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Next Time, Skip The Middleman

President Donald Trump's hands, folded, next to the signed version of the government's coronavirus relief law, the CARES Act.
President Donald Trump signs the CARES Act, March 27, 2020. Photo by Shealah Craighead, courtesy The White House.

Tens of millions of Americans have received direct deposits of their much-longed-for federal stimulus payments of up to $1,200. Millions more can look forward to getting their checks in the mail as the government’s presses begin rolling this week.

It may not be perfect, but it is a much better performance than we have seen thus far in two other prominent components of the coronavirus relief legislation that President Trump signed on March 27. The $350 billion Paycheck Protection Program element, which offered forgivable loans of up to $10 million to businesses with 500 or fewer employees (higher limits were available to restaurants and hotels), had notable trouble opening for business. When it did open, the program was swamped with applications that exhausted its appropriation in less than two weeks. This has left hundreds of thousands, if not millions, of business owners in limbo as they wait for Congress to agree on a financial package that would reload the fiscal bazooka. The deal currently under discussion would devote another $300 billion to the program.

The relief package known as the CARES Act also promised a federally funded boost of $600 per week in unemployment benefits, while expanding unemployment coverage to millions of self-employed contractors and “gig” workers who do not ordinarily qualify under state-run unemployment insurance rules. This money must seem heaven-sent to many of the 20 million or so workers who have lost their incomes amid the national coronavirus shutdown. Or the money would seem heaven-sent, if these workers could get to it.

Although the price to Uncle Sam of these unemployment benefits was estimated at $250 billion, there is no actual ceiling on the amount that the program can grant to the staggering number of claimants. Many traditional workers are already receiving the enhanced benefit, which will extend state-funded benefits by 13 weeks (to a maximum of 39 weeks in most states) and pay the $600 weekly federally funded bonus through July 31. But self-employed individuals have had to wait. States are scrambling to put new platforms in place to bring these workers into the unemployment system, a necessary step before they can collect benefits. Connecticut and Massachusetts, for example, have told self-employed residents to wait until April 30 before applying for benefits, which the states will ultimately pay retroactively.

All these measures are well-intentioned. Their dual goal is to tide us and our fellow citizens over until the pandemic crisis ends (or at least until it is under control) and to preserve the formerly healthy businesses that once employed workers so they will have jobs to which they can return when the economy restarts. Coupled with private charities – food banks have been especially critical to some vulnerable populations – and a host of other measures that have been taken at the federal and state levels, such as moratoria on evictions and foreclosures, the federal programs probably will be enough to see almost everyone through the pandemic’s worst economic hardships. But in times of financial and emotional stress, there is no such thing as getting money into the hands of needy people too quickly.

This is why the contrast between the comparatively rapid deployment of the stimulus weapon and the bumpy and delayed rollout of the PPP and unemployment benefits deserves notice. We can learn lessons for the next economic crisis, which probably will not be accompanied by a global pandemic.

One of the more important lessons is that when the government wants to hand out money, the government should do it directly. Middlemen face their own issues and constraints. They also may be subject to post-crisis second-guessing for actions they take hastily but in good faith to meet the demands of an emergency.

The two federal agencies that are in the business of distributing large sums of cash to ordinary Americans, and of verifying recipients’ eligibility for that cash, are the Internal Revenue Service and the Social Security Administration. The IRS distributes millions of tax refunds every year. It already had a large database of recipients’ bank account details for direct deposit. The Service also had access to the 2018 or 2019 tax returns that it needed to determine income-based eligibility for the $1,200 basic stimulus payment, along with another $500 each for qualifying dependents.

Reprogramming the IRS’s antiquated computer systems is no small feat, but because Congress likes to make frequent changes to the tax laws, the process is well practiced. The first electronic fund transfers arrived in the days surrounding April 15, the traditional tax deadline (pushed back to July 15 this year due to the pandemic’s disruptions).

Most of the challenges involve situations where the IRS did not have all the necessary data. I know some Social Security recipients who did not get the money right away, most likely because they do not file tax returns or do not collect refunds. The IRS thus did not have in-house access to their banking data. It needed to get those details from Social Security before it could send the cash. Many lower-income Americans do not file tax returns either. The IRS had to set up a separate system for them to identify themselves and attest to their eligibility, and to provide information on where to send the money.

I have also encountered situations in which taxpayers who have not yet filed their 2019 returns owed money with their 2018 returns. They paid those balances electronically, but it appears the IRS did not capture those banking details, and so could not use the information for electronic payments. These people will receive checks in the mail instead. If it happens that taxpayers have moved from the address that was on their 2018 tax returns, those checks will have to be forwarded. Other than filing a 2019 return, there is no mechanism to provide the IRS with updated address and banking details. I expect these individuals will not see their money for some time. But these are relatively rare exceptions to a generally efficient process.

The Paycheck Protection Program, in contrast, was notoriously inefficient. Banks and other private lenders were to issue loans of up to $10 million per qualifying business, with a 100% guarantee by the Small Business Administration. The program launched on April 3, a quick one-week interval after the coronavirus aid legislation passed, but the PPP was not ready for prime time. Crucial regulatory details were not issued until mere hours before the SBA opened its window. Further – sometimes contradictory – guidance continued to arrive until the initial $349 billion appropriation was almost exhausted. In all, the SBA reported that it issued more than 1.6 million loans, meaning an average-size loan was about $200,000.

Most of the lenders who processed these loans made them available only to their preexisting customers, whose details were easier to vet. This was understandable. Although the rules allowed lenders to take applicants’ assertions mainly at face value, many of these institutions found after the 2008-09 financial crisis that they were retroactively held accountable for failing to exercise proper due diligence. But this process left out small businesses who did not have the right banking relationships with the right lenders, or who could not gather necessary details quickly enough to get an early place in line.

The amount to be forgiven will likewise depend on how much of their labor force the recipient businesses employ, and pay, in the eight weeks after receiving the loan. This is a problem with the program design, because many of these businesses cannot operate during this period due to state shutdown and social-distancing orders. Many others will be able to operate in the coming weeks only at a greatly reduced capacity.

It would have been more effective to have the IRS disburse cash to the businesses under program terms that would spell out in advance the requirements for forgiveness or loan repayment. Businesses could then provide data supporting their forgiveness claims directly to the IRS along with their 2020 tax returns, which presumably they will prepare in a relatively calm postcrisis tax season next year.

Working directly with the IRS would have made similar sense – or even more – for self-employed gig workers. If those workers are filing honest and accurate tax returns, the IRS already knows who they are and how much they made in prepandemic times. This information was completely irrelevant to and outside the field of view of the state unemployment agencies, which must now gather and vet it to determine eligibility for a federally funded benefit. To their credit, the states have accepted this burden, and most are incurring large costs to cope with it. But it was not necessary.

Chalk it up to the fog of war. Congress and the administration were dealing with all sorts of issues at the height of the pandemic shutdowns in March. At that time, the dominant narrative was that social distancing would “flatten the curve,” but nobody could be certain of how soon it might work or how quickly things might get back to something resembling normal. We still don’t know, in fact, although we know we are closer than we were on March 27.

In all the confusion and urgency, lawmakers from opposing parties, who seldom agree on much of anything, agreed to a massive economic relief program. They decided to use mechanisms that seemed familiar to deliver it. Legislators did not believe they had the luxury of time to conduct the usual hearings and deliberation, or even to consult many of the ever-present lobbyists and trade groups that could have warned them about some of the pitfalls they were marching toward. Everyone has stepped up to make the best of things.

So this is not meant as a criticism or critique of the places where the process has been imperfect, as imperfect as it has been. It is only a quick observation that we can learn from this experience to do better next time.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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