Did the Paycheck Protection Program fail, and if so, why?

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While billions of dollars remain available to fund new Paycheck Protection Program loans, and some banks continue to accept applications, at this point it’s fair to say that the program is at least entering its final act, and the debate over its success or failure has begun in earnest. I’ve written about PPP loans (and the sister program, EIDL) in the past, so I want to give a brief overview for those struggling to figure out: what just happened?

What was the Paycheck Protection Program?

Over the course of its brief incubation, florescence, and decay, the PPP underwent many changes: the repayment period for unforgiven loans was lengthened and the required share spent on payroll was lowered, to give two important examples. But the underlying logic of the program always remained the same:

operating through private banks, the federal government would loan money to employers, with the amount calculated on the basis of their pre-crisis payroll expenses;
employers that maintained their employee count and payroll expenses at a certain percentage of the pre-crisis level could apply for their entire loan balance to be forgiven.

What was the PPP supposed to achieve?

Much criticism and praise of PPP revolve around competing answers to this question, so it’s important to understand the logic of the system as designed. The program was not designed to “subsidize employment” or to “keep people at work.” On the contrary, the expectation was that a temporary (the program was only supposed to last 2 months) period of business closure would give the government time to bring the virus under control and allow the economy to re-open. Instead of swamping state unemployment insurance systems with claims Congress knew those systems would be unable to manage, they conceived of the PPP: let employers administer unemployment benefits instead.

A closed business that agreed to keep paying its employees for a few months would receive a small additional subsidy to cover fixed expenses like utilities and rent, and would not see their unemployment insurance premiums rise, while employees would not see their pay decrease or be forced to wade through state unemployment insurance systems. Those systems, meanwhile, could focus their efforts on reviewing the claims of permanently laid-off workers, without being overwhelmed by folks anticipating just a few weeks or months of lost income.

So what went wrong?

Explanation 1: The Program Worked

This is the strongest form of the pro-PPP (or anti-anti-PPP) argument. In this view, nothing went wrong.

After a few early administrative hiccups, the program was successfully implemented, with large national banks, smaller regional banks, and even the smallest community banks and credit unions underwriting hundreds of billions of dollars in loans to businesses forced to temporarily close, either due to regulatory requirements or the simple fact of economic crisis. The program was so successful additional funding was allocated, and a few administrative requirements were eased in order to encourage maximum participation.

While it’s true that many of those businesses later decided not to retain their employees on payroll, couldn’t meet the loan forgiveness requirements of the program, or permanently closed, that shouldn’t distract from the fact that many employees did continue to receive stable paychecks, employer-sponsored health insurance, retirement savings contributions, and the promise of a return to normalcy after the first wave of infections ebbed.

The only failure, in this telling, is the failure of the government to follow through on its part of the deal: bringing the virus sufficiently under control that two months of federally-funded payroll expenses is all it would take to relaunch January’s full-employment economy.

Explanation 2: Communications Failure

This is the most generous explanation that still admits the failure of the program, and suggests that PPP was adequately designed and adequately implemented, but its design and objectives were inadequately communicated to the relevant actors. This explanation suggests a kind of “diffuse” blame: Congress should have been more clear about its intentions, the administration should have been more clear about its expectations, and banks should have reserved loans for employers committed to using the funds as intended to preserve their pre-crisis payroll.

How damning you find this criticism depends, I think, on how realistic you find the alternatives. If you believe that the total emergency funding Congress was willing to provide was fixed, then each dollar wasted on PPP logically could have been spent on an effective measure instead, like raising SNAP benefits, increasing the unemployment insurance top-up, or simply providing additional funds to state unemployment insurance offices to train the staff needed to deal with the influx of new claims. If you believe each leg of the emergency response stool rests on its own, then no money was “wasted” on PPP at all, since it wouldn’t have been spent on anything else.

Explanation 3: Funding Failure

Here we see a more combative argument: Congress’s artificial stinginess was always the program’s Achilles heel. In the face of economic ruin, the federal government should have stepped in and said “all payroll expenses up to $8,333 per employee, per month, will be reimbursed in full” (forgivable PPP payroll is already capped at $100,000 in salary per employee). This would be easily implemented through payroll processing companies or, for companies that process payroll manually, advance tax credits, and (just like PPP) would cost a modest fraction of the face value given that FICA, state, and federal income taxes would still be owed on the subsidized payroll.

In this telling, it was Congress’s ass-covering tendency that suffocated PPP. Each additional layer of bureaucracy and “fraud prevention” excluded more and more employers from the program, making it easy to attack unpopular organizations who eventually managed to navigate the gauntlet. Universal participation, while expensive, would have diffused criticism and much more effectively achieved the goal of the program: to save the American economy.

Explanation 4: Ideological Failure

Each of the preceding explanations has somewhere between a grain and a bushel of truth in it. For employers that were able to receive funding, continued to make payroll, and achieved their loan’s forgiveness requirements, the program worked exactly as intended. The failure to clearly articulate the design and intention of the program both discouraged participation and led to a media backlash which has drowned out any success the program did achieve. Inadequate funding, private sector log-rolling and bureaucratic incompetence hobbled the program from the start and have ironically left billions of dollars that Congress did ultimately appropriate to the program unclaimed or refunded.

Taking all that into account, I believe the program did fail, and it failed for a much simpler reason: because it required employers to act on behalf of and for the benefit of their employees. No matter how good an idea the waiter, dental hygienist, janitor, or clerk thinks the PPP is, no matter how much they might prefer to receive their paycheck rather than run down their unemployment insurance entitlement, no matter how much they might prefer to stay on their current health insurance plan rather than transition to Medicaid or the ACA exchanges, they never got a say. The decision was left up to their employer.

At first glance, this failure should not strike you as quite as bad as it sounds. After all, Congress also extended and expanded unemployment benefits, Medicaid is still available to most unemployed people in most parts of the country, SNAP work search requirements have been suspended, and even certain evictions have been suspended in many parts of the country. In other words, Congress gave workers whose employers “opted out” of PPP alternatives for income, health insurance, food, and housing.

The ideological failure is that employers don’t want to pay their employees to stay at home doing nothing. This is not because it’s unprofitable; after all, Congress is footing the bill. Rather, it’s because employers never volunteered to administer the welfare state: they expect their employees to work, no matter who is paying the bill. Congress thought they could “maintain the employer-employee relationship,” and ease re-hiring post-pandemic, by bribing employers to continue their payroll, and in one sense, they were right. They were just confused about what the employer-employee relationship entails. It entails work, when what we needed to suppress the contagion was precisely the opposite.

Conclusion

I have tried to be as fair as possible to all four explanations for the success or failure of PPP to date. Feel free to take each explanation in the dosage that seems appropriate to you. But there are two conclusions that I think are irresistible, regardless of your preferred explanation.

First, these ad hoc emergency programs are always going to be vulnerable to communications failures, and we need a better, more sustainable solution. Those still capable of remembering more than 3 weeks in the past might recall the Solyndra debacle, an almost perfect analogy to the PPP. In the face of the collapse of the financial system and accelerating climate change, the Obama administration included in its recovery initiative a loan subsidy program for experimental clean energy technologies. The program was an unqualified success, and never lost money, but Solyndra became a poster child for government waste. Sound familiar? If we want the federal government to invest in clean energy, and if we want employers to administer the welfare state, we should communicate that clearly, forcefully, and on a permanent basis — not ad hoc in the middle of an unprecedented emergency.

Second, we should have taken into account more seriously, and sooner, the changes to work the crisis would require. Instead, we’ve sleep-walked into a complete restructuring of the labor force, without enacting any of the required policy changes. White collar employees try to work from home while serving triple duty as childcare workers and teachers, grocery store employees scramble to find childcare and transportation, nurses and doctors get sick and die caring for the virus’s victims, while bartenders and servers collect either unemployment insurance or paychecks, depending on their employer’s whim. While we shouldn’t design our economy around this crisis — the next crisis is sure to look different in important ways — we should proactively design an economy that is capable of responding to those future crises more nimbly than this, or the failures will continue to mount.