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Targeted policies to mitigate economic effects of COVID-19 show most promise

December 10, 2020

COVID-19 could affect 3.1 percent of private sector jobs due to business failure among small and medium-size enterprises (SMEs) in 17 different countries (not the U.S.), according to a new working paper from the Federal Reserve Bank of Atlanta. Findings also revealed that the fiscal cost of an intervention that narrowly targets at-risk firms can be modest (0.54 percent of GDP), while non-targeted subsidies can be substantially more expensive (1.82 percent of GDP) to achieve the same level of effectiveness. Without government support, the paper estimates a failure rates of SMEs of nearly 9 percentage points.

In COVID-19 and SME Failures, Pierre Olivier Gourinchas et al. attempt to estimate the impact of the COVID-19 shock on SMEs, which are firms with less than 250 employees. In the European Union, those firms account for 99.8 percent of all employer firms, 65 percent of private sector employment and 54 percent of private sector gross output. The authors note that despite the importance of SMEs, they are vulnerable due to their dependency on debt for financing, especially bank loans. During a crisis like that posed by the pandemic, this dependency and an inability to raise other sources of funds could turn a liquidity shortage into a solvency problem, the authors point out. And if there is a wave of SME failures the efforts to contain the economic consequences of the pandemic will have failed they say.

The authors contend that public support to address these liquidity shortages is essential for a smooth recovery and the paper estimates the impact of various policy proposals on the rate of business failures and quantifies their fiscal costs. While providing properly targeted relief to at-risk firms who are viable and would have survived in the absence of COVID-19 would be extremely efficient, the authors acknowledge that such interventions require “much more granular information than fiscal authorities typically possess.” Other policies considered include waiving financial expenses and firm subsidies.

small business, coronavirus