I hate to say I told you so, but … wait, I love to say I told you so. So did Lindsay Graham, Tim Scott, Rick Scott, and Ben Sasse, for that matter, about a time bomb in the CARES Act that is about to blow up in the faces of restaurant owners. They want Congress to pass a special version of the Paycheck Protection Program for them and other similar businesses, thanks to the “massive drafting error” that made unemployment pay better than most entry-level jobs for the next four months:
Restaurants say their industry needs its own targeted recovery fund because the bailout package Congress passed last month is making it more attractive for their staff to draw unemployment benefits than to continue working.
The new Paycheck Protection Program waives repayment of small business loans if the borrower uses 75 percent of the money to maintain payroll, a measure intended to reduce layoffs. But with the expanded unemployment benefits included in the stimulus bill, some workers can as much as double their weekly checks if they stay unemployed. …
“If the intention was to get people back to work, they’re not doing it,” said Tom Colicchio, the renowned restaurateur and “Top Chef” judge, who has been an advocate for small restaurants during the pandemic. “They’re not going to come back to work because unemployment is too attractive.”
Here’s how Congress trapped restaurants and other casual-entertainment businesses. PPP loans become entirely forgivable — meaning they become grants rather than loans — if restaurants use 75% or more of the funds on payroll. One has to have employees to have a payroll, however, and Congress’ expanded unemployment benefits makes it more lucrative to quit, at least for the next three months. Rather than require states to pay 100% of salaries, which was the original conception of expanded benefits, the bill funds lump-sum additions to the normal level of unemployment which can take a $15/hour job and turn it into the equivalent of a $24/hour vacation:
Unemployment benefits vary by state, but in 2019, before the coronavirus crisis, the average weekly benefit nationwide was $370. A $600 sweetener that the stimulus bill added, on a temporary basis, to weekly unemployment checks raises the average weekly benefit to $970, an amount that approximates average weekly pay nationwide and is nearly double average weekly pay within the food industry: about $500 nationwide for full-time workers.
Who could have predicted that this would incentivize workers to quit their jobs? Anyone who understands economics, for one, but specifically the aforementioned Graham, Scott, Scott, and Sasse. At the time, they called it a “massive drafting error” at best:
“If this is not a drafting error then this is the worst idea I’ve seen in a long time,” Graham said. Under the deal worked out with Democrats, jobless individuals would receive $600 a week for four months on top of their regular unemployment compensation, which varies by state. In South Carolina, the maximum benefit is $326 per week, so for four months an individual could get paid the equivalent of about $49,000 a year or $24 an hour, Graham said.
“I think we’ve done absolutely the worst thing we can do to stabilize the economy. We’ve incentivized people not to go back to work,” he said. “Every employer in the state has to compete with a $24 an hour minimum wage now I guess.”
As I wrote at the time: legislate in haste, repent at leisure. Haste doesn’t explain this entirely, though; even after the quartet pointed out the obvious perverse incentive and easily predicted its impact, Senate Democrats refused to change the language. Bernie Sanders declared that he would personally derail the bill and force a lengthy debate over the CARES Act if that language got changed, rather than get quick passage of relief to Americans. The four Senate Republicans were allowed to propose an amendment, which got shot down before the Senate voted 96-0 to pass the bill as is.
And now, we find out that we were indeed right all along. Restaurant owners want to use PPP money to pay their employees, but the government wants to pay them more to be unemployed. That leaves restaurant owners in a financial trap, where they either have to pay way above normal market rates for labor in order to keep from having to pay back those loans, or not take any money and go under. If they choose the former, they will have to pass those costs along to their customers, many of whom are now unemployed too and won’t be able to afford it.
This is what comes from government distortion of markets. The need to distort markets by shutting down commerce in a pandemic is unfortunate but necessary as a short-term measure. This clause in the unemployment benefits, however, was entirely unnecessary and its outcome was entirely foreseeable. This was social engineering dressed up as relief, and it’s going to destroy a lot of businesses over the next couple of months. Anyone who claims they didn’t know this was precisely what would happen should apply ASAP for a Captain Louis Renault Award … once the casino restaurant has enough staff to reopen, that is.