This week, Congress approved $310 billion to add to the initial $349 billion Paycheck Protection Program (PPP). The program provides small businesses with forgivable loans to keep workers employed, but the COVID-19 pandemic's effect on job losses continues unabated.
Over four million Americans filed for jobless claims for the week ending April 18, bringing the total number of workers seeking unemployment aid in the last five weeks to 26 million and wiping out a decade of job gains. Some projections point to an unemployment rate as high as 30% in the second quarter of 2020.
Reports suggest the Congress is considering a third round of stimulus to bolster the PPP, but it is clear the program, while well-intentioned, is not achieving its objective of stopping job losses. The U.S. should immediately step in to guarantee capped paychecks to all employees for businesses of all sizes.
Guaranteed paychecks are easier to administer than forgivable loans and will directly address the unprecedented job losses caused by the pandemic. Estimates suggest a guaranteed paycheck program with a salary cap of $100,000 can be implemented for $506 billion over six months and save millions of jobs. Paycheck guarantees have also garnered the support of some Congressional representatives.
To be clear, we are not advocating that social employment policies are good for the nation in general or at all times. In fact, job turnover — and temporary unemployment — is a central feature of the capitalist system: obsolete, less productive, jobs are replaced by more productive ones. This was the case, for example, with the wave of automation and computing in the past few decades. But the current unemployment surge is caused by an unanticipated health crisis, and there is no reason to believe this job reallocation will improve the economy.
The short-term consequences of these job losses are painful. Recently furloughed and unemployed American workers are flocking food banks, leading to lines of up to six miles long in cities such as San Antonio, Las Vegas, and Cleveland. But the long-term effects may be even worse: a deep and permanent dent on America's competitiveness, in particular its innovation edge.
As elegantly summarized by our colleague and Nobel Laureate Paul Romer, the driver of American economic competitiveness in the 20th and 21st centuries has been innovation. Tiny start-ups a few decades ago, innovative companies such as Amazon, Google, Gilead and Genentech have since created enormous wealth and employment while bringing new services and life-saving drugs to the market.
Our research shows that the secret sauce of innovative companies is a highly talented workforce which continuously learns and invents, allowing American companies to stay at the frontier of highly competitive global markets. Other economists emphasize the critical role of teams of innovators, and how disrupting these teams can lead to significant productivity losses, stemming from job-specific investments that disappear with the departing employees. It takes years to train new hires on company-specific processes.
Large corporations may be able to weather this storm, but the inability to retain talent can mean death for many innovative start-ups and small businesses, and permanent burial of the novel ideas they are seeking to bring to the markets. We are witnessing this imminent danger first hand at a program dedicated to accelerating the success of some of the country's most scientifically advanced seed-stage start-ups. Some are contemplating shuttering laboratories and essential facilities currently idle as the result of the lockdown. Letting go of these start-ups' employees to preserve cash and survive will only raise the challenge of restarting research when the economy reopens.
As some economists have noted, governments in countries such as the U.K., Germany and Denmark are covering most of employees' wages through direct payments to employers, thus keeping the employer-employee link alive. By contrast, business owners are finding the PPP's requirements too onerous for the program to be effective.
Although 70 percent of small businesses applied for PPP loans, only a fraction received relief in timely fashion. The program was subject to widespread misuse, with several large companies and hedge funds benefitting from the stimulus. The package excluded a vast majority of unbanked businesses and some businesses are wary of accepting relief, fearing the loans may not be forgiven. And the alternative of helping the unemployed has one major drawback, namely that, once the economy reopens, these workers need to be retrained by their new employers, thus further slowing down the recovery process.
Paycheck guarantees will ensure American employer-employee links are preserved and employees can seamlessly return to their productive tasks as the economy recovers and demand picks up. Unless Congress takes immediate, direct, and vastly expanded action to encourage businesses to retain their employees, we may lose an entire generation of the most promising ideas, and, with it, America's longstanding advantage sustained over the past decades through continuous innovation.
—By Deepak Hegde, associate professor of management and founding director of Endless Frontier Labs at New York University, Stern School of Business, and Luis Cabral, professor and Chair, Department of Economics at New York University, Stern School of Business