Moneybox

The Government’s Big Program to Save Small Businesses Ran Out of Money. Maybe Time to Rethink It?

Jovita Carranza stands in front of an American flag and the White House logo
Money printer go sputter sputter clank. (Above, Administrator of the Small Business Administration Jovita Carranza in the White House press briefing room on April 2.) Mandel Ngan/AFP via Getty Images

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So, the thing everybody predicted would happen just happened.

Funding for the Paycheck Protection Program, the federal government’s big initiative to aid small businesses and their employees during the coronavirus lockdown, appeared ready to run out of cash by Wednesday, after receiving an overwhelming crush of applications since opening on April 3. The U.S. Small Business Administration officially announced that it had approved 1.4 million loans worth $305 billion out of the total $349 billion Congress set aside for the initiative. But officials told Bloomberg they expected the money to be tapped out by day’s end.

Again, this was widely foreseen. Republicans could probably have chosen to put an adequate amount of funding into the program in anticipation of what was obviously going to be massive demand, but did not. Now the Trump administration and Democrats are bargaining over how to refill the thing (or, more precisely, what other bits of economic relief funding need to be topped off before Democrats agree to another round of PPP funding). They’ll probably come to a deal pretty soon, because nobody wants to leave small businesses in the lurch.

Which might actually be a bit of a shame, because at this point the entire Paycheck Protection Program could probably use a rethink. The effort has been chaotic and confusing to applicants since it started. Under the initiative, banks are making government-backed loans that get forgiven if businesses don’t lay off their workers. Some business owners have had trouble finding lenders willing to accept their applications, while some financial institutions have moved much faster to process the loans than others, meaning that getting approved for aid has been partially a matter of luck so far. We also have no idea how much of the money that’s been approved has even reached borrowers; banks don’t have to immediately finalize the loans after the government greenlights them, and nobody is officially tracking disbursements. On crowdsourced database COVID Loan Tracker, only about 5 percent of those who’ve applied for a Paycheck Protection Program loan say they’ve received one.

Meanwhile, data released earlier this week by the Small Business Administration suggest that the program is doing a poor job of reaching some of the businesses that have been hardest hit by this pandemic. Restaurants and bars, for instance, shed more than 400,000 of the 701,000 jobs that were officially lost in March, and as of early April had some of the largest reductions in hours among any industry, according to a recent analysis by the University of California, Berkeley’s Institute for Research on Labor and Employment. That’s not especially surprising, since many of them have been shut down or reduced to selling takeout by stay-at-home orders. Yet the combined hotel and restaurant industry has received a smaller share of the Paycheck Protection Program’s aid than professional services businesses like law, architecture, accounting, and advertising firms. Times are tough for them too, but judging by the hours employees are working, they haven’t seen nearly the same type of collapse as the food business.

Chart of PPP loans by industry
Small Business Administration

To be clear, this bailout should not be judged based solely on whether it saves your favorite taqueria from going out of business (though, as someone who likes to eat, I honestly will judge it partly on that). But ideally, the government’s small businesses rescue would be aimed at rescuing the hardest-hit small businesses. At the moment, the Paycheck Protection Program doesn’t appear to be doing that.

Nor does it appear to be very effective at helping businesses in parts of the country that have been most damaged by the coronavirus pandemic. One way to measure that is by looking at the dollar value of loans approved in each state compared with how much eligible businesses could theoretically borrow based on the size of their payrolls. Evercore ISI economist Ernie Tedeschi calculates that by Monday, firms in COVID-ravaged New York have been approved for loans equal to 23 percent of eligible payrolls. In California, which was early to shut down, the number is 24 percent. In Texas, which was later to join the quarantine party, it’s 44 percent. In Alabama and Arkansas, by comparison, it’s more than 50 percent. In Nebraska, not exactly the epicenter of anything right now, it’s more than 75 percent.

Why have some states benefited more than others? Tedeschi offers a couple of reasonable answers. One might be industry mix. Texas has a lot of oil and gas companies, and 43 percent of eligible firms in that industry have been approved for loans, compared with 19 percent across all industries (it’s 20 percent for restaurants, in case you’re wondering). Another could be that a program that requires working through a complicated loan process via a private bank just isn’t well-suited to helping businesses in states that are in total lockdown, like New York.

Either way, it does not seem as if the Paycheck Protection Program has been targeted at helping those who need it most, judged either by industry or by geography. You could try to fix that by tripling the amount of money that’s gone into it so far and hope that by the end it reaches almost everyone who is eligible. But even then, some businesses may be put off by all the red tape. Another option would be to rethink the way we’re trying to help small businesses altogether. You could aim wider, possibly by having the federal government subsidize payrolls for every business in the country, as suggested by Republican Sen. Josh Hawley. You could tailor help more narrowly to states and sectors of the economy that really, truly have been flattened by the virus. And you could try to streamline things, by nixing the bank loans and having a larger federal agency like the Treasury Department manage the aid. What we’ve tried so far looks more like an aimless half-measure. If we don’t fix it, the economic crisis we’re still just wading into will sting for a lot longer than it has to.

For more on the impact of COVID-19, listen to Thursday’s What Next.