President Donald Trump understands that his chances of winning the November election depend on the strength of the economy. So why is his Treasury secretary, Steven Mnuchin, going out of his way to impede a recovery?
Congress established the Paycheck Protection Program (PPP) in late March to provide forgivable loans to businesses to help them through the Covid-19 crisis.
The Small Business Administration (SBA) is insisting that 75% of any amount forgiven has to be spent on payroll, as opposed to rent, utilities and other overhead costs. That requirement is not in the law, as the agency’s inspector general has pointed out in a report.
The agency explained that it had consulted Mnuchin and determined this limit fit the law’s "overarching focus on keeping workers paid and employed."
But the rule subverts the purpose of the program. If a business fails because it can’t make rent, it won’t be able to keep paying its employees.
John Lettieri, the president of the Economic Innovation Group, has been leading the charge against this rule since its inception.
He says that the rule perversely favors companies that least need help, the ones that aren’t having trouble with their fixed costs. Larger and better-connected businesses already had a head start on the program because they could master its details and use their connections with the banks administering it. Some of that unfairness was unavoidable, but the 75% rule has made the misallocation of loans worse.
It’s not as though the rule is necessary to give employers an incentive to avoid layoffs and re-hire former employees. The law stipulates that the amount of loan forgiveness declines to the extent that companies have lower payrolls on June 30 than they had at the start of the epidemic. The administration isn’t implementing the program Congress designed. It has changed the design.
Opposition to the rule is growing. The Washington Post and Wall Street Journal, whose editorial pages rarely agree on domestic economic legislation, both want to discard the rule.
The Chamber of Commerce, American Hospital Association and National Restaurant Association are among the groups mobilized against it.
Glenn Hubbard, a professor of economics and finance at the Columbia University School of Business, has come out against what Treasury is doing, "The rule limits success with borrowers and their business continuity. If the desire was to economize on funds given an inadequate initial appropriation, a better route would be to request additional support from Congress."
The House Democrats’ proposal for the next round of coronavirus relief, the Heroes Act, includes an explicit prohibition on the administration’s imposition of any limits on the Payroll Protection Program that Congress has not legislated. That bill passed the House, although it also contains so many Democratic demands that it is not advancing any further.
But there is also bipartisan legislation against the rule. Representatives Chip Roy, a Texas Republican, and Dean Phillips, a Minnesota Democrat, introduced legislation that would end it and also mandate other changes to make the program more helpful to businesses.
The bill passed the House today. Businesses would have until the end of the year, for example, to restore payroll levels, and good-faith efforts to rehire former employees would count toward the goal even if unsuccessful.
Roy says that while he generally opposes federal aid to business, in this case companies are being compensated for not being allowed to conduct their normal operations. "I represent 2,300 restaurants with 53,000 employees plus a host of other businesses that all were calling me with grave concerns about their ability to stay afloat," he says.
The difficulty of competing with high unemployment benefits and navigating the complexities of the Paycheck Protection Program were issues they often raised.
Mnuchin has remained unmoved, quipping that the program is not called the "Overhead Protection Program." To placate Treasury, the congressmen have modified the bill so that the 75% rule is relaxed to 60% rather than abolished altogether.
The department could improve the program today if it relented rather than waited for congressional action. Its obstinacy on this point is difficult to fathom.
If the dubious legal basis and harmful economic effects of its policy weren’t enough to make it back off, you would think that the political imperative of getting businesses up and running would.
Small business owners have reason to be displeased with Mnuchin.
So does Trump.
Ramesh Ponnuru is a Bloomberg View columnist. He is a senior editor of National Review and the author of "The Party of Death: The Democrats, the Media, the Courts, and the Disregard for Human Life." Read Ramesh Ponnuru's Reports — More Here.
© Copyright 2020 Bloomberg News. All rights reserved.