What the Shake Shack Debacle Tells Us About the Flawed Small-Business Bailout

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Last week, the federal government’s major bailout for ailing small businesses ran out of funding—but not before dozens of public companies, including some large restaurant chains like Potbelly and steakhouse operator Ruth’s Hospitality Group, managed to tap it for millions of dollars in loans.

Unsurprisingly, this has been a swelling source of outrage, especially among the many small-business owners who have found themselves shut out of the relief effort either because they didn’t apply swiftly enough or their bank was slow processing paperwork. Now, one big name has decided to give the money back. On Sunday, Shake Shack—which is still open and serving takeout and delivery across the country—announced that it would return the $10 million it received through the Paycheck Protection Program “so that those restaurants who need it most can get it now.”

The Republican reaction to this decision has been a bit odd. Treasury Secretary Steve Mnuchin tweeted that he was “glad” the company was returning its loan. Meanwhile, Florida Sen. Rick Scott said he was “concerned that many businesses with thousands of employees have found loopholes to qualify for these loans meant for small businesses.” Based on these responses, you might think that chains like Shake Shack had somehow unfairly gamed the system when, in fact, the Paycheck Protection Program was written specifically to help them avoid laying off staff. The actual problem is that Congress simply didn’t put enough money into the rescue effort, so help for big chains has so far come at the expense of mom and pop shops.

The Paycheck Protection Program has usually been described as a “small businesses” rescue because most companies are only eligible if they have fewer than 500 employees, or if they qualify as a small business under the established industry-by-industry size standards used for other federal programs (which in sectors like mining and manufacturing, can include firms with up to 1,500 workers).¹ But Congress added one big exception: Restaurants and hotel chains can apply as long as they have fewer than 500 employees per location. This was an intentional carve-out, not a drafting error. The law is written to help most of the hospitality industry, including the Shake Shacks of the world, except for behemoths with large corporate offices such as McDonald’s. It’s essentially a small-business rescue and quiet bailout of the restaurant industry grafted together.

This made some sense, at least in theory. Restaurants and hotels have been battered by the coronavirus crisis. Since the whole point of the Paycheck Protection Program is to keep people employed—it offers businesses forgivable loans to cover operating expenses in return for continuing to pay their staff—it was reasonable to target larger businesses in an industry suffering mass layoffs.

But lawmakers whiffed on execution. Most crucially, they only appropriated $349 billion for the program’s initial round, which meant that every dollar going to a midsize chain was a dollar diverted from your favorite diner that’s now on the verge of going bust. (By the time $250 billion of loans had been approved, only about 19 percent of eligible hospitality businesses had received one, according to Evercore ISI economist Ernie Tedeschi). It didn’t help that the banks in charge of actually making the loans were more likely to prioritize big clients, like Shake Shack, than actual small firms.

In the end, the Paycheck Protection Program did not exhaust its first round of funding because giant restaurant and hotel chains gobbled it up. Forbes staffer Nathan Vardi found 71 publicly traded companies that received loans through the PPP; together they netted $300 million, or 0.09 percent of the program’s total appropriation. But the fact that Shake Shack and Potbelly got help while millions of actual small businesses didn’t is a symptom of how the program fundamentally wasn’t that well thought out.

Democrats and the White House are currently negotiating over a deal that would add an additional $300 billion to the Paycheck Protection Program, which would ease its short-term cash crunch. But that won’t change the fact that it’s still a first-come, first-served program, nor will it quell outrage at the fact that some larger businesses have benefited from it at the expense of smaller ones. A better solution might just be to uncap the PPP’s funding entirely so that any businesses that need a loan can get one. An even more sweeping possibility would be for the government to subsidize pay for every business that can show it has been seriously hurt by the coronavirus crisis, as a group of Senate Democrats, including Bernie Sanders, has proposed.

Another, narrower option would be to create a separate rescue program for the hospitality sector, one that aids large and small businesses alike. That might be useful anyway at this point; the Paycheck Protection Program’s forgiveness formula makes it a bad fit for restaurants that have been totally shut down, because it requires them to spend 75 percent of their loan proceeds on payroll, leaving relatively little over for fixed expenses like rent. It would also clarify some of the public confusion; instead of a small-business bailout that channels money to big restaurant chains, we’d have a restaurant bailout that big companies like Shake Shack wouldn’t have to take a PR beating for using. If an entire industry is hurting now, the right move is to give the entire industry help.