The Future of the Paycheck Protection Program

Eakinomics: The Future of the Paycheck Protection Program As Congress grapples with another round of support for the economy, one component has solid – if not unanimous – bipartisan support: a revival of the Paycheck Protection Program (PPP). Yesterday, I testified in the Senate on this issue. Recall that Title IV of the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided $349 billion for the PPP. The Small Business Administration commenced the PPP on April 3, 2020, and closed the program on April 16, 2020, having exhausted the funds appropriated by Congress. Congress later provided an additional $310 billion for the PPP, bringing the total funds available to $659 billion. While originally set to expire at midnight on June 30, Congress authorized an extension through August 8. The PPP expired at that time. In thinking about the PPP, it is important to remember the economic setting into which it was introduced. With the arrival of the coronavirus pandemic, households fled from economic activity that involved personal contact. As a result, customers disappeared in large swaths of the economy (restaurants, hotels, etc.), creating a cash-flow crisis. In response to the cash flow crunch, business did two things. First, they sold everything they could to raise cash; the Federal Reserve stepped in to calm financial markets by providing massive amounts of liquidity. Second, they cut their costs; the PPP was created to counter the incentives of small businesses to lay off workers. The PPP provided loans that would be forgiven if the firm spent 75 percent of the loan on payroll and other core expenses, with the hope of a) providing needed paychecks to households, b) keeping connections between workers and their employers, and c) preserving key economic infrastructure past the peak of the pandemic. The PPP was perhaps the single most effective policy tool deployed by Congress in response to the economic stresses posed by COVID-19. The PPP moved fast, disbursing $525 billion, with most of it in four weeks at the end of April and start of May. Data from the Census Bureau indicate that roughly three-quarters of all small businesses received a PPP loan. Research indicates that those firms retained employees and had stronger finances than those that did not. With a surge of cases nationwide and the arrival of winter, the economy is re-experiencing the loss of customers and cash flows. Hence, it makes sense for Congress to think about another round of the PPP. If Congress were to reinstate the PPP without any program changes this would likely be a significant benefit to the economy. Congress could also undertake reforms, however, including shifting the focus to revenue replacement rather than payroll retention, simplified forgiveness, and structural improvements at the Small Business Administration and Treasury.