Since this spring, the federal government has handed out $517 billion through the Paycheck Protection Program, the main lifeline that Congress threw to small and midsize businesses to help them survive the coronavirus crisis. It’s a weighty amount of money, almost two-thirds of what Washington spent on the entire stimulus package it passed in 2009 to combat the Great Recession.
Unfortunately, it doesn’t seem to have bought us very much.
Hastily crafted as the economy began to collapse earlier this year, PPP was designed to keep businesses alive and Americans attached to their jobs while the country shut down to try and squelch the pandemic. It offers employers with 500 or fewer workers low-interest loans to cover their operating expenses, which the government will forgive if they avoid layoffs. (Somewhat larger companies can qualify if they are in the hospitality industry or meet the government’s previously established small-business size standards.) For most borrowers, it’s essentially free money that they can use to pay their bills and their staff.
This week, a team of economists led by the Massachusetts Institute of Technology’s David Autor released the most detailed evaluation yet of the program’s results—and their conclusions were not flattering. The researchers found that PPP only boosted overall employment among eligible businesses by between 2 to 4.5 percent and likely saved about 2.31 million jobs, at the cost of $224,000 each.
To put those numbers in perspective, consider that there were 31.8 million Americans on the unemployment rolls at the start of this month, and that 2.4 million people filed for benefits last week alone. The country appears to have spent a half-trillion dollars and put just a small dent in joblessness. What’s more, we only paid for a temporary fix. PPP only provided loans equal to about 10 weeks of payroll expenses; now that the money is running out, some businesses appear ready to start laying off workers again.
Here’s another way to think about it: If each of those 2.31 million people who kept their jobs had gone on unemployment instead, and received a $600 check from the federal government each week, it would have cost Washington just $9,600 a head—$22 billion total—over four months. With the money left over, the feds could have given states an extra $10 billion to hire more staffers to process UI claims, spent another $293 billion doubling the checks the IRS sent to families, and still had another $192 billion left over to help businesses like bars, restaurants, movie theaters, salons, and gyms that were shut down for public health reasons keep paying their rent.
The point being: There were almost certainly more efficient ways we could have spent this money.
Why didn’t we get more bang for our 500 billion bucks? The answer likely boils down to the fact that PPP was not carefully targeted at the businesses hardest hit by the crisis, nor was it meant to be. By the time Congress began slapping the program together in late March, businesses had already laid off millions of people, and lawmakers could only guess how bad the economic damage from COVID-19 would ultimately be. With potential devastation looming, their goal was to get money to as many vulnerable businesses as possible, as quickly as possible, even if that meant tolerating some waste. For the sake of speed, the program did not require applicants to prove that the crisis had actually hurt their business, which would have required more time and paperwork. (At least some other countries, like Australia, did require that sort of proof in their own wage subsidy programs.) Instead, it basically asked them to pinkie-swear that they needed the money by self-certifying that “the uncertainty of the current economic conditions makes necessary the loan request to support the ongoing operations of the borrower.” Whatever that meant.
Once the program got up and running, and news reports that large-ish companies like Shake Shack had received loans started to generate a public backlash, the Treasury Department did try to tighten PPP’s rules a bit. It issued a FAQ that essentially warned bigger businesses with easy access to other sources of cash that they shouldn’t apply and could face penalties if they couldn’t show that the loan was essential. But in the end, the program doled out money pretty freely.
The upside to this approach is that government pushed out an enormous amount of support to employers at a time of economic turmoil. According to the Census Bureau’s tracking survey, 72.4 percent of small businesses say they’ve received aid through PPP; in the food and accommodations and manufacturing industries, the figure is above 80 percent. According to the Treasury Department, the share of total small-business payrolls backed by the program ranged from 72 percent in Virginia to 96 percent in Florida.
The downside to rushing all that money out is that some borrowers probably got a freebie they didn’t need. That’s become increasingly obvious since the government released the list of businesses and nonprofits that received loans of more than $150,000, which included high-priced law firms, financial asset managers, the Church of Scientology, and Kanye West’s Yeezy, among other eyebrow-raising names. Many of these outfits probably could have avoided layoffs without a loan, in which case PPP just ended up subsidizing their owners’ profits. Treasury Secretary Steve Mnuchin has said borrowers who received more than $2 million will face an audit—good luck with that, Kanye—and could be forced to return the funds. But plenty of businesses will likely get to keep the loans and have them forgiven, even if the cash wasn’t strictly necessary to keep their lights on.
It’s also been clear for months now that relatively few of PPP’s dollars were going to the industries hurt worst by the pandemic. Since the crisis began, 27 percent of all U.S. job losses have been clustered in the food services and accommodations sectors, as restaurants and bars have been forced to shut down, and hotels have seen travelers vanish. Yet hospitality businesses have only received 8 percent of PPP’s total loan dollars, less than the 12 percent claimed by professional, scientific, and technical services—the catchall category that includes law and accounting firms, as well as tech and management consultants, which have been comparatively unscathed by COVID, since their employees can generally do all their work from home.
Unless you happen to be a deficit fanatic, there are much worse tragedies than the government frittering away a bit of cash in an attempt to shore up an economy in crisis. The country isn’t facing a fiscal crisis. The feds can still borrow for cheap. It’s OK if a few businesses receive aid they don’t absolutely need, if it also means getting help to those in peril. What’s most frustrating about PPP is that it wasted money yet still failed to reach all of the mom and pop shops that needed assistance. Its complicated rules, meant to ensure that firms spend most of their loan proceeds paying workers, make it a poor fit for some businesses, especially ones that are entirely shut down and don’t want to recall their staff. According to the Census Bureau, a quarter of small businesses never even applied for the program, and as of now, $130 billion of PPP’s total funding still remains untouched, even as many firms are shuttering permanently across the country. Congress could have justifiably spent even more money to build a simpler program providing a backstop to all businesses. Or it could have designed something narrower targeting businesses whose revenues plummeted during the crisis. Instead, it built something that gave a lot of money to the businesses that needed it least while hanging some that needed it most out to dry.
You can’t blame Congress for not writing a perfect program on the fly in the middle of a global catastrophe. Lawmakers were hurriedly trying to stitch together a parachute for the economy while it was already in free fall. But even in March, there were other, potentially better models available. Much had already been written about Denmark’s approach, which only covered pay for workers who were furloughed, and covered 100 percent of normal expenses for businesses like restaurants and hairdressers that were ordered closed. A similar program in the U.S. might have prevented law firm partners from pocketing subsidy dollars while also decreasing the political pressure on states to reopen early from business owners who were worried about covering their rent.
On Capitol Hill, lawmakers do seem to have internalized some of these lessons. Because the pandemic is still raging and Congress now must pass another rescue bill, there’s talk of renewing PPP going forward but limiting it to smaller businesses that can prove they have lost revenues. Documents circulating among Republicans suggest they’re considering building out other programs to support small businesses that might have been poorly served by PPP. At least some senators are pushing for a plan that is better designed to save businesses that need to be totally or mostly shut down, like bars and theaters.
Hopefully, the next rescue effort will be money better spent—and when this is all over, we can all return to the shops, drinking holes, and restaurants we loved.