Has the CARES Act Helped Out Small Businesses?: A Preliminary Look at the Paycheck Protection Program (PPP)

With the coronavirus-induced lockdowns, there have been millions who cannot go to work. Even with the reopening, businesses still struggle and the high level of unemployment is hitting millions especially hard. That is why Congress allocated $669 billion as part of the Paycheck Protection Program (PPP) as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The PPP was designed to provide up to eight weeks of federal-backed, forgivable loans to small businesses to cover employee payroll, utilities, and rent in order to make sure that small businesses do not permanently close during these lockdowns. The PPP was intended to prevent rupturing employer-employee connections and the matching of workers to firms, as well as limit the suffering of unemployment and loss of health insurance. The Small Business Administration (SBA), which is responsible for administering the PPP, went through the initial funding in a matter of days. Congress had to approve a second round of $310 billion in April. It is now August, and Congress is looking to pass another coronavirus stimulus package. While we wait to see whether there will be further funding for the PPP, I had been asking myself whether the program has been successful enough to merit another round of funding.

Since the main goal of the PPP is to keep payroll afloat during this tough time, one of the main metrics is whether the PPP had an effect on the employment figures. Economists over at Harvard concluded that "the PPP had little material impact on employment at small businesses (Chetty et al., 2020)," and that PPP-eligible businesses laid off employees just as quickly as those who were not eligible. Economists at the University of Chicago similarly found a negligible impact on employment (Granja et al., 2020). Those at the Federal Reserve and the Massachusetts Institute of Technology [MIT], on the other hand, found a modest increase of 3.25 percent, or 2.3 million jobs (Autor et al., 2020). There is a possibility that the PPP resulted in milder declines in unemployment and faster rehiring (Bartik et al., 2020).

Another important metric is how businesses fared. Firms with greater exposure to PPP had more cash on hand, they were more able to pay off loans. This means that the PPP likely helped with financial stability of businesses (Granja et al., p. 29). Another paper from the National Bureau of Economic Research [NBER] found that businesses were 14 to 30 percent more likely to survive (Bartik et al., 2020).

Going off that, let us see how smaller businesses or more vulnerable businesses fared. Smaller businesses are going to be more disproportionately affected by the economic downturn in part because they have less capital to weather such disastrous events as lockdowns and decreased demand. Looking at preliminary data, it does not look like smaller businesses have benefitted as much. Why? Because smaller businesses were less aware of the program, less likely to apply, faced longer application times, and were less likely to get approved (Neilson et al., 2020). In terms of geography, funds did not particularly reach the geographical areas that were hardest hit by the economic downturn (Granja et al., 2020). An industry-based look is not exactly flattering, either. The Peterson Institute points out in its analysis on the PPP that although food services, the arts, and recreation incurred huge job losses, other industries received larger shares of the loan money [see below].

Conclusion

So how has the PPP fared so far? We see mixed evidence on the effects of employment, ranging from negligible to slightly positive. It seems that the major benefit of the PPP is that it helped businesses stay afloat for longer. At the same time, there are concerns that the loans were not well targeted, either in terms of geography, industry, or businesses that needed the loans the most. On the whole, was the PPP a good idea? A panel of economic experts at the University of Chicago generally think that it was. The centrist Brookings Institution conversely thinks that it was not because past SBA loans have led to favoritism, delays, and high costs. To that effect, there is evidence that the average cost per job was about $224K through May 2020 (Autor et al., 2020, p. 24), which is a lot for a couple of months of work. It makes one wonder if it could have been more efficiently spent.

Some have proposed alternatives to the PPP. Economist Gregory Mankiw suggests sending a lump-sum, short-term loan to individual ex post. The American Enterprise Institute proposes a tax credit. The Brookings Institution has suggested hazard pay. Instead of the PPP, the Mercatus Center thinks that the government should better ensure access to credit instead. Right now, it looks like there are more downsides to the PPP than upsides. I don't know whether the PPP will ultimately be a force of net good, but I hope to revisit this topic in the future with updated information.  

1-23-2022 Addendum: An economist from MIT along with nine co-authors measured the impact of PPP. (Autor et al., 2022). They found that the PPP preserved two to three million job-years of employment over 14 months. That means to preserve the equivalent of 2-3 million jobs, it cost $170K to $257K. Only 23 to 34 percent of that money spent on PPP went directly to the workers who would have otherwise lost their jobs. Finally, three-quarters of the PPP funds went to households in the top 20 percent of earners. Talking about an ineffective way to spend $800 billion!

7-8-2022 Addendum: The Federal Reserve Bank of St. Louis released its study on the PPP (Emmons and Dahl, 2022). Not only were 75 percent of recipients were unintended recipients, but most of the recipients were in high-income households. Also, the cost of the PPP was anywhere from $169K to $258K, which means that it cost the taxpayers about $4 for every dollar received in wages and benefits.