As the US Congress prepares to replenish its Paycheck Protection Program for small businesses, questions still linger: Do guaranteed loans for small businesses work in the long term? Who wins? Employees? Businesses? Taxpayers?
The answer appears to be yes for all three—with impact lasting years after an event passes, according to recent research based on a survey examining French firms with fewer than 250 employees during the global financial crisis last decade.
Conducted over a seven-year period starting in 2008, the research shows workers at firms who received guaranteed loans enjoyed a more stable career path. The firms themselves also grew stronger, and the French government eventually saved more in unemployment benefits than the program cost, according to the study, Employment Effects of Alleviating Financing Frictions: Worker-level Evidence from a Loan Guarantee Program.
The research was conducted by Boris Vallée, the Torstein Hagen Associate Professor of Business Administration at Harvard Business School, and three colleagues: Thorsten Martin and Julien Sauvagnat of Italy’s Bocconi University and Jean-Nöel Barrot of the HEC Paris School of Management.
How to keep small businesses afloat—and even make sure they eventually thrive—is a critical question as the world economy freezes amid the COVID-19 pandemic. Small businesses employ some 70 percent of the workforce for the 35 countries that make up the Organization for Economic Co-operation and Development, Vallée and colleagues write in the working paper.
"Firms that received loan guarantees, and their employees, enjoyed far more stability than their counterparts."
In the United States, where small businesses account for about 47 percent of private sector employees, according to the Small Business Administration (pdf), Congress is set this week to replenish its Paycheck Protection Program with an additional $320 billion to supplement the federally guaranteed loan and credit program that began April 3, but was quickly used up. The program’s loans and credit lines can cover weeks of payroll, defer payments, and are forgivable if firms use the cash infusion for essentials like rent and to retain most workers.
A catastrophe in France
A dozen years ago, as the Great Recession unfolded, French small businesses also faced catastrophic prospects, or what economists call a shock. To measure the effect of the policy on firms and employees, the researchers compared the outcome between regions with varying generosity in the loan-guarantee program.
Firms that received loan guarantees, and their employees, enjoyed far more stability than their counterparts, the research found. Workers’ incomes from beneficiary firms were significantly higher than those from non-beneficiary firms, and they tended to stay with their 2008 employer more often and for longer, in part because those firms did not shut down.
“Exposure to the program results in a significantly higher likelihood of being employed over the next seven years, which translates into significantly higher accumulated earnings and lower unemployment benefits,” according to the study.
By 2015, the researchers found, workers from beneficiary firms were still earning more than their counterparts. Employees were also “significantly less likely” to have changed employers, the researchers write.
“What was surprising to us was the persistence of the effect—that, even seven years later, there was still a significant difference, whereas the shock itself was one, maybe two, years long,” Vallée says.
Even more surprising: The program had a “net negative” cost for the French government. The loan guarantee program likely prevented the loss of roughly 217,000 jobs over a seven-year period ending in 2015, at a gross cost to the government of about 3,200 euros, or about $3,500, per job.
However, France not only made its money back, but, by 2015, it actually made theoretical gains from avoiding payment of unemployment benefits and by collecting tax and social security payments from the workers who would otherwise have been unemployed.
“To be fair, unemployment insurance is more generous in France than it is in the US,” Vallée says. “So, savings for the government would be lower in the US. But the same forces would still be at play, and since American workers have less protective safety nets overall, including on health care, they might value the increased employment stability even more.”
THE CORONAVIRUS CRISIS
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The current rescue package might end up being more expensive for the American taxpayer, he added, because the guaranteed loans are forgivable under certain conditions.
Researchers used detailed small- and medium-enterprise firm data as well as individual employee information accounting for roughly 4 percent of France’s workforce. Bpifrance, the equivalent of the Small Business Administration in the US, and the French Statistical Office include information tied to individuals like age, gender, and employer through tax returns, and “exhaustive” firm-level data, all scrubbed to ensure privacy.
The average firm in the analysis had 20 employees in 2008 with assets of 3.3 million euros, or about $3.6 million, and was about 18 years old.
Go for the loan
Vallée has simple advice for small businesses now: Apply for the loans.
“For the firm, they should apply and try to get these loans, because our evidence shows that the firm is more likely to survive and more likely to be able to keep its workers,” Vallée says, calling the implications for firms “perfectly unambiguous.”
For employees who work for those firms, it will mean they are more likely to stay employed and in professions where they want to develop a career.
For the government, Vallée recommends, “Go big, as the efficiency of this tool is proven, while staying attentive to crafting the most appropriate design to control costs.”
About the Author
Rachel Layne is a writer based in the Boston area.
[Image: BalkansCat ]
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