In a little noticed action last month, the Small Business Administration sent out millions of letters to small businesses that borrowed money under its COVID-19 loan program. The letters announced an additional six-month delay before businesses must begin repaying their COVID-19 Economic Injury Disaster loans.
On the surface, this looks like a pure act of kindness on the part of the SBA. On closer consideration, however, two points are significant. First, this action defers repayments until the fall. It is unclear what will be different in the fall than now. Businesses are free to operate without COVID-19 related governmental restrictions today. Those businesses that plan to remain open are operating today.
The principal problems facing small businesses operating today are not problems of cash flow, but a shortage of employees and rapidly escalating inflationary costs. These problems will not disappear by fall. Neither will be cured by kicking the can down the road for six months.
Second, and more important, is the timing of the letter. Roughly 3.9 million businesses borrowed more than $353 billion under this program. This deferral seems like an obvious effort to produce the least possible pain before the November midterm elections.
The amount of borrowing under this program — some of which was pressed upon small businesses by the SBA itself — was enormous, and there is a strong suspicion that a great part of this will never be repaid. Some small businesses that did not need the cash infusion have set aside these funds. For them repayment should be easy. Most small businesses, however, used the loans and do not have the funds to repay them, even under generous long-term payment plans.
What we are likely to discover after the midterm elections is that many businesses will make either minimal repayments or simply default on the loans altogether. The SBA — that is, the American taxpayer — will be on the hook for these loans.
A betting person would make one more reasonable guess. When the repayment date arrives in the fall, there will be intense pressure to extend the repayment date once again. These are the same pressures we see on the massive and even larger student loan program, where repayments have been systematically deferred, even in the face of earlier pledges not to do so.
The Biden administration is currently seeking new COVID-19 related funding. It is by no means done absorbing losses from the loans which the federal government has already made.
In recent decades the federal government has been running a series of very dishonest programs. Rather than expend money, and perhaps smaller sums, on grants, it has structured numerous programs as loans. Grant programs would have an immediate impact on federal spending and on federal deficits. Loan programs, on the other hand, have no such implications. They allow the federal government to expend far more funds than are appropriated. For the federal government it is the best of worlds — providing money with little or no budgetary impact until years later, when repayments fail to materialize or are partially forgiven.
Parenthetically, this same process once characterized many of our foreign aid programs. In the 1970s the U.S. and international lending organizations crafted enormous loan programs for poor countries which had no hope of repaying them, especially at the high inflationary interest rates at the time. President Ronald Reagan put an end to this in bilateral American aid programs. His view was that if aid is in the U.S. national interest, it should be made in the form of grants and accounted for honestly. If not, it should not be made at all. This was a more honest way for Congress and the executive branch to spend taxpayers’ money.
• Jeff Bergner served in the legislative and executive branches of the federal government.
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