An unprecedented flood of federal support may have helped larger companies stay afloat, but small businesses and poor households continue to face severe economic pain, suggesting the recovery from the coronavirus-fueled recession will be slow and uneven.
The federal government has deployed trillions of dollars in economic rescue through direct financial aid approved by Congress and emergency loans and asset purchases by the Federal Reserve. The record-shattering price tag of the coronavirus recession response is widely credited for keeping financial markets stable and halting the free fall of the broader economy.
The U.S. added 2.5 million jobs to payrolls in May, according to the Labor Department, as 2.7 million workers returned to businesses forced to close during the lockdowns imposed to slow the spread of COVID-19. Some economists pointed to the surprising rebound in hiring as a sign the government response helped many businesses get through the depths of the initial wave of coronavirus cases.
But many smaller firms — and the typically low-wage workers who depend on them — have fallen through the cracks despite federal programs intended to help them, prompting concerns from policymakers and the oversight panel charged with monitoring federal rescue efforts that they will be left behind in any economic recovery.
“It is too early to celebrate”, wrote Diane Swonk, chief economist at Grant Thornton, in a recent research note. “Stimulus checks, along with enhanced unemployment benefits, helped many to weather the shutdowns, but food lines lengthened as only about half of renters were confident they could pay rent in May.”
The $2.2 trillion CARES Act passed by Congress in March gave the Federal Reserve and Treasury Department authority over a $500-billion rescue fund for businesses, state and local governments, and industry aid. The bulk of that money — $454 billion — was directed to backstop Fed emergency loans with credit protection from the Treasury.
The massive backstop gave the Fed free rein to offer loans to and purchase debt from large companies in good financial standing before the pandemic.
That funding, coupled with Fed Chairman Jerome Powell’s insistence that there’s “no limit” to the bank’s lending abilities, has helped financial markets recover with little activity from the emergency programs, even as the Fed has only purchased $6.7 billion of the $2 trillion in debt allowed to be purchased through the rescue programs, according to a Thursday report from the Congressional Oversight Commission established by the CARES Act.
“Powell simply saying that the Fed will never run out of ammunition and that they’ll do whatever it takes to stabilize markets is in and of itself enough to soothe,” said Amanda Fischer, policy director at the Washington Center for Equitable Growth, a progressive think tank.
“Even though they haven’t engaged in a lot of the actual bond buying or lending yet, it seems to have decreased borrowing spreads and the stock market obviously is doing really well,” she added.
While the federal intervention into financial markets has been largely successful, efforts to prop up smaller business have been less effective.
The CARES Act ordered the Fed to create the Main Street Lending Program, a special lending facility for businesses too small to be covered under its other emergency programs. But it took the Fed more than two months from the March 27 signing of the bill to polish off the program and open it for registration earlier this week.
The Small Business Administration’s early difficulties in handling demand for the Paycheck Protection Program (PPP) and confusion among business owners over its forgiveness rules may have also dampened the effectiveness of the program.
More than 3 million small business owners were forced to close shop between February and April, according to a paper published by the National Bureau of Economic Research, roughly 22 percent of all small businesses.
Economists at nonpartisan research center Opportunity Insights also found in a recent paper that PPP loans “have had little impact on employment rates at small businesses to date.”
“Employment rates at small firms in the hardest-hit sectors trended similarly to those at larger firms that were likely to be ineligible for PPP loans,” wrote the economists. “These results suggest that providing liquidity itself may be inadequate to restore employment at small businesses, at least in the short run.”
In congressional hearings this week, Powell and lawmakers have acknowledged the gaps left in the federal response and its long-term danger for the broader economy.
“It would be wise to look at ways to continue to support both people who are out of work, and also smaller businesses that may not have vast resources for a continued period of time,” he said. “Not forever, but for a period of time so that we can get through this critical phase.”
Powell is also facing calls from Congress and policymakers to ramp up the Fed’s efforts to boost small businesses. Several lawmakers asked Powell this week to consider ways to expand emergency loans to specific industries and force recipients of Fed aid to prioritize rehiring.
The Fed chairman has insisted that while the Fed’s lending powers are broad, the central bank is legally limited in its ability to target industries or attach certain conditions to its emergency loans.
But progressives like Fischer argued that the main obstacle is a historic reluctance from the Fed to expand its rescue loans far beyond the financial sector and into areas of the economy seen as politically risky.
“The Fed lawyers are very clever in working around even very modest congressional restrictions when it comes to stacking the window with money,” said Fischer, referring to the practice of calming financial markets with a massive pledge of support to stave off further needs. “But the Fed doesn’t apply that same creativity to helping Main Street.”