The single best thing Congress can do to stanch economic bleeding is to enact a temporary national moratorium on small business debt collections.
Small businesses are already laying off employees in response to the drop in demand because of the coronavirus. These layoffs risk sending the economy into a downward spiral of decreased demand, defaults and further layoffs within weeks or even days. To limit the damage, small businesses need help now.
Many of the stimulus programs being considered by Congress are important and necessary. However, it could be months before these lifelines reach businesses. It will take Congress time to finalize the terms of any rescue package. Then, it will take time to build the administrative infrastructure for any new federal loan or reimbursement program, and even more time to process loan applications or reimbursement claims.
We will be lucky if most small businesses see any assistance in less than two months. That is time they — and their employees — do not have.
Fortunately, there is a way to help them immediately: a national debt collection moratorium. The single best thing Congress can do to stanch economic bleeding is to enact as stand-alone legislation a national moratorium on collections against small businesses.
This would include a freeze on foreclosures, evictions, repossessions, utility disconnects, garnishments, default judgments and concessions of judgments, administrative offsets and negative credit reporting. The best way forward, in other words, is a temporary, nationwide suspension of debt payments for small businesses.
Why this relief in particular? According to a recent survey by the Federal Reserve banks, 70 percent of small employers have outstanding debt. The only way businesses can maintain employment is if they have some cushion against these coming obligations.
A national collection freeze is an economic stimulus measure: It has the same effect as immediately injecting cash into the economy in that it allows businesses to shift funds from debt service payments to other pressing needs. Instead of paying mortgages, rent and utilities, small businesses can shift their cash to keeping people employed.
What’s more, unlike any other proposal, a national collection moratorium is immediately effective and requires no upfront bureaucracy that inevitably slows delivery of relief. There is no better way to inject a large amount of cash into small businesses so quickly.
To be clear, a moratorium is not debt cancellation. It is a temporary forbearance. Small businesses will eventually need to repay their obligations. They may need further assistance to do so, but that can be addressed after this most immediate phase of the crisis has passed.
Likewise, creditors and landlords will be affected by a moratorium, which would force them to float small businesses in the short term. Larger lenders may be less likely to cut jobs than small business borrowers, but they should also be compensated as the crisis abates. Congress can do that in subsequent recovery bills, perhaps through tax expenditures or direct assistance.
This is well within Congress’s power to regulate interstate commerce. Moreover, there is ample precedent for this kind of relief. There are numerous federal laws on the books limiting or delaying wage garnishment, collection actions against service members and foreclosures.
Similar policies have been enacted in the past week, or are now being considered, in New York, Kentucky, Florida and California. The Trump administration’s Department of Housing and Urban Development and the Federal Housing Finance Administration, the conservator of Fannie Mae and Freddie Mac, have also enacted foreclosure and eviction moratoriums. A uniform, national moratorium on debt collections can help stem a full-blown crisis.
This is not a permanent fix to the economic crisis at hand, and it may have broader consequences worth considering, such as in real estate markets. We should recognize that it will not be enough to ensure all small businesses survive in the short term.
Without this relief, though, we risk a cascade of small business defaults, sending a shock wave through markets and the economy. And if small businesses go under today, they will not be there to provide jobs and services when the quarantines end.
By Adam J. Levitin and