technology oriented start-ups and small businesses. In the 21st century, start-ups have more intellectual property than hard assets. And, they are especially hard hit by economic and local cycles. Make allowances for that. Create better, more customized to small business, lending practices.
- Establish and prioritize relationships with online lenders. This was one of the biggest downfalls of the PPP and EIDL (Economic Injury Disaster Loan) lending programs. The online lenders, who small businesses use the most, were not approved by the SBA until it was, frankly, too late for many.
- Create a nationwide business plan competition with rewards and grants that start at the State and regional levels and lead to national competition as the pinnacle to the size of rewards and grants. With small business so hard hit, we have to support and get more entrepreneurs out there as quickly as possible.
- Create a nationally funded Small Business Development bank. This would take the “greed” index out of the funding equation and also provide a central financing source that follows national guidelines that does not cater to the largest customers.
New Business Formation
- Incentivize States to create one-stop multi-agency applications and permitting to start a business.
- Provide tax incentives for small businesses employing fewer than 200 employees that carry through to the State level by providing credits to Federal taxes on an individual basis or by providing incentives to the State.
- Fund the Small Business Development Bank.
- Address patent laws that leave small businesses more vulnerable and raise their cost of doing business.
There is no sector of the economy that does NOT pine for better infrastructure. Everyone wants it. To underscore this fact, The Business Roundtable, a collection of business leaders representing companies with more than 15 million employees and $7 trillion in annual revenues, say that a modern infrastructure is critical to increased investment, job creation and overall economic growth. And, that the current state of U.S. infrastructure – from roads and bridges to air traffic control and navigable waterways – lags behind the nation’s global competitors. We know, and boy do we. However, while businesses are concerned, how the country pays for it, has been a Congressional stumbling block for at least a decade if not more. And now, infrastructure disrepair is urgent. Accordingly, legislators cannot hide from it and should/must consider creative funding solutions such as public private partnerships that incentivize good performance and upkeep, as one such example. Others include asset recycling, gas taxes, mileage taxes and tolling among others. Further, while the U.S. has joined the “race to the bottom” in terms of corporate taxes in a vain attempt to be more competitive, studies show that if a country has modern and efficient infrastructure, corporate taxes just don’t matter.
Therefore, tackling the gaps in the American Society of Civil Engineers (ASCE) Infrastructure Report head on, that are well defined with respect to economic damage resulting from a failure to act, and which are well documented in the ASCE’s “Failure to Act” report, among others, should be an urgent imperative. The key infrastructure in need of repair according to the ASCE’s study are – well – just about everything (see below):
- Surface Transportation
- Water/Wastewater Infrastructure
- Inland Waterways and Marine Ports
- Hazardous and Solid Waste
- Public Parks and Recreation
As cited in these reports, failure to address the gap in our country’s aging infrastructure will cost our economy by 2025 (in constant 2015 dollars) and it just gets worse the longer we wait:
- $3.9 trillion in lost U.S. GDP
- $7 trillion in lost business sales
- 5 million lost jobs
- $3,400 in disposable income per year for each American family
Isn’t this enough bad news to get on the stick? Whatever bill might be passed before the election on November 3rd, will likely be a half measure towards another stimulus bill, under a new administration, that addresses aging infrastructure and new jobs growth. If our Congress fails to act? Well, you can guess. But, certainly, U.S. economic performance will suffer, and our world leadership will, sadly, very likely decline.
I want to make a special note of thanks to my sources for their expertise and insights into managing, financing and mentoring small businesses including Cathleen Blood and Jeffrey Bardos of Speritas Capital, Tracy Chapman of 1843 Capital, Meleisa Holek of SCORE and Brenda Lewis of Transaction Marketing and TechXel.
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