Shortcomings of PPP

5/30/20

The Payroll Protection Plan (PPP) seems to have been designed with an expectation that the economic interruption from COVID-19 would be much shorter than it’s turning out to be. Now, given the extended nature of the disruption, further stimulus is being considered — and rightly so. The extraordinarily high unemployment we’re experiencing and associated financial distress certainly justify additional federal spending.

Despite my endorsement for additional COVID-related federal spending, I’m not a fan of PPP. It’s not that I think this program isn’t helpful. It is — for those who get the money. Unfortunately, we have a serious allocation problem. Even if the program were expanded, allocations will still fail to cover all the businesses that would seem to qualify. That’s really the point: this program is overly generous in identifying prospective beneficiaries, and if additional funds are allocated, that flaw seems unlikely to be corrected.

The purported objective of PPP is to help small businesses maintain their work force, allowing them to resume activity quickly once the economy begins to open up. Presuming the funds will be spent on payroll, rents, and utilities (subject to certain proportions and timing considerations), most of these loans are expected to be forgiven, effectively turning these loans into grants.

My problem with the PPP is that funds under this program are allocated without consideration of need. It’s true that recipients have had to attest to being hurt by the coronavirus, but that’s a low bar. Almost everyone has been hurt by the pandemic. In a world of limited resources, federal expenditures should be allocated on the basis of objective criteria, as opposed to relying on first-come-first-served rationing.

So who deserves the funds? This is a tricky nut to crack. In reality, we can divide small businesses into three categories: (1) those that won’t survive the coronavirus, despite the PPP funds, (2) those whose survival is dependent on receiving PPP funding, and (3) those that would make it even without PPP funding. In my judgment, PPP funds should be restricted to the second category. Unfortunately, that’s easier said than done.

The PPP misallocates too large a portion of the allocated funds. I’d like to see that misallocation corrected; but if we can’t better identify deserving small businesses, that money should be redirected to those areas where we have greater confidence that it will make a difference.

At this juncture, state and local governments clearly meet that condition. They will inevitably be cutting back services and employment if federal funds are not forthcoming. Congress should recognize this need and the essential nature of these sectors. In contrast to small businesses, which, as important as they are, tend to benefit the owners, their employees, and their particular customers, state and local governments provide services that are critical to our collective well-being.