This week marks 50 days since Congress passed and President Trump signed the landmark CARES Act, the largest health and economic mobilization bill in the nation’s history. The White House negotiator and main GOP lead on the bill and its implementation has been Treasury Secretary Steven Mnuchin. Now that we have had some time to see how the CARES Act has done, it’s not too early to give Mnuchin some midterm marks.
Unfortunately, you’d have to grade the Treasury Secretary very poorly on a number of fronts. A “gentleman’s C” might be overly generous.
Look no further than the Paycheck Protection Program. Conceptually brilliant, the PPP is the brainchild of American Enterprise Institute economists Michael Strain and Glenn Hubbard. The idea is that smaller businesses (those with fewer than 500 employees) would receive a Small Business Administration loan equal to about 10 weeks of payroll costs. In the two months after receiving the loan, if the proceeds were used to pay employee wages and benefits, rent, etc., the loan would be forgiven. To the extent any unforgiven loan amount remained, it would be paid back at a low rate of interest to the private sector bank that partnered with SBA to issue the loan.
Normally, Republicans would not entertain such an idea. The government giving businesses money to make payroll looks like a bailout. But the COVID-19 shutdowns effectively meant a kind of regulatory taking of small-business profits. Most in the congressional GOP were convinced that it was only fair that the government reimburse smaller employers for this taking.
Strain and Hubbard argued from the beginning that the PPP would result in more than $1 trillion in loans. Yet Mnuchin foolishly negotiated with House Speaker Nancy Pelosi for about a third of that amount in the initial CARES funding tranche.
This decision set into motion a series of events that have crippled the PPP.
The skimpy size of initial PPP funding invited a sort of “run on the bank” sharp elbows effect, like the famous scene from It’s a Wonderful Life. Lenders struggling to stand up lending platforms that synced up with the creaky SBA software found themselves overwhelmed with panicked requests for the loans. When Bank of America announced it was triaging its applicants and taking existing business lending customers first, it was disparaged for doing so by Sen. Marco Rubio and others.
Mnuchin then used his considerable regulatory authority to constrain PPP demand further. He established an arbitrary “75/25” rule that hinged PPP loan forgiveness on at least 75% of PPP proceeds being paid out in salary and benefits. Small-business owners with high rent found this untenable, and many have no doubt turned down the loan for that reason (handing off many of their employees to the unemployment rolls, which pay more than their old jobs did — the result of another bad negotiation between Mnuchin and Pelosi).
The Treasury and SBA rules also set up very strict “affiliation” rules, which made it difficult for startup and other companies owned by private equity firms to qualify for these loans even if they had fewer than 500 employees. This, despite a letter from Pelosi to Mnuchin asking him to apply the rules broadly and liberally so that as many of these firms as possible could qualify for PPP loans.
The IRS, under the direction of Mnuchin, has said that any wages paid using forgiven PPP loan proceeds are not eligible to be deductible business expenses, something that congressional tax leaders from both parties vociferously have insisted is contrary to congressional intent.
When Congress wrote the PPP language, it specifically excluded franchises, hotels, and restaurant chains from the 500 employee test, since the food and hospitality industries were especially hard hit by the virus. Shake Shack, Ruth’s Chris Steak House, and other large chains applied for PPP loans but found themselves publicly shamed into returning the money since they were taking it away from more “deserving” smaller firms. Mnuchin went so far as to suggest that bigger companies apologize for applying at all. He reminded PPP applicants that they had to attest to a need for the loan and gave unnamed “undeserving” companies a grace period to return loans.
To further scare companies off from PPP loans, Mnuchin announced that any loan of $2 million or more would be audited by the Treasury Department and the SBA before being forgiven.
All these actions were not enough, as PPP loan funding ran out within weeks of the CARES Act’s passage. Mnuchin asked Congress for another $320 billion in PPP loan money — still not nearly enough. As could have been predicted from the beginning, Pelosi was not going to give this away for free and dragged out negotiations for more than a week. Eventually, she successfully extracted a second ransom (on top of her original CARES Act demands) for a now only two-thirds funded PPP program. Most predicted that she would be back for a third ransom within days since Mnuchin was kind enough to fill up the PPP car tank a gallon at a time.
That hasn’t happened. Weeks later, about half of the second tranche of PPP money remains. Mnuchin did such a good job scaring away employers, reading them out of PPP loan eligibility despite clear congressional intent, and confusing lenders and borrowers alike, that PPP demand has slowed to a trickle. The program once envisioned as a grand “keep America working” experiment, ended up only halfway successful in doing so.
Might I suggest that employers who have taken PPP loans (which, after all, are used to fund the paychecks and benefits of workers, not owners’ pockets) have nothing to be ashamed of? Congress wanted them to have this money, they have used it to keep their employees paid during the crisis, and they should not be intimidated by Mnuchin’s bluster. Let’s hope the next 50 days of his management here is a lot better than his first 50.
Ryan Ellis (@RyanLEllis) is president of the Center for a Free Economy.
