Where Congress’ massive bailout of the economy went wrong and how it could be fixed

When COVID-19 shut things down, the federal government jumped into action. But the rush to do good didn’t mean the policies did much good. The programs were poorly structured and created inefficiencies that limit their effectiveness.

Since politics is all about image, the first step was to create the required catchy acronym for the signature plan: The CARES Act. Cute, right?

Then, to sell the key corporate welfare program, the Paycheck Protection Plan (PPP), heartstrings had to be tugged: Small businesses would be saved! Congress and the president were protecting paychecks and supporting the most beloved segment of the economy. Amazing.

Then money started to be thrown around.

The unemployed were showered with a huge add-on to their state’s unemployment compensation payment, while stimulus checks were sent to households. Didn’t get your money? Go to the IRS website and hit the button GET MY PAYMENT. Don’t you just love it?

Meanwhile, businesses were offered free money to hire people to do nothing.

All this cost trillions of dollars, yet Congress and the administration still messed everything up.

Consider the PPP, which was supposed to save small businesses. Well, the payroll size limit for funding was 500 – perhaps. As the U.S. Treasury Department noted, “Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.” How about 1,500 workers? (Or if you are a firm such as Shake Shack, 7,000 workers qualified.)

So much for small businesses being the focus of attention.

Unfortunately, focusing on really small businesses might not have helped.

In a typical year, nearly 900,000 firms fail (called “deaths” in the Bureau of Labor Statistics’ Business Dynamics Report). Most are really small. By trying to save small businesses, the government was funding many firms that would have disappeared anyway.

Then there is the theory that by paying workers to be on private-sector payrolls rather than unemployment rolls, firms would maintain employee contact and could restart efficiently.

But the PPP requires that 75% of the loan funds be spent on employment costs. In addition, firms must return to their February staff levels by June 30 for the entire loan to be forgiven.

Huh? When restarting, it is doubtful most firms will need 75% (or 100%) of their previous workforce. Unless demand recovers immediately, the act requires too many workers to be rehired.

Unfortunately, it could take years before total economic activity recovers to where most companies would want to staff up to their February 2020 level.

The hiring targets prevent firms from operating efficiently. By requiring an unnecessarily high percentage of reemployment, productivity is reduced and costs are increased. The end result is likely to be layoffs after the loan restrictions are met.

Let’s not stop there. The CARES Act included a politically popular element that exacerbates the PPP’s problems: It gave workers an extra $600 a week in unemployment compensation.

For many workers, it pays to stay on unemployment insurance rather than return to less lucrative jobs. But that makes it difficult for firms to meet the headcount requirements. Failing to do so comes with financial penalties. Participating in the PPP is problematic for many small businesses.

Finally, the CARES Act and its successors have failed to adequately help sectors of the economy where jobs may be more stable and needed. There are limited funds for the front-line COVID-19 warriors: state and local governments and health-care providers.

The unwillingness to aid state and local governments will partially offset gains from other programs. The costs of fighting the pandemic and the loss of tax revenues have created massive budget deficits at all levels of government. That will lead to layoffs, reduced public services, and diminished spending on critical needs such as education and infrastructure.

Is it really better for public funds to go to businesses that will likely fail than to local governments to retain teachers, police and firefighters or keep universities open? Which is better for the long-term health of the economy, better roads or more manufacturers making cup holders?

As for the health-care sector, the funding there has paled in comparison to the bounty lavished on the business community. Hospitals are bleeding cash as the costs of fighting the pandemic mount, while income from profit-creating activities has dried up. Specialists have seen elective surgeries collapse and scared patients are causing doctors’ practices to hemorrhage income.

Congress and the administration could have done a lot better and it would not have taken much thought.

Instead of setting a high bar for rehiring, the PPP should set a low minimal level and let management decide how to staff companies. This would cost less while providing the flexibility to manage through the difficult times ahead.

It would also allow firms to scour the unemployment rolls for more skilled workers and hire them as the growing economy requires. That would also increase productivity.

Instead of throwing money at any type of businesses, assistance should go to companies and sectors where the funds would clearly save or create jobs. Recipients should have a good chance to survive and grow once the government funding ends.

Funding should support the current and future private-sector growth centers and those segments, be they public or private, that form a well-rounded society so that growth is distributed and maximized, not concentrated.

As for households, extended unemployment, health-care and food support benefits, one-shot deals and short-term payments, are not needed. It could take years before the unemployment rate returns to a low level. The government should provide extended assistance, not short-term largess.

And if you can spend trillions on businesses, you can spend a trillion on state and local governments. Governors and mayors are leading the fight against COVID-19 and need the same support as businesses and households.

We need to start spending money in ways that support and foster growth. The CARES Act and its successors have been throwing cash against the wall with the hope that some stick. That is not a plan.