Here’s where billions in PPP cash meant for workers actually ended up going

When the small business sector that employed nearly half of all U.S. workers before the pandemic faced imminent collapse in 2020, the U.S. government tossed out a warship-sized safety raft in the form of the Paycheck Protection Program.

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

But the PPP’s “economic impacts were less than hoped,” with only about a third of the program’s nearly $800 billion in cash going directly to workers who otherwise would have lost 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 creditors and suppliers, the researchers found. Using data from payroll processor ADP, they determined that only between 23% and 34% of PPP cash went to workers who would have been out of a job without government aid.

Researchers also discovered that, while pandemic job losses were largest for the lowest-paid workers, of the $510 billion in PPP loans issued in 2020, nearly three-quarters went to people in the top-fifth of the household income bracket, where the average household income was about $255,000 in 2019.

The program only offered loans to support up to $100,000 in annual earnings, but subsidies to businesses largely went to higher-paid workers. Those in the top fifth of household income earn about 52% of aggregate income.

Yet the rapidly rolled out program wasn’t a “programmatic failure” because its creators knew the U.S. didn’t have the administrative firepower to better target the program, the study said. The program was created as part of the CARES Act, passed by Congress at the behest of the Trump administration.

“The program was deeply flawed, but in a way, that was by design,” said one of the study’s authors, David Autor, an economics professor at MIT. “The people designing it understood the flaws and didn’t see a way around them because of the woeful state of the U.S. government infrastructure.”

Instead, the program was designed to reach all small businesses and their workers in hopes the money would flow to those in need, Autor said.

The program was pervasive, with an estimated 94% of employers with fewer than 500 employees getting a PPP loan. In Texas, about 940,000 PPP loans totaling $62.8 billion were distributed, according to data from the U.S. Small Business Administration.

PPP’s rapid rollout made it easy to qualify for loans, with businesses simply needing to claim they were “substantially affected” by the pandemic (but not prove it) and pledge to use the cash to restore employment (but not maintain it). In the third wave of loans in 2021, the SBA tried to target the money better, requiring businesses to prove a reduction in income.

The takeaway, according to the authors: The U.S. needs a system for targeting aid during historic economic events.

Other high-income countries were able to target business support systems because they have tighter links between government data systems and businesses and workers, allowing them to top off paychecks based on income level and to aid businesses based on hours they are open or closed.

“Lacking such systems, the United States chose to administer emergency aid using a fire hose rather than a fire extinguisher, with the predictable consequence that virtually the entire small business sector was doused with money,” the study said.

The program deserves “high marks” for timeliness, handing out nearly $500 billion in its first two months in April and May 2020, the study said. How quickly that money made it to business owners was critical.

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

The rapid rollout was largely because of enlisting the private sector. The SBA issued the loan guarantees, while the loans were processed and delivered through the nation’s banking system.

SBA spokesperson Shannon Giles told The Dallas Morning News that the agency doesn’t comment on third-party studies. But SBA’s Office of Inspector General’s report had similar conclusions, saying the program “quickly made billions of dollars of capital available” but at the expense of controls on who had access to it.

“SBA’s efforts to hurry capital to businesses were at the expense of controls that could have reduced the likelihood of ineligible or fraudulent business obtaining a PPP loan,” the report said. “As a result, there is limited assurance that loans went to only eligible recipients.”

SBA administrator Isabella Casillas Guzman said in a statement that the agency noted that, in the first two rounds of PPP in 2020, some businesses, particularly the smallest ones, were left out. SBA worked to rectify that and, in 2021, 96% of PPP loans went to small businesses with fewer than 20 employees, she said.

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

In the view of Bill Briggs, former acting associate administrator at the SBA who oversaw the PPP, that means the program did its job to stabilize labor markets in the worst U.S. economic crisis since the Great Depression.

“PPP funds helped with jobs preservation as well as sending a clear signal that help was on the way in the early, confusing, and fearful 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 PPP was a huge factor in the successful response to the pandemic.”

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

“I had no other income besides 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. That’s four times I’ve had to go with no income.”

Without PPP, Little said she would have gone into more debt than she faced when she started her business in May 2018. She had just started to turn 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-leaf tea sourced from post-conflict countries after gaining an appreciation for tea while serving in Afghanistan and Iraq. They applied for a PPP loan for their company and said the money came quickly, whereas they have been waiting nine months for their Economic Injury Disaster Loan, a separate COVID aid program that placed more controls on the application process. (Jeffrey McWhorter / Special Contributor)

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

There was another COVID-19 aid program that put more restrictions on who qualified for money: the second wave of funds from the Economic Injury Disaster Loan program.

EIDL money eked out to recipients slowly and sporadically. Hold-ups were caused by the stricter requirements, such as submitting tax forms that needed review. A slight mismatch in numbers often sent applications into a months-long resubmittal process.

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

The NBER analysis showed that between 66% and 77% of PPP money went to business owners and corporate stakeholders. But that minimizes the effects of the program in 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 positioned them to not be playing catch up after so that we [could] have the sharp rebound in employment and economic activity that we have,” he said. “No doubt, some took the money and ended up not needing it, but to try to ferret those out in the moment would have slowed delivery.”

https://www.dallasnews.com/business/banking/2022/01/21/heres-where-billions-in-ppp-cash-meant-for-workers-actually-ended-up-going/