Funding Crises: An Empirical Study of the Paycheck Protection Program

Abstract

Though the medical damage wrought by COVID-19 has been examined thoroughly, economists and legislators are still seeking effective cures for the financial repercussions of the pandemic. To address the devastating consequences of business closures and millions of employees losing both their jobs and healthcare coverage during a public health emergency, the U.S. Congress funded a Paycheck Protection Program (“PPP”). That program immediately pumped more than a half-trillion dollars in loans out to five million businesses. But criticism has been swift and widespread, if sometimes spurious, with detractors attacking the award of loans to wealthy celebrities such as Kanye West, politically connected donors such as the Kushner family, and large corporations such as Shake Shack and Ruth’s Chris Steakhouse.In this Article, we conduct one of the first empirical studies of the central component of the largest financial bailout in U.S. history. We examine quantitative data released by the Small Business Administration to answer various competing claims about the effect of the PPP. Critics have accused the program of being administered as a partisan political tool for the president’s reelection, as a corrupt slush fund for cronies of the Trump administration, and as an incompetent waste of money on undeserving recipients. We test these hypotheses to evaluate the distribution of funds and whether the disbursement materially suffered from politics, corruption, or waste. We find that the lending process not only suffered from high-profile failures, it failed to target the neediest areas, particularly early on. Other studies present mixed findings on whether the PPP successfully protected paychecks. We conclude that critical data does not yet exist, as the PPP’s greatest weakness was in failing to reach businesses unable to survive long enough to apply for or to receive loans.Accordingly, we call for a start to the process of theorizing a model for future programs to fund economic crises, which avoids the worst mistakes of the PPP. In 2008 and 2020, the U.S. government engaged in massive transfers of money from the federal fisc to corporations and, on both occasions, the task was cobbled together during an emergency, with predictable failures and shortcomings. We consider successful economic responses and how they might guide more effective, fair, and efficient models for providing emergency economic funding in the future. We may soon need one to address the continuing financial devastation from COVID-19 itself.