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Thomas Gallatin / April 24, 2020

CARES Act Hurts Small Businesses

Higher unemployment benefits undercut small businesses’ ability to retain employees.

One of the most common occurrences when Congress rushes to fix a problem is that there are unintended or unforeseen consequences created by the “solution.” In fact, the bigger the “fix,” the greater the probability for it creating more problems than it solves. Congress’s recent $2.2 trillion CARES Act provides yet another classic case reinforcing this principle.

The Paycheck Protection Program (PPP), a part of the CARES Act that provides forgivable loans to “small” businesses to help them stay afloat and retain their employees throughout the China Virus-induced economic shutdown, has been undercut by other provisions within the overall legislation.

For example, “The Cares Act created a perverse incentive not to work,” write Rep. Chip Roy (R-TX) and Emily Williams Knight, CEO of the Texas Restaurant Association. “Because the Cares Act pays an additional $600 a week in unemployment benefits, many restaurants will find it difficult to get employees back on the job. And if they don’t, restaurants can’t receive loan forgiveness.” Furthermore, Roy and Knight note, “The PPP requirement that 75% of the forgivable loan be spent on payroll puts restaurants with expensive rent in an untenable position. That requirement doesn’t account for differences in business structures.”

The PPP was ostensibly aimed at helping small businesses, but in several ways it’s making it harder for many small businesses to get back to business because they’re competing with government to retain their employees. For instance, the CARES Act’s overly generous unemployment compensation disincentivizes employees from going back to work. They’re getting more money for staying on unemployment than working.

As The Resurgent’s David Thornton observes, “For workers who have been locked into low-paying jobs for long periods, however, the choice might not be so easy. This is especially true when the unemployment benefits continue for an extended period, such as the 26 weeks granted in Washington. The difference in take-home pay would be YUGE for a low-income worker who earns an extra several hundred dollars per week on COVID unemployment for six months. It isn’t a matter of being lazy, it’s a sound financial choice, at least in the short-term.”

The problem is that by not going back to work, these workers prolong a recession, which will then only make it harder for them to find a job when their time collecting unemployment benefits runs out. Furthermore, a prolonged stay on unemployment suspends any opportunity for upward mobility and salary increases, as well as stunts retirement benefits.

The trouble moving forward is that Democrats will demand that these unemployment benefits be extended beyond the initial six months, pointing to the economic recession as justification. Then, any action extending unemployment benefits will slow the economic recovery in a vicious cycle. It’s a classic example of Democrats working to get and keep as many people as possible on the government dole.

(Edited.)

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