MNI INTERVIEW:US PPP Props Up Zombie Firms-Jackson Hole Author

The U.S. transition to a post-coronavirus economy is stifled by the SBA's Paycheck Protection Program that shelters firms with little long-term viability, the author of a paper presented at the Fed's Jackson Hole conference Friday told MNI.

"Wishing for things to go back to the way they were in February is not necessarily the greatest idea and policies that enable the economy to conduct that shift more or less smoothly would be beneficial," Jose Maria Barrero of the Instituto Tecnológico Autónomo de México said in an interview. One better option is expanding longer-term business loans at zero interest, like the Small Business Administration's EIDL loans.

"We criticize one element of PPP in that it tries to save jobs even in enterprises that don't have a long-run future," Barrero said, referring to a forthcoming paper with colleagues Nick Bloom and Steven Davis. Between 30% and 40% of jobs lost since March likely aren't coming back, according to their paper for a Brookings conference.

DAMP STIMULUS

But according to his paper with Nick Bloom presented at Jackson Hole, even another fiscal package will be blunted by the uncertainty still facing the economy's future. The uncertainty could have an impact between 2% to 4% of GDP, strongly reducing investment, hiring and durable goods purchases.

"A lot more clarity on policy would be helpful and making sure left tail-risks are off the table would be helpful," he said. "To the extent that firms and consumers are clearer on what the policy objectives are and what the policies are going to be then they are more likely to make the expenditures and investments that they need to make."

The distribution of expectations in firm surveys have widened and are noticeably deeper for "catastrophic" scenarios such as having to close completely, so policies that can potentially help blunt these risks would be beneficial, he said.

The paper "Economic Uncertainty and the Recovery," uses newspaper articles, forecaster disagreements, and firm surveys that suggest surging uncertainty. Exacerbating the situation is the increased risk premium for investing and the increased value of delaying investing and hiring.

IMPEDING HIRES

Record high uncertainty also incentivizes hiring part-time rather than full-time employees. "They can easily lay-off these employees if conditions deteriorate. As such, the extremely high levels of pandemic uncertainty may lead to a rise in the share of part-time hiring."

And the coronavirus has accelerated shifts in the structure of the economy such as working from home, Barrero said, and that too "is impeding firm hiring."