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We All Need Small Businesses. Don’t Let Them Die. We All Need Small Businesses. Don’t Let Them Die.
(17 days later)
[Read our Coronavirus Relief Small Business F.A.Q.]
By the time the coronavirus crisis is over, we might emerge from our homes only to find some of our favorite shops, gyms and restaurants permanently shuttered.By the time the coronavirus crisis is over, we might emerge from our homes only to find some of our favorite shops, gyms and restaurants permanently shuttered.
It doesn’t need to be that way. While some of the harm has already been done, we can still prevent much of the long-lasting damage.It doesn’t need to be that way. While some of the harm has already been done, we can still prevent much of the long-lasting damage.
Consider a hypothetical neighborhood restaurant that, until this crisis, was flourishing. Business was brisk, the employees worked well together, and customers enjoyed the feeling of being “regulars” at a place where everyone knew their name.Consider a hypothetical neighborhood restaurant that, until this crisis, was flourishing. Business was brisk, the employees worked well together, and customers enjoyed the feeling of being “regulars” at a place where everyone knew their name.
Then the coronavirus hit. Suddenly business dried up. At first there was some takeout revenue, but even that disappeared.Then the coronavirus hit. Suddenly business dried up. At first there was some takeout revenue, but even that disappeared.
The bills keep coming. The restaurant owner no longer needs to buy meats, vegetables or liquor, but she is still on the hook for her biggest cost — rent. And she faces an ethical dilemma: Does she use her scant savings to continue to pay her workers?The bills keep coming. The restaurant owner no longer needs to buy meats, vegetables or liquor, but she is still on the hook for her biggest cost — rent. And she faces an ethical dilemma: Does she use her scant savings to continue to pay her workers?
She has little money in cash reserve; operating margins are thin in a restaurant, and her savings had already been spent on expanding the cramped kitchen. What was a thriving enterprise before the pandemic will emerge — if it emerges at all — as a hobbled business, which may well fail shortly thereafter.She has little money in cash reserve; operating margins are thin in a restaurant, and her savings had already been spent on expanding the cramped kitchen. What was a thriving enterprise before the pandemic will emerge — if it emerges at all — as a hobbled business, which may well fail shortly thereafter.
The example may be hypothetical, but for hundreds of thousands of restaurants around the country the story is all too real. As Ben Leventhal, the chief executive of Resy, an online restaurant reservation platform, said, “We’re in uncharted territory,” and restaurants are struggling to survive.The example may be hypothetical, but for hundreds of thousands of restaurants around the country the story is all too real. As Ben Leventhal, the chief executive of Resy, an online restaurant reservation platform, said, “We’re in uncharted territory,” and restaurants are struggling to survive.
But there are tools that can be used to create better outcomes.But there are tools that can be used to create better outcomes.
The government can unilaterally freeze commercial rent and mortgage payments for small businesses. The policy can be targeted to businesses that use less than a certain square footage.The government can unilaterally freeze commercial rent and mortgage payments for small businesses. The policy can be targeted to businesses that use less than a certain square footage.
This would shift the loss to the owners of those properties and mortgages, but many of them are large diversified companies with a balance sheet to absorb losses and the ability to renegotiate their contracts with their investors. Of course, some owners are themselves individuals or small businesses; for them, the waiving of their own mortgage payments would serve as relief.This would shift the loss to the owners of those properties and mortgages, but many of them are large diversified companies with a balance sheet to absorb losses and the ability to renegotiate their contracts with their investors. Of course, some owners are themselves individuals or small businesses; for them, the waiving of their own mortgage payments would serve as relief.
During the 2008 crisis, the government understood this principle well. It bailed out large financial firms for much the same reason: They were facing temporary shocks that, without intervention, would unnecessarily become permanent ones. Whatever else one may feel about those bailouts, that economic logic was sound. Those investments yielded healthy profits for the government.During the 2008 crisis, the government understood this principle well. It bailed out large financial firms for much the same reason: They were facing temporary shocks that, without intervention, would unnecessarily become permanent ones. Whatever else one may feel about those bailouts, that economic logic was sound. Those investments yielded healthy profits for the government.
If it made sense to help American International Group then, surely it makes more sense for the local pizza shop. Beyond freezing rents and mortgage payments, the government can infuse cash into these businesses. That need not be a transfer — it can be an investment. While government agencies cannot easily take equity in small businesses, they can give credit. It makes sense to offer zero-interest loans with long maturities for the sole purpose of paying the staff.If it made sense to help American International Group then, surely it makes more sense for the local pizza shop. Beyond freezing rents and mortgage payments, the government can infuse cash into these businesses. That need not be a transfer — it can be an investment. While government agencies cannot easily take equity in small businesses, they can give credit. It makes sense to offer zero-interest loans with long maturities for the sole purpose of paying the staff.
Governments around the world are beginning to act.Governments around the world are beginning to act.
President Emmanuel Macron has proposed suspending business rent payments in France. Proposals in Washington include loans to help cover lost revenue. As of this writing, a national rent moratorium has not been declared, but some policymakers recognize the need to do something for small businesses. Senator Marco Rubio, a Florida Republican, said on Wednesday, “There is broad general agreement that small businesses in this country will not be able to survive unless there is extraordinary assistance.”President Emmanuel Macron has proposed suspending business rent payments in France. Proposals in Washington include loans to help cover lost revenue. As of this writing, a national rent moratorium has not been declared, but some policymakers recognize the need to do something for small businesses. Senator Marco Rubio, a Florida Republican, said on Wednesday, “There is broad general agreement that small businesses in this country will not be able to survive unless there is extraordinary assistance.”
Individuals can take action, too. Small businesses are asking customers to buy gift cards for future use. Those who can afford this kind of investment will be doing some good.Individuals can take action, too. Small businesses are asking customers to buy gift cards for future use. Those who can afford this kind of investment will be doing some good.
It is not only businesses that face economic distress. A sad fact of the economy in recent decades has been that far too many people have been relegated to economic positions that are even less secure than a small business.It is not only businesses that face economic distress. A sad fact of the economy in recent decades has been that far too many people have been relegated to economic positions that are even less secure than a small business.
They get the worst end of entrepreneurship: exposure to bad circumstances with little benefit if things go swimmingly. All those people — hourly workers, gig economy workers, off-the-books cleaning and day care workers — now face a sudden drop in income.They get the worst end of entrepreneurship: exposure to bad circumstances with little benefit if things go swimmingly. All those people — hourly workers, gig economy workers, off-the-books cleaning and day care workers — now face a sudden drop in income.
For these people, too, the temporary economic shock threatens to leave lasting damage. Without income flowing in, they are in deep trouble. Payday loans leave them trapped under a mountain of debt. Missed payments mean late fees and a permanent marring of credit scores. Missed rent can mean eviction.For these people, too, the temporary economic shock threatens to leave lasting damage. Without income flowing in, they are in deep trouble. Payday loans leave them trapped under a mountain of debt. Missed payments mean late fees and a permanent marring of credit scores. Missed rent can mean eviction.
Wise policies can prevent this. A recent paper persuasively argued that the best way to prevent temporary shocks from becoming permanent problems is to eliminate short-term debt obligations to create some financial breathing room. For now, the government can institute a temporary forbearance on all major debt: mortgages, auto loans, student loans and big credit card payments. Such a policy is hardly onerous given that real interest rates (nominal rates minus inflation) are below zero. Such a policy would ensure that individuals did not emerge from this crisis burdened with debts and blemished credit.Wise policies can prevent this. A recent paper persuasively argued that the best way to prevent temporary shocks from becoming permanent problems is to eliminate short-term debt obligations to create some financial breathing room. For now, the government can institute a temporary forbearance on all major debt: mortgages, auto loans, student loans and big credit card payments. Such a policy is hardly onerous given that real interest rates (nominal rates minus inflation) are below zero. Such a policy would ensure that individuals did not emerge from this crisis burdened with debts and blemished credit.
Renters need help, too. Rent can be deferred without counting missed payments toward late fees or eviction triggers, with aid given to small landlords who need help. Brakes such as these need to be enacted — and enacted quickly — to keep the bad from turning into worse.Renters need help, too. Rent can be deferred without counting missed payments toward late fees or eviction triggers, with aid given to small landlords who need help. Brakes such as these need to be enacted — and enacted quickly — to keep the bad from turning into worse.
I take the plight of small-business people personally. Perhaps you do, too.I take the plight of small-business people personally. Perhaps you do, too.
My mom ran a small video store in Los Angeles for over 20 years. She survived a major economic recession, two riots that rumbled past her window and even the opening of a Blockbuster nearby.My mom ran a small video store in Los Angeles for over 20 years. She survived a major economic recession, two riots that rumbled past her window and even the opening of a Blockbuster nearby.
Eventually, though, her business succumbed to the changing times. The customers moved on. And my mother, having had a good run, was about ready to let go anyway. She had time to make a choice and move on herself.Eventually, though, her business succumbed to the changing times. The customers moved on. And my mother, having had a good run, was about ready to let go anyway. She had time to make a choice and move on herself.
But that’s not the case for the hundreds of thousands of businesses that were flourishing just two weeks ago. Their customers want those businesses to continue. Their owners were not ready to move on. Their employees wanted to work.But that’s not the case for the hundreds of thousands of businesses that were flourishing just two weeks ago. Their customers want those businesses to continue. Their owners were not ready to move on. Their employees wanted to work.
When my mother closed the doors for the last time, it was hard and there was sadness. But it was the sadness of a good run that, like all things, must end.When my mother closed the doors for the last time, it was hard and there was sadness. But it was the sadness of a good run that, like all things, must end.
The businesses affected by the coronavirus face a different kind of sadness: the anguish of an unexpected disaster when everything was going well. That is a tragic end we must act now to prevent.The businesses affected by the coronavirus face a different kind of sadness: the anguish of an unexpected disaster when everything was going well. That is a tragic end we must act now to prevent.
Sendhil Mullainathan is a professor of behavioral and computational science at the University of Chicago. Follow him on Twitter: @m_sendhil.Sendhil Mullainathan is a professor of behavioral and computational science at the University of Chicago. Follow him on Twitter: @m_sendhil.