The US Paycheck Protection Program was designed by Congress and sold to the public as a way to protect American workers. But the no-collateral, low-interest loans came with no requirement for employers to preserve jobs.
Since March, the federal government has allocated $659 billion for eligible businesses to spend on essential expenses such as payroll, rent, utilities, and mortgage interest. As long as at least 60% of the money is spent on payroll, there is no repayment obligation.
With nearly 80% of funds released so far—$521 billion as of June 30—the Paycheck Protection Program (PPP) is “supporting more than 51 million jobs and over 80% of all small business employees, who are the drivers of economic growth in our country,” US Treasury secretary Steven Mnuchin said on July 6.
But the 51 million jobs does not refer to the number of positions saved. It is simply the total number of jobs reported by businesses at the time they applied for the program. A commitment to keeping those jobs was not a condition for loan approval.
Banks handling loan applications on behalf of the US Small Business Administration (SBA) did not need to collect job retention estimates, and often didn’t, says Gregg Gelzinis, a policy analyst at the liberal-leaning Center for American Progress. (The banks, which were paid $20,000 to $60,000 per loan issued, were only expected to do minimal due diligence when processing the 1% interest loans.)
“The real answer will come from the receipts provided as firms seek loan forgiveness or not,” says Gelzinis. “If a firm doesn’t seek any loan forgiveness because it didn’t use the money to retain any employees, then it’s just a cheap subsidized loan.”
Even once businesses apply for loan forgiveness through a separate SBA application (pdf), it’s unclear if the government will be able to accurately measure the number of jobs saved by the PPP. Among the 5 million loan applications approved between April and June, more than 500,000 indicated a zero in the “jobs retained” field, and another 324,000 left the field blank, according to federal data analyzed by Quartz.
The SBA did not respond to requests for a comment. Several employers told Marketwatch they retained employees even though their loan data showed no retention, and said they would work with the SBA to get the information corrected.
Meanwhile, the costs to retain jobs that were reported on the loan applications varied wildly. Some businesses took out loans of $12,500 and indicated they would retain one job (suggesting either the borrower is self-employed or the loan data is incomplete). Others borrowed less than $5,000 while claiming to retain 400 or more positions. The average amount of the loans disbursed through June 30 was roughly $100,000.
Ultimately, many employers should have a chance to update their data with the SBA. The National Federation of Independent Business, a trade group for small businesses, says a vast majority of its members receiving PPP money expect to apply for at least partial forgiveness of their loans, including 54% who expect full forgiveness and 27% who expect at least three-fourths of their borrowing to be forgiven.
Until then, it is impossible to say just how many jobs the PPP has preserved.
The opacity, along with much of the broader confusion about the process and purpose of the PPP, is due in large part to the structure of the program itself. Rather than pay workers directly, it steered hundreds of billions of dollars into complicated business loans that were expensive to administer.
Though the PPP is being widely credited as a success—”economists, business leaders, White House officials and lawmakers from both parties think it helped stabilize the economy,” the Washington Post reports—most PPP money may not end up going to workers at all, nor even to mom-and-pop businesses.
Loose terms from the outset
Few strings were attached in March when Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This largesse was by design: Congress wanted companies that needed cash to get it as fast as possible. The bipartisan legislation authorized the SBA to run loan programs assisting small businesses hit by Covid-19. Businesses were allowed to receive loans of up to 2.5 months of average payroll (based on 2019 tax returns) and the money had to be spent over 24 weeks.
Several changes later approved by Congress made the program even friendlier for businesses. For example, rehiring requirements were relaxed; the deadline for paying workers was extended from June 30 to December 31; and exceptions were added if businesses did not bring back workers. Also, the amount that needed to be spent on payroll to qualify for loan forgiveness was reduced from 75% to 60%.
The terms attracted almost anyone who qualified for the loans, and the program’s generous eligibility criteria were broad enough to encompass not just mom-and-pop businesses but also Ruth’s Chris Steak House (a public company worth $231 million, which later returned the money); the libertarian Ayn Rand Institute (which took it “unapologetically”); and at least 8,100 firms backed by private equity or venture capital firms that together received as much as $13.4 billion of PPP loans, according to an analysis by PitchBook, the private equity research firm.
Europe opts to pay for paychecks
The US government also tried to address needs at the individual level through stimulus checks and an expansion of unemployment benefits. But the PPP favored companies over workers, says Andrew Park, a senior policy analyst with Americans for Financial Reform, a left-leaning organization seeking better oversight of the financial sector.
“The American system is not designed to funnel money directly to individuals,” Park says. “It’s built to give money to corporations…By doing all these giveaways to corporations, it’s not clear if it flows to employees.”
Europe took a different route. Job-protection programs in Denmark, Ireland, France, and Spain gave employers less say in how the bailout money would be spent. Governments essentially nationalized payrolls, backing them with treasury funds. As a result, unemployment rates in Europe barely budged. And when economies began to rebound, firms did not need to rehire employees; they simply recalled them.
Direct support for payrolls in the US was more limited. Meanwhile, the $1,200 stimulus checks, sent to Americans earning less than $75,000, constituted just a fraction of the total lost income for many households. And the unemployment system, expected to support those left without jobs, was quickly overwhelmed, with workers shunted into virtual or physical unemployment lines for weeks or months on end. (I witnessed this first hand when my partner made hundreds of phone calls to California’s unemployment offices after being laid off in April. She only succeeded in claiming benefits in June.)
The US approach left many newly unemployed Americans in the lurch. But the prevailing approach across much of Europe, designed to keep workers as closely attached to their jobs as possible, might not turn out to be the right call either. As Quartz’s John Detrixhe has noted:
If workers have lost jobs that aren’t coming back (for example, the preference for food delivery over eating out may prove long lasting and lead to a decline in server jobs), a German-style short-time working program could just delay the inevitable. It may make the labor market less flexible, meaning it will take longer for workers to fill roles suited for the new economy.
The US may have ensured more future flexibility in its labor market by relying more on unemployment benefits and by giving businesses leeway in how their PPP money is spent.
Right now, that’s probably of little solace to Americans who have lost their jobs. And with the unemployment rate hovering above 11% (pdf), up from around 3% in February, we don’t know how many Americans filing jobless claims were let go from companies that took PPP funds. It’s yet another indication of how difficult it will be to show how many paychecks the PPP ultimately protected.