Paycheck Protection Program a Costly Mess

By Washington, D.C., standards, the Paycheck Protection Program (PPP) is a success.

The program funded over $659 billion of loans to small businesses so they could avoid laying off employees because of state and local lockdown orders. Small businesses that take out PPP loans can also receive a unique bonus: As long as the borrowers spend at least 75 percent of the loan amount on sustaining their payrolls, the U.S. government will forgive their loans. They will never have to be paid back.

With that kind of incentive, a lot of small businesses have sought to get PPP loans. But two studies by economists are raising questions of whether the program has been an effective tool for saving jobs.

The first paper, dated June 17, finds that PPP loans to small businesses “have had little impact on employment rates at small businesses to date. Employment rates at small firms in the hardest-hit sectors trended similarly to those at larger firms that were likely to be ineligible for PPP loans, and remained far below baseline levels as of May 30. These results suggest that providing liquidity itself may be inadequate to restore employment at small businesses, at least in the short run.”

The second paper, dated July 22, has a more positive view, finding “the PPP boosted employment at eligible firms by 2 to 4.5 percent, with a preferred central tendency estimate of approximately 3.25 percent. Our estimates imply that the PPP increased aggregate U.S. employment by 1.4 million to 3.2 million jobs through the first week of June 2020, with a preferred central tendency estimate of about 2.3 million workers.”

That sounds good, until the second paper’s authors estimate the cost of each of those saved jobs. “Noting that the PPP has so far disbursed $518 billion in aid, our benchmark estimates imply that each job supported by the PPP cost between $162K and $381K through May 2020, with our preferred employment estimate implying a cost of $224K per job supported.”

A cost of $224,000 represents a pretty steep price to pay per job saved. Especially when the equivalent annual average compensation for the wages and total benefits earned by all employees in the U.S. is $78,500.

The large mismatch between those two values confirms the Paycheck Protection Program as a costly mess. That mess is something the U.S. Congress should carefully consider before authorizing new borrowing to fund a new round for the now expired program.

Craig Eyermann is a Research Fellow at the Independent Institute.
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