Here’s where billions of dollars in worker P3s ended up going

When the small business sector that employed nearly half of all American workers before the pandemic faced an impending collapse in 2020, the US government launched a warship-sized safety raft under the form of the Paycheck Protection Program.

The goal of the program, which ended in May 2021, was to quickly get billions of dollars in forgivable loans into the hands of small business owners so they can keep workers on the payroll during the coronavirus crisis. COVID-19.

But the “economic impacts of the PPP have been lower than expected”, with only about a third of the program’s approximately $800. billions in cash going directly to workers who would otherwise have lost their jobs, according to a new National Bureau of Economic Research study by a team of 10 top economists from the Massachusetts Institute of Technology and the Federal Reserve Board of Governors , among others.

Most of the PPP money went to business owners and shareholders or to creditors and suppliers, the researchers found. Using data from payroll processor ADP, they determined that only between 23% and 34% of PPP money went to workers who would have been out of work without government assistance.

The researchers also found that while pandemic-related job losses were greatest for the lowest-paid workers, of the $510 billion in PPP loans issued in 2020, nearly three-quarters went to people in the top quintile of the household income bracket, where the average household income was around $255,000 in 2019.

The program only offered loans to support up to $100,000 in annual income, but business grants largely went to the highest-paid workers. People in the top quintile of household income earn about 52% of overall income.

Still, the rapidly deployed program was not a “programmatic failure” because its creators knew the United States lacked the administrative firepower to better target the program, according to the study. The program was created as part of the CARES Act, passed by Congress at the request of the Trump administration.

“The program was deeply flawed, but in a way it was by design,” said one of the study’s authors, David Autor, an MIT economics professor. “The people who designed it understood the flaws and didn’t see how to work around them due to the dismal state of the US government infrastructure.”

Instead, the program was designed to reach all small businesses and their employees in the hope that the money will go to those in need, Autor said.

The program was ubiquitous, with around 94% of employers with less than 500 employees having obtained a PPP loan. In Texas, about 940,000 PPP loans totaling $62.8 billion have been issued, according to data from the US Small Business Administration.

The rapid rollout of PPP has made it easier to get loans, with businesses needing only to claim that they have been “substantially affected” by the pandemic (but without proving it) and commit to using the money to restore employment (but not maintain it). In the third wave of lending in 2021, the SBA tried to better target the money, requiring businesses to prove reduced revenue.

The takeaway, say the authors: The United States needs a system to target aid during historic economic events.

Other high-income countries have been able to target business support systems because they have closer links between government data systems and businesses and workers, allowing them to top up paychecks depending on the level income and help businesses based on opening or closing hours.

“In the absence of such systems, the United States chose to administer emergency aid using a fire hose rather than a fire extinguisher, with the foreseeable consequence that virtually everyone small business sector has been doused in money,” the study said.

The program deserves “high marks” for its speed, doling out nearly $500 billion in its first two months in April and May 2020, according to the study. How quickly that money got to business owners was key.

The study cites two separate 2021 reports from Federal Reserve economists, academic researchers and other economic experts who found that “loans received even slightly earlier had a more pronounced effect on employment than those granted a little later”.

The rapid deployment was largely due to the engagement of the private sector. The SBA issued the loan guarantees, while the loans were processed and issued by the national banking system.

SBA spokeswoman Shannon Giles said The Dallas Morning News that the agency does not comment on third-party studies. But the report from the SBA’s Office of Inspector General had similar findings, saying the program “quickly made billions of dollars of capital available,” but at the expense of controls over who had access to it.

“The SBA’s efforts to accelerate capital to businesses have come at the expense of controls that could have reduced the likelihood that an ineligible or fraudulent business would obtain a PPP loan,” the report said. “As a result, there is limited assurance that the loans have only been issued to eligible recipients.”

SBA Administrator Isabella Casillas Guzman said in a statement that the agency noted that in the first two PPP rounds in 2020 some companies, especially smaller ones, were left out. The SBA has been working to rectify that, and in 2021, 96% of PPP loans went to small businesses with fewer than 20 employees, she said.

National Bureau of Economic Research analysis attributed PPP blunted job losses by preserving between 1.98 million and 3 million years of employment during and after the pandemic, but at a high cost of between 69,000 and $258,000 per year of employment saved. A year of employment is defined as a person working for one year. The PPP also reduced the rate of temporary closures for small businesses, “although it is less clear whether it reduced permanent closures,” according to the study.

In the opinion of Bill Briggs, a former acting associate administrator of the SBA who oversaw the PPP, this means the program has done its job of stabilizing labor markets in the worst US economic crisis since the Great Depression.

“PPP funds helped preserve jobs and sent a clear signal that help was on the way in the confusing and frightening early days of the pandemic,” he said. “No program of this size is without challenges, but nearly two years after PPP began, current economic conditions show that PPP has been a huge factor in the successful response to the pandemic.”

Laurie-Beth Little runs a one-woman hair studio in the Lakewood neighborhood of Dallas and received a PPP loan of approximately $16,000 in May 2020 that was forgiven. She used about 60% of it in rent, which allowed her to keep her studio during the pandemic.

“I had no income other than hair in the middle of a pandemic when you’re not supposed to touch people and your job is to touch people,” she said. “[Omicron] is the fourth variant. It is four times that I had to leave without income.

Without PPP, Little said she would have taken on more debt than when she started her business in May 2018. She had just started turning a profit in 2020 when the pandemic hit.

“2020 was the worst financial year of my life,” she said.

TK Kamauf, Brandon Friedman and Lance John, left to right, started Rakkasan Tea in 2017 to sell loose tea from post-conflict countries after learning to appreciate tea while serving in Afghanistan and Iraq. They applied for a PPP loan for their business and said the money came quickly, as they waited nine months for their Economic Disaster Loan, a separate COVID relief program that placed more checks on the application process. (Jeffrey McWhorter / Special Contributor)

Brandon Friedman, CEO of Rakkasan Tea Company, said his PPP loan “brought peace of mind during our most difficult time.” The loan received in May 2020 was for $5,000 and went to payroll.

There was another COVID-19 relief program that placed more restrictions on who was eligible for the money: the second wave of funds from the Economic Disaster Loan Program.

EIDL money was disbursed slowly and sporadically to beneficiaries. The delays were caused by the more stringent requirements, such as submitting tax forms that needed to be revised. A slight mismatch in numbers often sent applications into a months-long resubmission process.

Friedman applied for an EIDL loan in April 2021. Nine months later, his application is still under review.

NBER analysis showed that between 66% and 77% of P3 money went to business owners and business stakeholders. But that minimizes the program’s effects on keeping businesses open by paying rent, utilities and creditors, said Christopher Williston, CEO of the Independent Bankers Association of Texas.

“It helped protect the long-term viability of a number of businesses and better position them not to catch up afterwards, so that we [could] have the strong rebound in jobs and economic activity that we have,” he said. “No doubt some took the money and ended up not needing it, but trying to find them in the moment would have slowed down the delivery.”

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