The PPP may have saved jobs in the United States, but was it profitable?

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Of the $800 billion allocated to small businesses through the Paycheck Protection Program (PPP), just 25% went to workers, according to a report by the St. Louis Federal Reserve Bank. The majority of the funds instead went to suppliers, creditors and business owners. While the Fed notes that the PPP may have helped keep small businesses from closing, its effectiveness in preserving wages was not only limited, but came at a high price. This outcome was probably unavoidable, however, due to both program parameters and a lack of supportive structural systems.

The PPP was a temporary program implemented under the CARES Act, the initial federal response to the COVID-19 pandemic. The program aimed to prevent small business closures and the job losses that accompanied them through unsecured, non-repayable loans, funneling up to $10 million each to businesses with fewer than 500 workers. The funds were not earmarked solely for wages and benefits, but rather were available to cover other costs related to maintaining employment levels, such as utilities, rent or mortgage. The only requirement borrowers faced to obtain full loan forgiveness was to certify that the funds had been used appropriately within the specified time frame, so it is no surprise that the bulk – 90% – was canceled as of June 20 of this year.

But have jobs really been saved? According to the report, yes. Just under three million jobs were saved each week in the second quarter of 2020, with that number falling to 1.75 million in the fourth quarter. Although with an annual cost of $169,000 to $258,000 per position preserved, these savings came at a high price, especially since the estimated average compensation for these jobs was only $58,200. . Instead of using the majority of funds on payroll and benefits, 75 cents of every dollar went to suppliers, creditors, owners and shareholders. As a result, 72% of the $800 billion allocated under the program ended up in the hands of those whose incomes were already in the top 20%.

Fed researchers compared those results to the other two major pandemic programs — unemployment and stimulus checks — and found that neither allocated funds so regressively. But, while arguing that the PPP was not the most efficient use of funds, they argued that the program was necessary to prevent a tsunami of small business closures that would have had a resounding and disastrous effect on the economy. economy as a whole. The researchers also pointed to the lack of infrastructure for work-sharing and wage subsidies as partly responsible for the failure of targeting PPPs and suggested expanding and implementing structural programs in anticipation of future ones. sudden economic downturns.

Perhaps the biggest problem with PPP, however, was the scope of businesses it catered to under the “small” label. While the name may conjure up visions of the local mechanic, mom-and-pop shops and neighborhood restaurants, in reality, many large businesses that would have otherwise weathered the pandemic well on their own have been able to use the program to subsidize their bottom line. .

This begs the question: Why did Congress include companies that employed more than 500 employees, regardless of their structure? One should certainly expect companies of this size to plan ahead and largely survive temporary downturns on their own. And yet, none of this is surprising given the government’s propensity to subsidize big business in the first place.

By allowing multi-million loans while setting such lax repayment forgiveness requirements, the PPP encouraged businesses that didn’t necessarily need the money to take it as a godsend anyway. Higher standards for loan forgiveness might have prevented some of that. At the time the program was written, business owners knew they would not have to repay the money, regardless of how much they paid to employees, and therefore had no reason not to take out loans. and spend the money as they see fit to improve their profit margins. .

Image credit: Viktor Forgacs via Unsplash

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