Small and medium sized businesses form the beating heart of the American economy. Together, these two sectors employ 2/3 of the American workforce.
The catastrophic decline in commerce stemming from the COVID-19 crisis has put a vast swath of American businesses in critical condition. Unlike large corporations, small and medium sized businesses (SMBs) have no ability to sell commercial paper to the Federal Reserve right now in order to stave off the crisis of maintaining full payrolls. Unlike banks, SMBs cannot obtain zero percent loans for working capital. For these SMBs that employ the overwhelming share of Americans, the well-intentioned passage of paid sick leave last week means they must shoulder a massive share of the cost of COVID-19’s dislocation. However, most of these businesses are now on the verge of bankruptcy. They do not have the money to save the country. Mass unemployment will inevitably result and in fact, it is already occurring.
Some days back Senate Democrats advocated a plan to provide “unemployment insurance on steroids” where workers are furloughed at full salaries and then brought back to their jobs when the crisis has ended. For a crisis with limited duration but calamitous impact, this idea has a lot going for it. It is similar to what the UK and EU are attempting to work out. However, this plan falls short in two crucial ways. First, every recession has shown the same thing: behaviorally, employers are fast to fire and slow to hire.
Once out of a job, shellshocked business owners and managers are going to be reluctant to take back every worker employed before the crisis. A dramatic spike of unemployment will occur, albeit slightly later, and the recessionary impact is unavoidable. The second problem with this idea of paid furloughs is that GOP leaders are unlikely to accept it. It’s too much of a handout, with too little of a handshake in return. There’s no market mechanism in it.
We have an alternative proposal. Instead of furloughing workers, keep them employed. Instead of trying handouts, give the money directly to workers—backstopped with long term, zero percent disaster loans to business owners.
This method has multiple merits. It spreads the cost of this dislocation from a sudden, destructive waterfall into a thin thread that can be stretched across the disaster loan timeframe of thirty years. It gives business owners the chance to retain their team members with minimal disruption to their operations and to the lives of all involved. And it maximizes the chance that the recovery will occur at peak speed, since everyone is still on the job and capable of responding without delay to the resumption of sales and order flow.
It lets business owners dial up or down the amount of assistance they actually need; for those businesses with resources to weather the storm, they can skip this assistance. And, crucially, this plan has at minimum a revenue neutral trajectory that should get the Republican establishment on board. When combined with the GDP payoff from avoiding work disruption and the avoidance of unnecessary unemployment payouts in the medium and long term, it is most certainly ROI positive for American taxpayers.
Most important, it staves off a cascade of unemployment claims not seen in this country since 1929.
We have discussed this idea, which we are calling the American Work Assurance Plan, with small and medium sized business owners from all types of industries. Tech in San Francisco, restaurateurs in Long Island, vet clinics in Alabama. We have not found a single business owner who would not take this deal. Owners and managers of American businesses don’t want to furlough their workers. They want to keep the company family together during this extraordinarily difficult time. And they want to get back on the playing field tomorrow. They need the resources to do this, and fast. This program accomplishes this.
There may be some who point out that Senate leaders are busy making sure that the Small Business Administration (SBA) will receive several hundred billion in the set of business bailouts on the table. Here is where we have one additional thing to say. With all due respect to the hard-working women and men at this agency, the rules of today’s SBA are not aligned for a crisis of this magnitude. Hopefully they can be fixed when the crisis has passed. But today’s SBA involves a document-heavy loan submission followed by 6-8 weeks of underwriting reviews. Business owners who have already begun the painful process of layoffs says its irrelevant to their pain.
It may be obvious but in an age of one-click ordering, mechanism matters. Tossing $300B to the SBA in some emergency bill laundry list is not going to solve the impending unemployment disaster. We are worried this is what is happening. Instead, we advocate administering the entire program via the Treasury Department through the IRS. Business owners would log in with their EIN and instantly view a quarter’s worth of payroll and 1099 contractor data which can generate an instant loan qualification amount. Owners can accept a loan with simplified terms with a single click. In hours or days, the actual money would be distributed directly to workers via bank transfers using the IRS refund mechanism. And repayment would be assured, administered through a small surcharge on regular taxes owed.
American business and their workers did not create this crisis. With ingenuity and luck, we as a nation will prevail over the health crisis in the upcoming months. By summoning a payroll continuity plan for 2/3 of the American workforce that’s readily backable by millions of business owners, we shall also prevail over the economic crisis.
Author: Rob Hutter is a founding partner of Learn Capital, a venture capital firm based in California
Over a dozen tech and mainstream business leaders have signed their name to this solution.
If you would like to be involved with this solution or interview Rob Hutter, please message me in LinkedIn.