April Joy Bascos

M224 Reaction Paper on “The impact of COVID-19 on small business outcomes

and expectations” (Bartik et al., 2020)

The paper tackled about the economic impact of COVID-19 to small businesses in
the United States, answering the following objectives: (1) How did SMEs adjusted to
economic disruptions from COVID-19; (2) How long did they expect crisis to last and how do
these expectations affect decisions; and (3) How might alternative policy proposals impact
business and employment resilience. Indeed, COVID-19 did not only affect the public health
system but also caused disruptions within the economy across different sectors and
industries.

The research study is timely and relevant, with data collection conducted during a
critical point wherein progression of the pandemic and government response where
uncertain. True enough that massive dislocation where observed during the early stage of
the crisis. However, the paper provides ample measure and analysis on the extent of the
effect of the pandemic to small firms, SMEs’ forecasting and economic management, and
effectiveness of the financial aids made available to them by the government.

Impact of COVID-19 on business operations and employment were evident since the
beginning of the crisis. Closures among small firms were observed, with reasons cited
mainly on reduction in demand and employee health concerns, rather than supply chain
constraints. Moreover, impact varied among different sectors. Firms with products and
services that require high degree of person-to-person contact and interaction were the most
vulnerable to business closures and mass layoffs. On the other hand, the study found that
financial fragility of firms were significant in determining how long they can sustain the crisis.
Firms having more cash on hand were optimistic to remain open and continue operations
until the end of the year, as compared to those with limited liquidity. Furthermore, the role of
beliefs and expectations of SMEs regarding the duration of COVID-19 crisis affected their
decision-making, with some firms committing possible forecasting mistakes. Nevertheless,
most firms anticipated taking advantage of financial aids despite having reluctance to apply
for funding due to administrative complexity.

Further, the study demonstrated how the small business ecosystem is an

interconnected economy. Results show that financial fragility of many SMEs and length of
the COVID-19 pandemic is directly proportional to how firms are being negatively impacted
by the crisis. Since many firms had little cash available toward the onset of the pandemic,
outcomes such as dramatically cutting of expenses, taking on additional debt, or declaration
of bankruptcy were already expected; much more if the pandemic persists longer for many
months. Thus, from the research sample, 43% of businesses were temporarily closed and
overall employment dropped by 40%, which represents dislocation larger than experienced
since Great Depression and 1918 influenza epidemic. With the unprecedented occurrence of
COVID-19, these firms clearly did not have enough liquidity to meet their regular expenses
and eventually resulting to prevalence of layoffs and shutdowns.

Given the scarcity experienced by the small firms during the pandemic, government
intervention should be meant to promote efficiency and equity. Yet in spite of cash injections
to the economy (e.g. through financial grants and loans) as short-term solution to address
the pressing problems, presence of flow disruptions were cited through assessment of take-
up rates and business resilience effects for loans. Perhaps having overly optimistic impacts,
it was unclear how government aids such as the CARES (Coronavirus Aid, Relief, and
Economic Security) Act will enable America’s SMEs to survive. Instead of making funding
rapidly available, small firms were reluctant to apply for assistance due to the bureaucratic
complexities and seeing the application as too much of a hassle. Therefore, clarity about the
program criterion and a streamlined process are important policy considerations to ensure a
high take-up rate. Loan forgiveness rules are also deemed attractive for SMEs that will
encourage them for funding.

To conclude, financial fragility of many small businesses have caused them as to

how affected they are by the current crisis. Having little cash on hand during the start of the
pandemic have resulted to businesses closures and mass layoffs, absent financial
assistance. Moreover, firms in exposed industries are extremely sensitive and have more
difficulties for them to stay in business, much more if the pandemic exceeds for many more
months. In addition, government intervention can only do so if their loan process are
simplified and SMEs are clarified on how to establish their eligibility. If possible, with loan
forgiveness rules since the end of the crisis is still uncertain. By then, total demand for such
aid may ultimately be even higher under an extended crisis. Lastly, the study concludes that
further work is still needed to understand how interactions between programs may influence
economic outcomes.