US policy makers are spending a lot of money trying to keep the economy afloat during the COVID-19 pandemic. What’s the best use of those funds? Chicago Booth’s Constantine Yannelis says the focus should be on making sure small businesses have access to liquidity, so that they can resume normal operation once the health crisis is past.
There are a lot of similarities between the problems facing businesses and consumers. Essentially, this is a crisis of liquidity.
You have a lot of businesses that, three or four weeks ago, were profitable. They were doing well, they had no problems, and they were just hit with this exogenous shock from the sky. This virus came out of nowhere, and suddenly they had to close, either by government order or because consumers didn’t want to show up because they were afraid of being infected.
Hopefully there will be treatment or immunity to this virus over some period of time, and those businesses can go back to being very successful businesses. So really what these businesses need at the moment is liquidity. Policy should be focused on providing liquidity to businesses during this time through things like loan guarantees, which would allow businesses that will be generating revenue in the future to access credit when lenders are concerned about knowing which businesses will survive and which businesses won’t.
The response of lenders depends on the policy response, too. Obviously, lenders don’t want to extend funds to businesses that may not exist in six months. So if there’s concern that these businesses will go under and there won’t be a policy response, that will affect their willingness to lend and provide liquidity to these businesses in a time of need.
So if there’s really one thing that policy makers should be focusing on, it’s making sure that small businesses have access to liquidity.