Lessons learned from support to business during COVID-19
RECESSION REMEDIES

Lessons learned from
support to business
during COVID-19

April 27, 2022
Illustration of watering can and a cash register

The United States responded to the recession caused by the COVID-19 pandemic with massive and unprecedented support for businesses. New federal business subsidies over the period 2020Q2–2021Q1, including the Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL) advances, and targeted aid for sectors such as airlines and restaurants, totaled $600 billion, or about 2.7 percent of potential GDP, while expanded EIDL added an additional $200 billion of support. The Federal Reserve authorized purchases of up to $750 billion in corporate bonds through the newly created Corporate Credit Facilities (CCFs) and up to $600 billion in long-term, low interest rate loans to midsize corporations through the new Main Street Lending Program (MSLP).

It is important to try to isolate the role for and effectiveness of direct government support for businesses from the COVID-19 recession circumstances. Both the overall macroeconomy and business survival fared much better during the pandemic than initially feared or historical experience would have predicted. Videoconferencing technologies, testing protocols, and the quick development of vaccines meant that many businesses were able to partially or fully reopen sooner than anticipated. These factors, in addition to the policy response, created a quick economic rebound which allowed businesses to face short-term cash flow shortfalls rather than fundamental insolvency.

Evidence on Support to Business

Lessons learned from support to business during COVID-19

The variety of policy supports enacted during the COVID-19 recession as well as the unusual course of a lockdown-driven recession pose serious confounders to concluding a causal link between the business aid programs and the economic trajectory. The speed at which support programs were deployed during the COVID-19 pandemic was admirable. However, given the rapid rollout, it is not surprising that some of the programs were not well-designed to achieve maximum impact. Policymakers should not automatically interpret the rapid recovery from the pandemic as evidence that business aid programs have strong economic benefits; policymakers should not blindly re-deploy the 2020 tool kit.

Both the overall macroeconomy and business survival fared much better during the pandemic than initially feared or historical experience would have predicted.

Many careful studies found that the programs meant to support business and employment had relatively small effects, suggesting that other factors including the nature of recovery from a temporary lockdown and general support for households likely played a more important role. There may be circumstances in which small business lending programs like the EIDL or bond market stabilization programs like the CCFs could prove useful—for instance, in cases in which other support for households is less generous—but they should be judiciously deployed.

Support for small businesses, like the PPP, could have been restricted to significantly smaller firms. For instance, the employment cap for program eligibility could have been set at 50 or 100 employees, instead of 500, without adversely affecting the program’s overall impact. Support for large firms, such as publicly traded airlines, should be treated skeptically because these firms have access to many forms of financing and can be efficiently processed by the bankruptcy system. While the Federal Reserve clearly can support banks and corporate credit markets, whether it should do so involves careful consideration of the reason for the disruption in credit markets.



For more information or to speak with the authors, contact:

Marie Wilken

202-540-7738

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About the Authors

Gabriel Chodorow-Reich

Gabriel Chodorow-Reich

Associate Professor of Economics – Harvard University
Ben Iverson

Ben Iverson

Associate Professor of Finance – Marriott School of Business, Brigham Young University
Adi Sunderam

Adi Sunderam

Willard Prescott Smith Professor of Corporate Finance – Harvard Business School