Federal Covid-19 Response Hurt Small Business, Threatens Future Of American Entrepreneurship

Federal Covid-19 Response Hurt Small Business, Threatens Future Of American Entrepreneurship

Small business owners and entrepreneurs have plenty of barriers to success without considering the costs from the COVID-19 pandemic. High and excessively complex tax laws, the anti-growth reconciliation bill, and regulatory burdens like the pending congressional “Right to Work” bill and California’s AB5 law that is going national through the PRO Act. These barriers make starting a small business, hiring employees, and successfully growing a challenge.

Then there is the government’s economic response to the COVID-19 pandemic.

Lawmakers and regulators at the federal level took unprecedented action to help stabilize the U.S. economy and protect American small businesses and entrepreneurs. Unfortunately, despite good intentions, it didn’t help.

new study I authored shows that small businesses have little to show for the massive increase in government funding and, thanks to these policy responses, many are now worse off than before the COVID-19 pandemic.

Congress spent $5.9 trillion since March 2020, including $835 billion on the Paycheck Protection Program, or PPP, and another $815 billion spread among the three stimulus check programs. In addition, activist monetary policy by the Federal Reserve greatly expanded the federal government’s balance sheets.

The PPP program is a prime example of the federal government spending excessive sums of money during COVID-19 with little impact on those it was trying to help. How do we know this? The Federal Reserve said as much in a recent survey.

While some businesses may have benefited from the loans, nearly half of the small businesses who received their full PPP loan requests still laid off workers, according to the Federal Reserve’s 2021 Small Business Credit Survey.

Many analysts have noted that the rollout of the PPP program was too slow, and the program quickly became inefficient and poorly targeted. Demonstrating this point are the findings of a study showing that PPP loans increased employment at small businesses by only two percent, at a cost of $377,000 per job saved.

Instead of identifying families, small businesses and individuals who needed assistance during the pandemic, the federal government spent hundreds of billions on those who didn’t need the money. According to data from the Bureau of Economic Analysis, personal savings rates jumped between 20 percent and 34 percent respectively when the stimulus checks were sent out – an indication that many recipients did not need the money to weather the pandemic-induced shutdowns.

Before the COVID-19 pandemic, entrepreneurs widely cited the large and growing regulatory burden as a major obstacle to growth. The pandemic made things worse. According to research from George Washington University, 215 new COVID-related regulations were enacted by the federal government, many of which were supposed to benefit small businesses struggling during the pandemic. Not unexpectedly, these regulations have actually hurt entrepreneurs even more.

Consider the eviction moratorium. Small entrepreneurs who own rental homes or apartment buildings have suffered disproportionate harm from this moratorium. For some, rental income is their primary source of income, so the eviction moratorium is a major threat to their financial well-being.

Then there is the unstable and destabilizing monetary policy being pursued by the Federal Reserve. The disrupting impacts from these actions threaten entrepreneurs’ access to credit in the future; credit that is needed to grow their businesses.

This begs the question: Was the massive increase in spending, borrowing, and regulating worth the future harm it will impose on American entrepreneurship? The answer is no. Washington’s response to the pandemic shows that when government expands beyond its core competencies, its actions become detrimental to prosperity.

However, federal policymakers can stop the economic damage their policy choices have created if they truly embrace entrepreneurship as the key to future prosperity. They should consider:

  • Limiting future spending growth to less than the economy’s growth rate until it reaches an affordable level of government spending, around 15 percent of the economy;
  • Enacting fundamental tax reform to simplify the current system and increase the incentive to work and become entrepreneurs;
  • Implementing a rules-based monetary policy; and
  • Conducting a comprehensive regulatory review with the goal of simplifying the code and reducing the cost of compliance.

The reconciliation bill inching toward passage is the opposite of these needed pro-growth economic reforms, unfortunately. It doubles down on the high-taxing, big-spending, burdensome-regulating response to the Covid pandemic. This approach portends dire long-term consequences for entrepreneurship and potential economic growth.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.