Give Individuals and Small Businesses a Government-Backed Line of Credit

An economic response to COVID-19 that's fiscally responsible.


The economy is reopening. Consumer spending increased by almost 18 percent last month, sending the stock market soaring. That's the good news. The bad news is that with no COVID-19 vaccine or cure on the horizon, consumers have not fully resumed their prepandemic activities, and they might not do so for quite a while. There are no silver bullets to help everyone weather this storm. There is, however, a policy that could help the economy—businesses and individuals alike—in a fiscally responsible manner.

That policy is to extend a low-interest rate, government-backed line of credit to everyone with a checking account.

This idea was first designed and introduced by economist Arnold Kling as a much better alternative to the Payroll Protection Program, or the PPP. He and I wrote a policy brief for the Mercatus Center explaining the details of the proposal, which are quite straightforward. Take the amount of prepandemic income that went into every checking account in the country for the months of January and February 2020, and use that amount to determine each business's and person's available line of credit. Implementing this policy requires only that banks write a few lines of computer code.

The beauty of this idea is that the funds go to individuals and businesses without any restrictive terms on what they can use the credit for. This detail is important because it makes implementation simple and flexible, and it eliminates the need for bureaucratic oversight or long and tedious application processes.

It also addresses a problem ignored by other plans to help small businesses: It's easily accessible to sole proprietors—a group that includes freelancers, contractors, and other artisans, who represent 81 percent of all small businesses in America. These sole proprietor firms don't exist as businesses in the eyes of the federal government, which makes it very difficult for them to access programs like the PPP. Extending a line of credit to every individual is key because if everyone pays their bills, it helps the businesses who have issued the bills.

By now I'm sure some of you are wondering why I describe this plan as fiscally responsible. That's because the loan is repayable. The interest rate is low, and people who choose to take this credit have several years to repay their debts. Having to repay the loan means that only those who can't find better ways to come up with the liquidity they need will actually use it.

The plan also gives those who borrow the money total flexibility in terms of whether or when they access the funds. The plan's design means the government does not dictate its conditions, such as requiring that the borrowing business keep their employees. If keeping those employees is good for the business, it will do so, but if not, the business won't be compelled to as a condition for getting the loan.

One follow-on benefit, as mentioned, is that there's no need for oversight from the government. And, of course, the taxpayers' burden will be relatively small because most companies won't use this line of credit—and when they do, most will repay it, especially if it's paired with strong incentives to repay.

Finally, under this system, representatives and senators trying to make a political point by requiring that aid to businesses be conditional on banks extending a certain share of the funds to certain populations will be neutralized. Under this plan, there's no need to demand that farmers or Native American tribes get a certain share of the loans, because everyone has equal access to them.

If we decide to go down this route, which we should, other programs aimed at injecting liquidity to help firms and individuals should not be renewed when they expire or run out of money. That means no extension of PPP, no new individual checks sent out, and no extension of the $600 per week unemployment insurance bonus. Aid under this line-of-credit proposal is versatile, and it creates all the right incentives to encourage businesses to reopen as they see fit in an economy that's still shaken up by the lockdown and by consumers who demand to be protected from the virus in ways they didn't need to be prepandemic.