The US recovery is losing momentum. Job growth is slowing, the economy is still down 10.7 million jobs since February, and 36% of unemployed workers are now classified as “permanently unemployed.” The unemployment rate fell to 7.9% in September not because of an uptick in job creation, but because of an exodus of people from the labor force. Reflecting the dualism of the US labor market, the unemployment rates remain even higher for African-Americans (12.1%) and Hispanics (10.3%), and an additional 6-8 million people have fallen into poverty.
With COVID-19 infection rates rising and fiscal stimulus measures ending, nowhere are the pain and downside risks of a faltering recovery more apparent than in the already hard-hit small-business sector. Small businesses, defined as those with fewer than 500 employees, play an outsize role in the US economy, accounting for about half of all private-sector employment and about 65% of all net new job creation between 2000 and 2018. Between January and September of this year, the number of small businesses in operation fell by one-quarter, and small-business revenues declined by 23%. Important small-business sectors such as retail, transportation, leisure, hospitality, education, health, and other personal services have suffered the largest revenue and employment losses.
Minority-owned and female-owned businesses – employing about 8.7 million people – have been especially vulnerable. On the eve of the COVID-19 recession, around half of African-American and Latinx-owned businesses were already financially “at risk or distressed,” and many lacked the cash reserves to cover a two-month revenue loss. Making matters worse, minorities own 25% of the small businesses in sectors hit hardest by the pandemic, compared to around 15% in less-affected ones. African-American small businesses have been especially hard-hit, experiencing a 41% drop in business activity, while Latinx small business activity has declined by 32% and business activity in female-owned small businesses has declined by 25%, compared to a decline of 17% for white-owned businesses.
The $670 billion Paycheck Protection Program (PPP), a major component of the $2 trillion fiscal stimulus enacted by Congress in March and supplemented in April, has provided funds in the form of forgivable loans to small businesses to help them maintain employment and wages at pre-crisis levels. Seventy-two percent of small businesses (accounting for 62-85% of small-business employees) have received PPP assistance. As of August, when the program ended, more than five million loans worth over $525 billion (an average of $100,729 per loan) had been approved, but an estimated one in seven small businesses had already shut down permanently.
Studies assessing the PPP’s effectiveness have yielded mixed conclusions. Firms that applied for PPP loans were far less likely to go out of business, and more likely to maintain employment, than larger, ineligible firms. Among firms that received first-round PPP loans, the chances of survival increased by 14-30%, with the largest effects for the smallest firms. All told, PPP loans may have increased employment by 3-4%, but at a cost of $224,000-340,000 per job saved, reflecting the fact that the majority of loans went to firms that were not planning to lay off many workers. Many recipient firms used PPP loans to build savings and repay outstanding loans.
It is also clear that the distribution of loans across sectors did not mirror the distribution of job losses. PPP funding did not go to sectors that experienced the steepest decline in hours worked, the largest number of business shutdowns, or the greatest rise in unemployment. For example, firms in the professional, scientific, and technical services industry received a larger share of PPP loans than firms in the hard-hit accommodation, food services, and retail sectors. And yet, 23 jobs were retained per loan to the restaurant and hospitality industry, compared to just nine jobs per loan to the professional, scientific, and technical services industry. Finally, $4 billion in PPP loans have already been “red-flagged” by regulators for possible fraud, and congressional investigations are underway.
It is too early to say what will happen to recipient businesses and their employees when the PPP loans have been exhausted (the onerous process of determining which loans meet the conditions for forgiveness via conversion to grants is just beginning). But we already know that minority- and female-owned small businesses in poor neighborhoods have had a harder time getting PPP loans in the first place.
Many of these businesses are under- or unbanked, because traditional lenders have little incentive to incur the high fixed costs of servicing a large number of very small loans. Larger firms with established banking relationships were more likely to receive PPP loans benefiting from PPP’s “first come, first served” design than were businesses with fewer than ten employees, non-employer businesses, and minority-owned businesses in communities of color that lacked such relationships. Many of these businesses rely on Community Development Financial Institutions – certified financial institutions with a mandate to serve such clients and decades of experience doing so. When more CDFIs were granted authority to act as PPP lenders and an additional $10 billion was set aside for them during the second round of PPP funding, they outperformed larger and better-capitalized banks in their respective communities, providing both technical assistance and loans to their clients.
With the federal government mired in political gridlock, many states and municipalities have begun to act on their own. California, for example, is launching an innovative new program to increase CDFI funding through public and private sources, with the state’s infrastructure bank leveraging private funding through loan guarantees and loan-loss capital. Participating CDFIs will offer affordable loans along with technical assistance to small businesses on the basis of common underwriting and eligibility criteria. A recent fund created by New York City follows a similar “loan participation approach,” with participating CDFIs using funds from both private and public sources.
But state and local governments face falling revenues and budget constraints, and only the federal government has the budgetary capacity to fund affordable and flexible lending to small businesses. That’s why the federal government should channel the $134 billion in unused PPP funds or some share of the Federal Reserve’s largely unused Main Street Lending Facility to states and municipalities to expand their small business recovery funds, and to CDFIs and community banks to increase their lending capacities.
The United States is teetering on the edge of a fiscal cliff. An additional stimulus package of at least $2 trillion is needed for a sustained and equitable recovery. Small business recovery measures must be a significant part of the package.
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