Coronavirus

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

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

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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.

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  1. When I first saw this, probably as a Café Hayek link to Arnold Kling’s blog, it struck me as genius for its simplicity and flexibility and accountability. I’m sure it would be more than a few lines of code, and then there’s code reviews and QA and all the other modern bureaucracy, but it is dead simple.

    I’d nominate Arnold Kling for a Nobel in economics for this, and Veronique de Rugy if that’s proper; I don’t know how much each contributed.

    But of course it’s way too devoid of government control to ever be implemented.

    1. Would have worked, but that ship has sailed. Possibly next time.

      As is, I see congress taking steps to nix a fury of lawsuits over businesses that were forced to close, which also gives ammunition to lefts claims only corps were bailed out and the hypocrisy on the right of being fiscally responsible.

      And they’re right.

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    2. Is this satire?

      Lol…as if the government could do this, and not later be forced to forgive all the new debt owed by companies too big to fail and let the debt go to the taxpayers, while letting the little people just file bankruptcy.

      Why not just pass a law that everyone can just make everyone give whatever needy people need to have?

      What could go wrong?

  2. This really doesn’t seem to do anything, though.

    A credit line of 2 months of income for businesses that have been shut for 2+ months? And whose income might very well be only 1/3 what it is for the next year because of occupancy restrictions?

    1. Nope, it works fine.

      If a restaurant took in $100,000 a month, that would be its deposits, and its credit line; if the restaurant has no business during the lockdown, they could borrow the full amount and pay staff as normal; staff would have their own credit lines to make up for lost tips over what they got in paychecks, and not need to borrow their full credit line. Or the restaurant could cut what it pays staff and borrow less, and staff could borrow the full amount; and if unemployment kicked in, staff could borrow less, the restaurant could borrow less. Everything works just peachy.

      1. The average restaurant in my neighborhood more than doubles in capacity from Jan. to Jun.

        The business owner might reasonably assess and apply for a loan in Jan. for the business they thought they could expect in June and make a case to a loan officer (who would likely want to see finances going back a year or more), but no taxpayer reasonably could and, if you put them on the hook for it, would (or should).

        1. I’m not sure why a taxpayer engaged in seasonal employment wouldn’t be able to show their earnings for last year May/June to justify a loan in that amount, as opposed to Jan/Feb

          1. I meant all taxpayers, the people backing the loans. And you read:

            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.

            Right?

            I didn’t make the rules, I’m just trying to interpret the nonsense.

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    2. For every complex problem there is an answer that is clear, simple, and wrong.

      H. L. Mencken

      There are going to (need to) be exceptions for businesses like roofers, pavers, curbside cafes, pool and outdoor entertainment venues, resort locations, etc., etc.

      Businesses who’s income in Jan. and Feb. will amount to nothing more than an out-of-pocekt loan for the average person and who’s lost revenue in Apr-Jun. (as well as going forward after Jun.) is going to be potentially orders of magnitude larger than what they can borrow.

      It’s better than the PPP, but not by leaps and bounds, and is still far from perfect.

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

    And when they default on their loans, we folks who were fiscally prudent get to pay them off through taxes.

    Thanks.

    1. Exactly.

      She says “most will repay it, especially if it’s paired with strong incentives to repay”

      That’s some real hand-waving.

      1. This is how the US stays on the trajectory of giving the Fed power to print money.

  5. Is the loan at a rate below my existing mortgage? I don’t mind getting a mortgage subsidy.

  6. “Implementing this policy requires only that banks write a few lines of computer code.”

    And the internet is made up of a bunch of tubes.
    I am constantly amazed how an entire field made up of just ones and zeros can be so complicated, and so misunderstood.

    1. I can’t recall how many times I’ve heard “it only requires a few lines of code” from those who don’t understand the system.

    2. and so misunderstood.

      It’s easy when you realize most of the ones doing the understanding are actually zeroes.

  7. 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.

    So sports organizations, outdoor supply and clothing stores, curbside restaurants, and other seasonal businesses who’s income in the winter months *consumes* their spring and summer income will still be fucked.

  8. Because government-guaranteed debt is so awesome!

    Some of us remember the awesomeness of government loan guarantees from 2008.

    But apparently some of us don’t.

  9. Orrrrr, we can just open the frick up full stop.

    It’s all a sick joke now.

  10. One follow-on benefit, as mentioned, is that there’s no need for oversight from the government.

    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.

    In the government’s eyes those would be seen as bugs, not features. No oversight from the government also means no way to rig the game to benefit cronies. No opportunity for politicians to score cheap, easy political points by requiring aid to go to certain populations means no opportunity to grandstand and play identity politics.

    This may be a nice idea but it’ll never happen.

  11. ha ha money printer go brrrrrr

  12. whatever happened to the dude who said “fuck you, cut spending.” every time?

    1. *Stares into the distance while pondering the futility of libertarianism.*

  13. Rule of Peace: Don’t initiate, or threaten to use, violence to achieve personal, social or political goals! More simply – Don’t hit me or take my stuff!

    This most basic principle of personal freedom seems to be lost on De Rugy and, more and more, on Reason.com editors. Moral principles are nearly non existent in our culture now. It is all expediency and compromise. This is expected from the main stream academics, ‘scientists’, social commentators, philosophers and certainly politicians. But what is Reason’s raison d’etre if not to educate their readers on what is basically required to have individual freedom. Sorry, Veronique, but your plan is still enforced redistribution at the point of a gun. Perhaps, the Huffington Post would be a better fit for your ideas.

  14. Would this be like government guaranteed student loans, where the “guarantee” is to the lender that the borrower will never be allowed to discharge the debt in bankruptcy? Very fiscally responsible.

  15. “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.”
    So we let the govt see our personal checking accounts to get a loan based on how much I’ve deposited in Jan Feb? I really don’t want the govt looking at my accounts at all, but if I did Nov Dec take in is almost 10 fold. Many industries are in similar situy

  16. “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.”
    So we let the govt see our personal checking accounts to get a loan based on how much I’ve deposited in Jan Feb? I really don’t want the govt looking at my accounts at all, but if I did Nov Dec take in is almost 10 fold. Many industries are in similar situations.

  17. I very interesting idea, but what about President Trump? Would he sign on to a bill where his administration could not direct the money to his big donors or business friends?

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