The government shouldn’t try to save all businesses during this crisis (opinion)

As brutally Darwinian as it might sound, the cleansing effect of recessions will cause inefficient firms to fail, likely at a higher rate than they do during normal times. While preventing a wave of bankruptcies is important, artificially propping up companies that were in trouble to begin with will deprive sounder companies access to resources and hurt the economy as a whole.

The “too big to fail” argument made during the Great Recession is likely to be made again, especially using job losses as a reason for bailouts. However, it would be more effective to directly address the job losses that may result from the failure of distressed firms. Providing assistance to affected families and bolstering unemployment insurance, as the current relief package does, could be even more crucial. Subsidies for market-relevant training of displaced workers so they could move to other sectors and occupations could also help.

Small businesses have been severely affected by stay-at-home restrictions. According to an analysis of small business transactions by JPMorgan Chase Institute, half of all small businesses can handle less than a month of cash outflows if there were no inflows, and a quarter of them only 13 days. The situation is worse for labor-intensive businesses, such as restaurants, retail and personal services, which have been hit hard. Help given to such businesses is less likely to attract the type of backlash as providing help to large companies, since the median income for self-employed business owners is only around $50,000. Moreover, helping small businesses that generate over 40% of US economic activity and serve as crucial links in supply chains could help the economy recover. It is important to remember that many small businesses, especially startups, fail every year even under normal conditions. This is a natural and necessary part of the creative destruction that keeps the economy vibrant.