New study gauges the impact of PPP money

When the COVID-19 pandemic hit in 2020, a large number of small businesses in the U.S. found themselves in precarious financial situations — their revenue took a deep dive, access to credit was found to be inadequate or absent, and large-scale layoffs and closures took place. 

To help these distressed businesses, Congress enacted the Paycheck Protection Program, which provided uncollateralized, low-interest loans of up to $10 million to businesses with fewer than 500 workers. These loans were forgivable on the stipulation that recipient companies maintained employment and wages at close to pre-crisis levels in the two to six months following loan receipt. 

The scale of the aid provided was so remarkable that by the time the program ended in mid-2021, approximately $800 billion in loans had already been extended. In fact, 93% of small businesses ultimately received one or more loans, and the PPP nearly saturated its market in only two months. 

However, despite the speed of this extraordinary program that helped companies keep their doors open, a new study conducted by the National Bureau of Economic Research found that workers were not the main beneficiaries of PPP. 

The economists at NBER found that only $115 billion to $175 billion in PPP loans went toward paychecks — meaning only 23% to 34% of PPP money went directly to employees who would otherwise have lost their jobs. The remaining $335 to $395 billion, or 66% to 77%, went to owners of business and corporate stakeholders, including creditors and suppliers, among others.

The report also revealed that the distribution of PPP loans overwhelmingly accrued to high-income households. Of the $510 billion (the first two tranches) in PPP loans provided in 2020, only $13.2 billion ultimately went to households in the bottom fifth of the income distribution, and that $130.8 billion to the second through fourth quintiles. The remaining $365.9 billion, or 72%, landed up with the top one-fifth of household income. 

The NBER economists wrote in the study that because of the “highly distributionally-skewed incidence of PPP payments,” the government’s two other pandemic-aid programs, namely, enhanced unemployment benefits and Economic Impact Payments (that is, stimulus checks), were spread far more equitably among U.S. households. 

What the NBER economists recommend

The study found that “the primary job retention goal of the Paycheck Protection Program could in the future be better achieved through an expanded program to encourage ‘work-sharing,’ which refers to a policy in which employers, when faced with an economic downturn, are encouraged to reduce hours worked more broadly across the workforce rather than laying off a narrower group outright. In effect, the government program ends up paying partial unemployment to many, rather than full unemployment to some.” 

Currently, there are 26 states in the U.S. that have a work-sharing program through their unemployment insurance systems, but these are not well-subscribed. 

A work-sharing program can target firms of all sizes that are cutting hours or employment, not just small businesses. Additionally, the progressivity of the program could be changed as policy-makers deem appropriate with sufficient administrative capacity developed in normal times. 

A separate liquidity provision program could then be targeted primarily at small businesses, which are more likely to be liquidity-constrained. Moreover, with better information systems operational, liquidity could be offered in proportion to firms’ decline in revenues as well as firms’ actual fixed obligations.

Several other high-income countries responded to the COVID-19 pandemic with a mix of job retention incentives, including work-sharing programs that allowed either partial or complete furloughs; and newly introduced wage subsidy programs, similar in many ways to the PPP, which provided firms with direct support for at least some fraction of their wage bill. 

According to the authors of the study, “A key lesson from these cross-national comparisons is that targeted business support systems were feasible and rapidly scalable in other high-income countries because administrative systems for monitoring worker hours and topping up paychecks were already in place, prior to the pandemic. Lacking such systems, the United States chose to administer emergency aid using a fire hose rather than a fire extinguisher, with the predictable consequence that virtually the entire small business sector was doused with money.”