Jim Hartman: The budget deficit is growing
Intentions were good when Congress enacted the massive $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (the “Cares Act”). The Cares Act was the third coronavirus relief and emergency bill passed by Congress in March. It included $350 billion for the Small Business Administration’s Paycheck Protection Program.
Under the PPP, loans were designed to provide a direct incentive for small businesses to keep their workers on their payrolls. The loans would be forgiven if all employees were retained for eight weeks and the money used for payroll, rent, mortgage interest or utilities. There was a 500 employee worker limit intended for the program.
On April 16, the PPP proved so popular that the program ran out of money, only 14 days after inception; 1.6 million loans had been approved.
But the program has been a mess. Lots of the money went to larger businesses. Barron’s reports that 44 percent of the SBA loans went to 4 percent of loan requesters — 67,000 applications taking almost half of the resources.
Large auto dealer organizations, like publicly-traded Penske Auto Group or Auto Nation, were eligible because applications were done at the franchise level. A loophole for restaurants and hotel chains allowed Ruth’s Chris Steak House, with 5,000 employees, to pocket $20 million. Shake Shack, with 8,000 employees, received $10 million from the program.
Midsized hedge funds, brokerage businesses, small law firm – all outfits making money – qualified. They took money away from businesses barely surviving in times of social distancing and mandated closures. Banks prioritized loans on a first-come, first-served basis, giving priority to their best customers.
During the first 14 days of the federal government’s small business rescue program, the spigot was wide open in Nebraska, where firms got enough money to cover 82 percent of the state’s eligible payrolls. But it was a far different picture in Nevada where companies did only half as well. Nevada ranked 48thamong the states, with 8,674 loans approved for a total of $2 billion (42.4 percent of eligible payrolls).
Nevada was disadvantaged by the fact that that SBA regulations would not allow companies generating more than one-third of their revenue from gaming being included in the Paycheck Protection Program. That left out casinos, taverns and gaming equipment manufacturers.
An example, the Lakeside Inn and Casino at Stateline, announced it would not reopen after 35 years in business once the coronavirus crisis diminishes. The SBA had denied Lakeside a loan.
On April 8, President Trump said he would consider concerns raised by small casinos and gambling businesses that couldn’t get access to emergency loans as a result of the SBA rule. “I will take a look at that strongly,” Trump told Debra Saunders of the Las Vegas Review-Journal .
Initially , the Trump administration modified the rule allowing more small businesses to qualify — those earning less than half their revenue from gaming. That change didn’t satisfy Nevada’s congressional delegation.
On April 24, the White House decided to allow small casinos access to Payroll Protection loans without any legal gaming revenue limitation.
Because of Payroll Protection loan demand, Senate Republicans sought to immediately replenish the PPP adding $250 billion. Democrats objected insisting on an additional $160 billion for their priorities.
The result was a fourth aid bill from Congress totaling $484 billion, with $310 billion infused into the PPP. On April 27, the SBA reopened new loan applications amid complaints of delays and glitches.
With $2.9 trillion in coronavirus spending approved since March, the four expensive rescue packages spiked the exploding federal debt to $24.6 trillion. The federal budget deficit will rise to $3.7 trillion for fiscal year 2020 — quadruple the previous estimate — assuming no additional emergency spending.
Before spending more, Congress needs to address the ballooning list of mistakes and unintended consequences in all these aid packages, specifically including Paycheck Protection.