THERE'S AN OLD saying: When all you have is a hammer, everything looks like a nail. For Congress, that hammer is the Small Business Administration (SBA). And every economic crisis is a nail.
Whenever the country is hit by a hurricane, an earthquake, or a terrorist attack, the government instructs the owners of small businesses that have been hurt to turn to the SBA for help. The agency was originally conceived in 1953 to provide guidance and aid to small businesses. Today, its mission statement also includes efforts "to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation." But in recent decades, it has become the federal government's all-purpose tool for promoting economic recovery.
Unfortunately, the agency has a long history of responding to crises chiefly with a mix of ineptitude, bureaucratic sloth, and cronyism--most spectacularly in the aftermath of Hurricane Katrina. The current crisis is no exception.
When the COVID-19 pandemic struck, millions of firms were put out of business. By the middle of April, nearly 17 million people had filed for unemployment. Retail sales for the month of March fell 8.7 percent from February, the biggest single-month drop in the 30-year history of tracking. Analysts universally expected that the following month would be even worse.
And so, faced with an unprecedented economic downturn, Congress got out its hammer. The SBA was once again asked to dole out hundreds of billions of dollars' worth of federal loans and grants meant to prop up the economy during what looked to be the worst recession in a generation or longer.
Despite the agency's longstanding, prominent role in the federal government's economic recovery portfolio, there's little reason to believe it will be successful in this case--and it may hurt more than it helps. For decades, the SBA has shown itself consistently unable to hit the nails placed before it. And as coronavirus relief efforts ramped up this spring, the agency quickly began failing taxpayers, small-businesses owners, and the nation s economy, just when the country needed help the most.
$350 BILLION WORTH OF FAILURE
IN NORMAL TIMES, the SBA mostly exists to extend publicly guaranteed loans to companies that can't find credit elsewhere. But these are far from normal times.
As the COVID-19 pandemic spread across the globe, U.S. states ordered lockdowns in hopes of slowing viral transmission. The national economy was put into a figurative coma.
In March, Congress stepped in with life support in the form of the Coronavirus Aid. Relief, and Economic Security (CARES) Act, a $2.2 trillion spending program. Among its major provisions was $349 billion for small-business loans to cover qualified payroll costs, rent, utilities, and interest on debt obligations, later topped up with more than $300 billion in additional funds. That money was, of course, to be administered by the SBA.
There were two main pieces to the small-business relief part of the bill.
First, Congress directed the SBA to distribute $10 billion in disaster loans to businesses through an expansion of its Economic Injury Disaster Loan program (EIDL). Each eligible company could get a loan of up to $2 million, with the first $10,000 distributed as a grant--essentially an advance--within three days of its application to an SBA-qualified lender. In addition, a business could apply for an express bridge loan of up to $25,000 while waiting for the larger EIDL loan to come through.
The second piece was called the Payroll Protection Program (PPP), which tasked the SBA with issuing another $349 billion in loans to small businesses through an extension of its flagship 7(a) loan program. Low-interest-rate loans granted under the PPP will be forgiven in full--making them grants from the government in essence--under two conditions: 75 percent of the loan must cover the borrower's payroll costs, and the loan must be used to keep workers on the payroll for an eight-week period after the loan is granted.
Businesses applying for both programs are already smacking face-first into an array of bureaucratic complications, from processing delays to unexpected changes in loan limits. Just a few weeks in--at a time when huge portions of the economy are desperately looking to the agency for assistance--the SB A's administration of the PPP and EIDL looks incompetent at very best.
The first reason...