Unclogging the financial pipeline to US workers and businesses

Getting financial assistance to tens of millions of households and businesses caught in the COVID-19 economic collapse is proving enormously challenging. State offices charged with administering the unemployment insurance system are by all accounts overwhelmed by the 22 million claims for benefits filed in the past four weeks — and millions more are on the way. And stories are now widespread about the many different types of people who have not received their $1,200 relief payments from the Treasury Department — and may not receive it for some time to come. 

Fortunately, there is a more effective way that Congress and the administration should carefully consider: Going wholesale rather than retail. Sens. Jones (D-Ala.), Sanders (I-Vt.) and Warner (D-Va.) have offered a plan of this type, as have Rep. Jayapal (D-Wash.) and Sen. Hawley (R-Mo.).

One key would be to use existing infrastructure. This could be accomplished by piggybacking on the financial system that the Treasury Department uses to collect tax payments from employers. The idea is to throw that system into reverse and use it to send grants out to businesses. These grants would be calibrated to allow businesses to pay their workers most of what they were earning a year ago, plus have some left over to meet other eligible expenses.  

The program would give workers a financial lifeline by transforming the current unemployment insurance program into an income insurance program and administrating it through employers. It would encourage workers and firms to stick together and thus should speed economic recovery once social distancing restrictions are relaxed. 

This new system would also be fiscally efficient because it would not send grants to companies that have not suffered a drop in gross revenues. The program would speed payments by relying, in the first instance, on businesses to tell Treasury how large a grant they are entitled to. But it would preserve accountability by requiring firms to use their tax filings roughly a year from now to perform any final reckoning.  

To bring the program to life, Congress would give Treasury authority to partially underwrite companies’ payrolls for a limited period of time. The amount of each grant would be calculated as the decline in the firm’s gross revenue during the current calendar quarter relative to the same quarter one year ago, multiplied by the share of compensation in total cost, in the year-ago period. 

Allowable compensation could be limited to the median individual income. All but the very smallest businesses already use this key Treasury system. Firms not using that system could remain eligible for the current paycheck protection program (PPP).

Each recipient firm would be required to use the proceeds of this grant, first, to pay individuals at least 90 percent of their pre-crisis truncated quarterly compensation. Any remaining amount from the grant could be used to meet other qualifying expenses such as debt payments, rent or utilities (similar to restrictions attached to the PPP program in the CARES Act). Each recipient firm would also have to maintain headcount at or above some defined benchmark, again similar to requirement in the PPP. Previously-laid-off workers would have to be offered a position back on the payroll at their old compensation level even if there was nothing for them to do. 

The duration of payments under this program could be tied to the timetable of the current national health emergency declared by President Trump on March 13. For example, payments could continue through one calendar quarter beyond the quarter in which the president lifts that declaration. If the president were to lift the emergency on June 1, payments could be made based on gross revenues through the third calendar quarter of this year; because payments could be calculated and delivered only after the end of the quarter, a last set of payments could be shipped in the fourth quarter.  

Special situations will arise and have to be addressed. What about firms that had already received a PPP loan? Their eligibility could be delayed by a quarter. What if a business fails or fires some or all its workers after the program is terminated? The affected workers would be free to apply for regular unemployment benefits. By then, hopefully, states will have cleared their backlogs. 

The price tag of a program like this would be high but manageable. If businesses, on average, suffer a 40 percent drop in revenue for two quarters, then the program could cost something like 9 percent of GDP, or roughly $2 trillion. Because dollars spent through this program would, to some degree, substitute for unemployment insurance, the actual cost would be somewhat less than the price tag of this initiative alone.  

Time is of the essence for millions of Americans, and this is a practical way to distribute the assistance they urgently need.

David Wilcox is a senior fellow at the Peterson Institute for International Economics and formerly director of the Federal Reserve’s Division of Research and Statistics, and a senior advisor to the past three Fed chairs.