The United States Chose to Administer Emergency aid using a Fire Hose Rather than a Fire Extinguisher

January 19, 2022

Bob Coleman

My headline is intriguing — the one I would assign to my reading of a just released think-tank report about the effectiveness of PPP.

Now, contrast that with Monday’s Marketwatch take on the same report — Up to three-quarters of the $800 billion PPP flowed to business owners instead of workers, study finds.

Or the Fast Company stock photo of a man stuffing $100 bills in his suit pocket.

Wow. What’s the story?

My take.

Buried in the report is the statement that the loans were granted to small businesses, not workers. Citing ADP stats, the authors were only able to match up 25% of payroll stats to gross PPP loans.

Ignored in the analysis is the critical fact that 40% of PPP loans could be used for business overhead. Only a minimum of 60% of funds had to go to payroll.

However, the most glaring error in the report is it skews results by considering sole proprietors and partnerships as owners and not employees.

Therefore, the implication that business owners pocketed 75% of PPP cash is disingenuous and flat out wrong.

Report Findings

Let’s start with the bad. Here are cherrypicked facts from Marketwatch’s reporting of the NBER report::

  • The majority of PPP loan dollars issued in 2020—66 to 77 percent—did not go to paychecks, however, but instead accrued to business owners and shareholders.
  • Job retention cost $170,000 to $257,000 per job.
  • Adds to income inequality with 75% of funds benefiting the top “quintile” of households. (Quintile = 20%)
  • Another finding was that so-called draw loans in 2021 — that is, companies going back for more funding a year later — had no impact on employment.
  • 23% to 34% of PPP dollars went directly to workers who otherwise would have lost jobs.
  • Other pandemic programs has less regressive distributions.
  • Primary job retention goal of PPP could be better achieved through expanding “work sharing,” or having employers reduce hours rather than make layoffs
  • Other high-income countries chose a mixture of job retention incentives — wage subsidies and job-shares. Why? Those countries have “administrative systems for monitoring worker hours and topping up paychecks.” Lacking such systems, the United States chose to administer emergency aid using a fire hose than a fire extinguisher with the predictable consequences that virtually the entire small business sector was doused with money.”

The Marketplace “journalist” does a couple of throw-away positive findings without comment:

  • In the U.S., the unemployment rate has dropped to 3.9%, from a pandemic peak of 14.9%. The employment-to-population ratio has improved to 59.5% from a pandemic low of 51.3%, but it’s still below the February 2020 level of 61.2%.
  • The authors said PPP did help keep the lights on at establishments that otherwise would have shut, though they don’t know whether that was a permanent or temporary impact. PPP loans helped reduce employment losses due to small-firm closures by about eight percentage points five weeks after loans were received, the authors said.

The other side.

Here are the positive findings I found in the report that were not mentioned:

  • The program deserves high marks for timeliness. When the pandemic began, no existing federal program had the scale to quickly distribute hundreds of billions of dollars to small businesses.
  • Despite these obstacles, the Paycheck Protection Program succeeded in delivering a staggering sum of money over a two-month period in the spring 2020.
  • Overall, we estimate that 94 percent of employers with fewer than 500 employees took up a PPP loan
  • The spike in business closings during the COVID pandemic was historic. Statistics finds that employment at closing firms, which hovered at about 1 million worker per quarter for the last three decades, spiked to 2.1 million workers in the second quarter of 2020.
  • Targeting The rapid, near-universal takeup of Paycheck Protection Program loans in 2020 is inseparable from the reality that the program was essentially untargeted. That takeup was around 94 percent of all small businesses means that loans reached the most and least distressed firms—and all those in between—in nearly equal proportions.
  • The program was temporary and ended as intended
  • Loan delinquencies declined

NBER Conclusion:

The U.S. small business sector appeared at risk of collapse at the outset of the pandemic. To avert this collapse, Congress enacted the Paycheck Protection Program, which successfully distributed vast amounts of aid to the near-universe of eligible small businesses in the space of a few months. Our best evidence to date indicates that PPP’s economic impacts were less than hoped: it preserved only a moderate number of jobs at a high cost per job-year retained and transferred resources overwhelmingly to the highest quintile of households. . . These outcomes should not however be viewed first and foremost as programmatic failures.

MarketWatch Article
NBER Release
SBA PPP Forgiveness Data