The Imperfect Victory of the PPP Program

The unprecedented global lockdown and economic collapse that coincided with the COVID-19 Virus pandemic left governments and economic planners scrambling. Without immediate intervention, economies — Western ones especially — would be facing catastrophe. In the United States, the government acted to safeguard as much industry as possible through the CARES Act and its Paycheck Protection Program (PPP). The PPP was designed to insulate small and large businesses through government loans. It used the potential for loan forgiveness as an incentive to keep employees on the payroll. But how effective was it?

First it is necessary to  examine how loans were distributed and who was receiving them. Proponents of the program argued it was essential to preserving small businesses across the country. The data reflects the general effectiveness of this mission. According to the Peter G. Peterson Foundation (PGPF), “Nearly three-quarters of small businesses in the country report having received PPP loans, according to the Census Bureau.” On average, two thirds of the loan payments were for under $1M, the other third being for $1M or more. Critics of the program argue that too many large businesses received loans, but the ambition of the program was to retain as many employees on payrolls as possible. If approximately one quarter of loans went to larger corporations, they likely saved countless jobs that would have been axed in preservation of the bottom line.

PGPF also reported that the loans generally followed the hardest hit businesses and sectors within the economy: “Sectors that were most affected by the pandemic, including manufacturing and construction, generally received more PPP loans than did other sectors.” One point it makes is that one of the hardest hit sectors which lagged in awarded loans was the Accommodation & Food Services. The greatest percentage of loans went to Construction, Manufacturing and Professional Services. These jobs lost a combined 13.8 percent of employees laid off due to the coronavirus but received 25.5 percent of the distributed loans. Accommodation & Food Service lost 30 percent of jobs but only received 8 percent of PPP loans. On the surface, these are easily criticized results. The sectors that received the most loans were the sectors allowed to operate through the nationwide shutdowns and state managed partial-reopenings. Food service has been gutted due to restrictions on gathering and capacity restrictions imposed by state and local government. This has destroyed profitability and employee retention. There is no incentive for Accommodation businesses to take on loans that they will not be able to use or have forgiven. Considering the variables, the loan program indeed worked as intended.

Just as industry was affected differently across sectors, businesses and employees experienced different fates in different geographical regions of the country. A study by the National Bureau of Economic Research suggests that loan distribution mostly hinged largely on private banks’ participation in the program and the exposure of those funds for customers who borrowed through them. “…(T)he counties with lower median household income, a lower share of college educated individuals, and a smaller COVID-19 shock were more likely to be exposed to lenders that overperformed in the PPP roll-out.” Florida, for instance, had 96 percent of small business payrolls covered, versus 73 percent in Massachusetts. Massachusetts shut down quicker and for far longer than Florida in the initial rollout. This again suggests that PPP success was largely reliant on the state-level restrictions of government and exposure to the virus.

Incredibly valuable insights can be gleaned from the studies into PPP distribution and efficacy to determine if or when it will be a necessary action in the future. But it is still too early to know the long-term legacy of the PPP program. According to the PGPF study, small businesses account for 99 percent of businesses in the U.S. economy, but by week nine of the virus, more than 50 percent of business owners surveyed expected their businesses to be closed for at least six months — or maybe forever. 

The immediate effects of the program are undeniable, however. A study conducted by MIT & The Board of Governors of the Federal Reserve concluded that the PPP program resulted in an extra 3.25 percent — or approximately 2.3 million jobs created or maintained during the crisis than would have otherwise existed without the stimulus. The loss of millions more jobs, affecting millions of more families, landlords, and homeowners, would have created panicked investor sentiment and even more destruction of service-based sectors. When examining the currently available information, it is fair to conclude that the PPP program was not perfect, but essential in preserving a stable economic outlook.

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