Government actions to “help” small businesses in the wake of the COVID-19 pandemic have worsened pre-pandemic government-imposed burdens to entrepreneurship, finds the final paper in the Breaking Down Barriers to Opportunityseries released today by the nonpartisan Pacific Research Institute, a California-based, free-market think tank.
“The federal government’s economic pandemic response was wasteful and ineffective, worsening the government-created obstacles to prosperity entrepreneurs faced before the pandemic – such as taxes, regulations and lack of access to credit,” said Dr. Wayne Winegarden, Pacific Research Institute senior fellow in business and economics.
“Promoting Economic Recovery Through Entrepreneurship Not Government” analyzes the impact of the federal government’s COVID-19 relief effort on small businesses.
Winegarden makes the case that the historic increase in the government’s burden on the private sector economy – including $5.9 trillion in newly-authorized federal spending – paves the way for higher future taxes that will diminish the after-tax returns and incentives to start or expand new businesses.
Among the study’s findings:
- While the Paycheck Protection Program (PPP) was somewhat effective in helping small businesses avoid layoffs, most of the spending was excessive and poorly targeted. Federal Reserve data shows that nearly one-half of the small businesses receiving the full PPP loans requested still laid off workers despite the financial assistance.
- The Federal Reserve worsened the entrepreneurial environment by enabling historically large increases in federal spending and distorting mortgage markets, which is an important source of funding for budding entrepreneurs. A vibrant entrepreneurial sector requires a stable financial and credit system.
- According to research from George Washington University, the federal government issued 215 new COVID-19-related regulations, some of which increased uncertainty rather than reducing the regulatory burden. For example, the federal eviction moratorium, will directly harm small businesses that own rental homes or apartment buildings.
- Winegarden calculates that the negative future tax implications of the pandemic-induced federal debt could jump to over $3,700 per taxpaying household if interest rates climb to 4 percent when the Federal Reserve inevitably pulls back on its pandemic fiscal policies.
“Washington’s response to the pandemic shows that when government expands beyond its core competencies, its actions become detrimental to prosperity,” said Winegarden. “Instead of hoping that an expanded federal bureaucracy will increase entrepreneurial innovation, policymakers should empower individuals by reducing barriers to entrepreneurship.”
To promote future entrepreneurship, Winegarden recommends that policymakers:
- Limit future spending growth until it reaches an affordable level of government spending, around 15 percent of the economy;
- Enact fundamental tax reform to simplify the current system and increase the incentive to work and become entrepreneurs; and
- Conduct a comprehensive regulatory review with the goal of simplifying the code and reducing the cost of compliance