Daily Maverick

Covid slows US economy

A giant stimulus package is needed to keep America from falling off the cliff

- By Laura Tyson Laura Tyson, former chair of the US President’s Council of Economic Advisers, is Professor of the Graduate School at the Haas School of Business and Chair of the Blum Center Board of Trustees at the University of California, Berkeley. Copyr

BERKELEY – The US recovery is losing momentum. Job growth is slowing, the economy is still down 10.7 million jobs since February, and 36% of unemployed workers are now classified as “permanentl­y unemployed”. The unemployme­nt rate fell to 7.9% in September, not because of an uptick in job creation, but because of an exodus of people from the labour force. Reflecting the dualism of the US labour market, the unemployme­nt rates remain even higher for African-Americans (12.1%) and Hispanics (10.3%), and an additional 6-8 million people have fallen into poverty.

With Covid-19 infection rates rising and fiscal stimulus measures ending, nowhere are the pain and downside risks of a faltering recovery more apparent than in the already hard-hit small business sector. Small businesses, defined as those with fewer than 500 employees, play an outsize role in the US economy, accounting for about half of all private-sector employment and about 65% of all net new job creation between 2000 and 2018. Between January and September of this year, the number of small businesses in operation fell by one quarter, and small business revenues declined by 23%. Important small-business sectors such as retail, transporta­tion, leisure, hospitalit­y, education, health, and other personal services have suffered the largest revenue and employment losses.

Minority-owned and female-owned businesses – employing about 8.7 million people – have been especially vulnerable. On the eve of the Covid-19 recession, around half of African-American and Latin-owned businesses were already financiall­y “at risk or distressed”, and many lacked the cash reserves to cover a two-month revenue loss. Making matters worse, minorities own 25% of the small businesses in sectors hit hardest by the pandemic, compared to around 15% in less affected ones. African-American small businesses have been especially hard-hit, experienci­ng a 41% drop in business activity, while Latin small business activity has declined by 32% and business activity in female-owned small businesses has declined by 25%, compared to a decline of 17% for white-owned businesses.

The $670 billion Paycheck Protection Program (PPP), a major component of the $2 trillion fiscal stimulus enacted by Congress in March and supplement­ed in April, has provided funds in the form of forgivable loans to small businesses to help them maintain employment and wages at pre-crisis levels. Seventy-two percent of small businesses (accounting for 62-85% of small business employees) have received PPP assistance. As of August, when the programme ended, more than five million loans worth over $525-billion (an average of $100,729 per loan) had been approved, but an estimated one in seven small businesses had already shut down permanentl­y.

Studies assessing the PPP’s effectiven­ess have yielded mixed conclusion­s. Firms that applied for PPP loans were far less likely to go out of business, and more likely to maintain employment, than larger, ineligible firms. Among firms that received firstround PPP loans, the chances of survival increased by 14-30%, with the largest effects for the smallest firms. All told, PPP loans may have increased employment by 3-4%, but at a cost of $224,000340,000 per job saved, reflecting the fact that the majority of loans went to firms that were not planning to lay off many workers. Many recipient firms used PPP loans to build savings and repay loans.

It is also clear that the distributi­on of loans across sectors did not mirror the distributi­on of job losses. PPP funding did not go to sectors that experience­d the steepest decline in hours worked, the largest number of business shutdowns, or the greatest rise in unemployme­nt.

For example, firms in the profession­al, scientific, and technical services industry received a larger share of PPP loans than firms in the hard-hit accommodat­ion, food services, and retail sectors. And yet, 23 jobs were retained per loan to the restaurant and hospitalit­y industry, compared to just nine jobs per loan to the profession­al, scientific, and technical services industry.

Finally, $4-billion in PPP loans have already been “red-flagged” by regulators for possible fraud, and congressio­nal investigat­ions are under way.

It is too early to say what will happen to recipient businesses and their employees when the PPP loans have been exhausted (the onerous process of determinin­g which loans meet the conditions for forgivenes­s via conversion to grants is just beginning). But we already know that minority- and female-owned small businesses in poor neighbourh­oods have had a harder time getting PPP loans in the first place.

Many of these businesses are under- or unbanked, because traditiona­l lenders have little incentive to incur the high fixed costs of servicing a large number of very small loans. Larger firms with establishe­d banking relationsh­ips were more likely to receive PPP loans benefiting from PPP’s “first come, first served” design than were businesses with fewer than 10 employees, non-employer businesses, and minority-owned businesses in communitie­s of colour that lacked such relationsh­ips. Many of these businesses rely on Community Developmen­t Financial Institutio­ns – certified financial institutio­ns with a mandate to serve such clients and decades of experience doing so. When more CDFIs were granted authority to act as PPP lenders and an additional $10 billion was set aside for them during the second round of PPP funding, they outperform­ed larger and better-capitalise­d banks in their respective communitie­s, providing both technical assistance and loans to their clients.

With the federal government mired in political gridlock, many states and municipali­ties have begun to act on their own. California, for example, is launching an innovative new programme to increase CDFI funding through public and private sources, with the state’s infrastruc­ture bank leveraging private funding through loan guarantees and loan-loss capital. Participat­ing CDFIs will offer affordable loans along with technical assistance to small businesses on the basis of common underwriti­ng and eligibilit­y criteria. A recent fund created by New York City follows a similar “loan participat­ion approach”, with participat­ing CDFIs using funds from both private and public sources.

But state and local government­s face falling revenues and budget constraint­s, and only the federal government has the budgetary capacity to fund affordable and flexible lending to small businesses.

That’s why the federal government should channel the $134-billion in unused PPP funds or some share of the Federal Reserve’s largely unused Main Street Lending Facility to states and municipali­ties to expand their small business recovery funds, and to CDFIs and community banks to increase their lending capacities.

The United States is teetering on the edge of a fiscal cliff. An additional stimulus package of at least $2-trillion is needed for a sustained and equitable recovery. Small business recovery measures must be a significan­t part of the package.

NEED MEDS? UBER IT

You can now order overthe-counter medicines to be delivered by Uber Eats.

The company has partnered with the Medicare health group to bring their new offering to the more than two million South Africans who use the delivery app. This is not the only new feature on the app. Soon customers will be able to instantly access merchants such as pet supply stores, grocery stores, butchers and retailers, including Game and Exclusive Books.

MIGHTY MARMITE RUNNING LOW Supplies of Marmite are running low in South Africa. The production of Marmite, which is a by-product of brewing beer, was affected by the alcohol sales ban during the first phases of the Covid-19 lockdown in South Africa.

Production at the Marmite factory ground to a halt because they were unable to secure spent yeast, a key ingredient for the making of the treacle-like black spread. Many stores have run out of Marmite. New stocks will only be available in a few weeks.

South Africa has immense renewable energy generation potential and could become a top exporter of green hydrogen to the world. Green hydrogen is produced from renewable energy technologi­es and is a clean-burning fuel. A report

released this week, shows South Africa is in an unpreceden­ted position to benefit from the global transition from fossil fuels and to transform into one of the world’s biggest green energy providers. The Green Hydrogen Atlas-Africa initiative, supporting sustainabl­e and economic developmen­t of green hydrogen in Africa, highlights South Africa’s potential to the global community.

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Photos by Marco Bianchetti, Anastasiia Chepinska, Benedikt Geyer, Markus Christina Wocintechc­hat, Tim Moss, Dan Burton all from Unsplash.
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