PPP Poked, Probed, Prodded

Update 446 — PPP Poked, Probed, Prodded:
How Many Paychecks Have Been Protected?

The administration’s $700 billion Paycheck Protection Program (PPP) represents the only federal effort to protect wages threatened by the Corona crisis. Congress enacted some tweaks to PPP last week that will save some small businesses but protect fewer paychecks. PPP can help some workers but offers no paycheck guarantees. Their firms must choose to apply for and succeed in securing loans. 

Today’s Senate Small Business Committee hearing today affords a mid-course evaluation of the program: is it working? Is it too soon to tell? Are more fixes in order? Is any money left? Are there better ways to protect paychecks? Answers below…




Title I of the CARES Act created the Paycheck Protection Program (PPP) to provide short-term economic relief to small businesses. Immediately, the program was beset with challenges and waste. The original PPP funding — $349 billion — dried up in under two weeks. Congress has now poured nearly $700 billion into PPP in total. 

Earlier today, the Senate Small Business Committee held a hearing on implementation of Title I of the CARES Act. Chair Rubio painted the program as a success, claiming that PPP supports the employment of about 50 million workers — more than 75 percent of the small business payroll in all 50 states — and has so far distributed $530 billion to 4.5 million companies (93 percent of all applicants). 

But because detailed PPP data has not been released, Rubio’s claim is unverifiable and likely based on cherry-picked data. Numerous independent analyses show that funds are generally not flowing to the neediest businesses or those hardest hit by COVID-19. Per John Lettieri, president of the Economic Innovation Group, PPP “works better for least-affected employers and worse for the most affected, which is perverse.” 

Below, we examine the problems surrounding the PPP and ways to fix them.

Numerous Program Design Flaws…

Before the program went into effect, the Treasury announced that lenders would be held liable for not thoroughly vetting applicants. As a result, much of the PPP funds went to established and thriving businesses with pre-existing relationships with their banks. PPP guidelines were designed to provide for flexibility: any business with fewer than 500 employees (per location) became eligible, and consequently, big companies like national restaurant chains could qualify. In total, publicly-traded firms have received more than $1 billion in funding.

Such large companies included Shake Shack and the Los Angeles Lakers, who both initially received PPP funds but returned their loans after a barrage of negative media. Some scandal-plagued companies received funds after settling suits with the Department of Justice. Others received funds after paying senior executives millions of dollars in compensation as they were laying off employees. Large companies with connections to Donald Trump received millions in government loans. And some firms, after receiving PPP funds, turned around and acquired rival firms. These companies were not the intended targets for PPP.

Meanwhile, struggling small businesses in need of loans were largely shut out. While firms with political connections received funds quickly, most small businesses had to wade through red tape and wait at the back of the first-come, first-serve queue. 

…Coupled with Administration Malpractice 

The Trump Administration’s ad hoc management of PPP has been borderline farcical. Trump and Secretary Mnuchin have issued (and backtracked on) unofficial guidelines and have threatened prosecutions, prompting confusion among loan recipients. 

PPP loans are regionally discriminatory. Small businesses in central states like North Dakota, Colorado, Nebraska, and Kansas received much higher relief compared to those in harder hit states like New York and New Jersey. These regional disparities are even more evident when PPP loans are separated by tranche. During the first round of funds, small businesses in midwestern states received the greatest loans relative to the number of small business employees. 

Source: New York Times

PPP Program Repairs to Date

Two PPP-related pieces of legislation have been enacted post-CARES Act:

  • The Paycheck Protection Program and Health Care Enhancement Act authorized an additional $310 billion for PPP loans, including a $60 billion set-aside for smaller lenders, bringing the total to $659 billion.
  • The Paycheck Protection Program Flexibility Act of 2020, which President Trump signed last Friday, gives PPP loan recipients more flexibility on the use of PPP funds and extends the life of the loan program through the end of the year. Before the law’s passage, employers could only use 25 percent on non-payroll expenses like rent and utilities and expect the loan to be forgiven; now that figure is 40 percent. Recipients of loans after June 5th now have five years to pay off non-forgivable loans, extended from the original two year requirement. 

What Remains to Be Done?

The following fixes were under discussion and did not make the cut in the last round of PPP reforms:

  • a carve out of funds for loans exclusively for businesses with less than $1 million in annual revenue;
  • a carve out of funds for loans exclusively for businesses with fewer than 50 employees; and
  • streamlining the application process for small businesses that do not have resources 

A bipartisan group of legislators have pushed for additional funding to community development financial institutions (CDFIs). On May 28, Treasury announced a set aside of $30 billion for CDFIs along with Minority Depository Institutions and certified development companies. The HEROES Act, passed by the House almost a month ago, allocates an additional $1 billion to CDFIs. However, the CDFI Fund services relatively few lenders in niche, underserved markets, so it is unclear how many paychecks this adjustment would actually protect. 

No matter how many fixes, set asides, and carve outs Democrats are able to incorporate into PPP, there will always be gaps and paychecks left unprotected. 

A More Optimal Solution

Congress could transition from its current piecemeal, scattered approach to a more simple wage and credit continuity program. Under a comprehensive continuity approach to paychecks and firms, the SBA would no longer need to administer the loan application process because businesses would have their credit agreements restored to their status before the beginning of the crisis. 

Wage continuity bills are gaining steam in both chambers of Congress. 

  • Although not included in the HEROES Act, Speaker Pelosi has praised Rep. Jayapal’s Paycheck Recovery Act, which would subsidize wages below $90,000 according to a company’s percentage of revenue lost and provide an additional sum to cover operating expenses. 
  • In the Senate, Sens. Sanders, Warner, Jones, and Blumenthal introduced the Paycheck Security Act, which similarly subsidizes wages and provides funds for other businesses expenses. 
  • Sens. Van Hollen, Warner, and Merkley introduced the Rebuilding Main Street Act, which would expand state workshare programs and allocate grants to businesses to cover a portion of operating costs.

Such an approach is administratively feasible and would drastically lower unemployment. Germany’s much-lauded Kurzarbeit wage subsidy program obviated the need for standing up PPP variants, and their unemployment rose less than 1 percent from March to April. Other European countries have adopted wage continuity programs, and the U.S. would do well to follow suit. 

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