Large franchised businesses and well-connected firms have hoovered up much of the capital of the Paycheck Protection Program (PPP) under the CARES Act. Despite its intention as a lifeline to small business, large firms have once again run roughshod over their smaller competitors. Once again, a complicated thicket of rules stood in the way for small business while large firms, armed with highly paid legal and accounting departments, slipped easily through. It’s a continuation of the misunderstanding of the relationship between regulation and power of large entities. Incumbents get what is in effect a moat in the form of paperwork that will easily overwhelm a lean start-up while their size means the costs of the regulation are often little more than a rounding error.
To illustrate, I’d like to talk about my friend Ray. He owns a small gym in Chicago which has been closed due to the stay-at-home order here. As soon as the PPP loans went live, he was trying to apply for one. He submitted his application as soon as he was able, but heard nothing from his bank initially beyond an automated email. He waited a day, then more, then a week. Finally, he went to the branch of his bank where his banker worked and knocked on the window to the man’s office. Since he knew the man personally, he was able to have a conversation outside (6 feet apart). He has not yet heard back on the status of his application, but he was at least able to (finally) get something in. Do you think Shake Shack or the Harvard Endowment had to knock on their banker’s window to get service?
Of course they didn’t. Banks are desperate for customers like that. They have enormous amounts of money to work with. Every minute spent with a Harvard Endowment likely nets as much profit as tens or hundreds of hours with small businesses like Ray’s. Why would a bank jeopardize the relationship they have with a large entity to make sure the application process was ‘fair’ for those applying for the PPP loans? Short answer: they wouldn’t.
It would have been difficult to foresee the obstacles to effectively deploying the money allocated to small business loans under the CARES Act, but that’s precisely the standard to which we need to hold our elected officials. Governing is not about posturing, it’s about creating an environment for your citizens to reach their potential and live relatively secure lives. These times are far from secure, but the federal government is uniquely positioned to cushion the fall that everyone in this country is currently experiencing.
Instead of rolling out a program targeted towards those in industries hardest hit by the pandemic, we over-complicated the response by trying to keep people on the payrolls. We spent more money on big business bailouts than small business lifelines and then big business even managed to finagle its way into the meager scraps left over for the small businesses that form the backbone of our economy.
The worst part is not the death of some businesses, but rather the uneven playing field. ‘Creative destruction,’ or the process by which inefficient or insufficiently productive enterprises are destroyed when they are out-competed by younger, hungrier ones is an essential part of capitalism. If we had bailed out carriage producers when automobiles replaced them, we would have had to wait decades longer before cars became ubiquitous. Small and young firms are often better equipped to handle a rapidly changing landscape because they are lean and able to quickly change direction; instead of providing the opening for a hungrier firm to dart into the openings left by a large business that was caught off-guard after, perhaps, spending effectively all of their cash flow on share buybacks, we have rained money down upon the incumbents while the challengers scrabble for crumbs dropping from the table. What broke capitalism in America? Corporate socialism and rent-seeking.