The Government’s Misplaced Trust in Big Business
May 29, 2020
By Bharat Ramamurti
In the CARES Act, the government offered different types of financial relief to businesses based on their size. There is a clear trend: the bigger the company, the fewer the requirements to use government aid to help its workers. Recent experience shows that we shouldn’t trust big American corporations to put the interests of their workers first—which means that the government’s hands-off approach to big business threatens to produce more layoffs and slow our economic recovery. There is still time for the agencies implementing the CARES Act to address this problem by subjecting big companies to the same types of rules as their smaller counterparts.
Government aid to small businesses (those with fewer than 500 employees) comes with a powerful financial incentive to pass along that aid to workers. Through the Paycheck Protection Program, the government offers small businesses a loan of up to $10 million at a 1 percent interest rate, but agrees to forgive the loan fully if the company keeps all full-time equivalent employees on payroll for eight weeks and uses at least 75 percent of the relief funds for payroll costs. The program is designed so that the prospect of loan forgiveness pushes small businesses to keep workers employed.
Government relief for mid-sized businesses (those with between 500 and 10,000 employees) also requires those businesses to make an effort to retain their workers, though the rules are less strict than the ones for small businesses. In the CARES Act, Congress recommended—but did not require—that the Treasury and the Federal Reserve (the Fed) set up a lending program for mid-sized businesses that included a requirement that businesses receiving loans retain at least 90 percent of their workforce. The Treasury and the Fed did not follow Congress’s recommendation but did create a program that requires mid-sized businesses to make “commercially reasonable efforts” to retain payroll and also prohibits companies from issuing dividends, repurchasing shares, or boosting executive compensation while repaying the loan and for a year thereafter.
And then there’s government relief for big businesses, which comes with no conditions at all. The Treasury and the Fed have set up multiple taxpayer-backed lending facilities that benefit big businesses, including a facility that will purchase newly issued bonds from big companies. Because the CARES Act only requires the Treasury and the Fed to impose conditions on “direct loans” to companies—not bond purchases—the Treasury and the Fed have the freedom to choose whether to impose conditions on their taxpayer-backed support to these companies.
So far, they have chosen not to impose conditions, which means that hundreds of billions of dollars in government support for big businesses is slated to come with no obligation to retain or rehire workers, as well as no restrictions on dividends, share repurchases, or executive compensation.
The government’s tiered approach places more trust in the companies that least deserve it. In recent years, big American companies have demonstrated that they will take care of shareholders and corporate executives first in good times, while asking workers to suffer first in bad times. Already in this crisis, big corporations like Caterpillar and Levi Strauss have fired thousands of their workers while continuing to issue hundreds of millions of dollars in dividends to shareholders. There’s nothing stopping them from taking government support and doing more of the same.
If the government’s goal is to minimize layoffs and stabilize the economy, its aid to bigger companies should come with the kind of inducements to help workers it included in the aid it provided to smaller companies. The Treasury and the Fed have the discretion under the CARES Act to make this change. If they don’t make these reforms, they should have to explain why we should trust big businesses more than small businesses to do right by their workers.