Stimulus package may preserve small businesses

The COVID-19 pandemic represents a huge labor market shock. Regional lockdowns have forced the layoffs and furloughs of millions of workers, disrupting long-term relationships between employers and workers developed in some cases over years.

Restoring these labor-market relationships post- COVID-19 is critical if a prolonged recession is to be avoided. This is why I am impressed with the design of the stimulus package. It includes provisions aimed at maintaining small business as going concerns, important among which is a small-business loan program. This program encourages keeping employees onboard via loan forgiveness.

In a normal recession, the economy is out of whack and there is a need to reallocate resources from inefficient, declining businesses to more innovative sectors. This sort of reallocation is an ongoing process in a capitalist market economy. During a recession, the reallocation is much more rapid.

This is bad news for those workers and families adversely affected by the contraction but ultimately in the best interests of society. Recognizing the inherent unfairness of some being harmed for the benefit of the whole, we mitigate the cost to individuals of market dynamics using government program such as unemployment insurance.

The current recession, to say the least, is a different beast. It is not the outcome of the typical gyrations of a market system that at times leads to higher than normal unemployment. Rather, it is a random event with no relation to economic circumstances. Efficient company are equally affected by the COVID-19 lockdown as are the inefficient. Well run innovative companies must lay off workers as do less well-run companies.

The unique circumstances of the current disaster require different actions than a typical recession. This is reflected in the stimulus package. The need is to maintain businesses as going concerns. Things were going well, and we want to get back to that when the epidemic recedes.

Economists talk about something called match capital. It is the value created by matching the right employee with the right job. This is no trivial thing. A whole industry exists to help employers find qualified employees with firms such as Indeed and Linkin, among others. At NMSU, it is common to spend $10,000 recruiting new assistant professors.

Without action, large numbers of businesses will shut down permanently, displacing many workers who otherwise would have continued as productive employees—destroying the match capital in the process.

The stimulus package provides $249 billion in small business loans. Businesses can borrow 2.5 times their monthly payroll that can be used to make payroll, cover rent and mortgage interest, and pay utilities. The loan is forgivable if employees are retained. The effect is to keep in place large number of workers that otherwise would have been displaced by COVID-19. Exactly what economists are recommending.

A problem with the new small business loan program is that it is expected to be rapidly exhausted. There is talk of another stimulus package that would extend additional lending.

Christopher A. Erickson, Ph.D., is the Carruthers Endowed Chair for Economic Development at NMSU. His dissertation was on the Savings and Loan Crisis, completed more than 30 years ago. The opinions expressed here may not be shared by the regents and administration of NMSU. He can be reached at chrerick@nmsu.edu.