This is a question answered in a paper Author et al. (2022). Some background on PPP:
Congress created the Paycheck Protection Program (PPP), which provides up to $10 million in unsecured, low-interest loans to companies with fewer than 500 employees—these loans are forgivable, subject to employment and wages at the recipient company Stay close to crisis levels two to six months after the loan is received.
The PPP is one of three federal initiatives to address the impact of COVID-19 on the U.S. economy. These three (and associated funds) include:
- Paycheck Protection Program: $800 billion
- Stimulus checks: $800 billion
- Unemployment benefits: $680 billion
Note that each of these three programs is roughly the same size as the American Recovery and Reinvestment Act of 2009 (ARRA), the primary fiscal stimulus passed in response to the Great Recession of 2007-2009.
What is the impact of PPP? The author found it:
Between 1.98 and 3 million work-years were lost during and after the pandemic, resulting in significant cost savings of $169,000 to $258,000 per work year. The PPP also reduced the temporary closure rate for small companies, although whether it reduced permanent closures is unclear. However, the majority (66% to 77%) of PPP loans disbursed in 2020 were not used to pay salaries, but went to business owners and shareholders. And because business ownership and equity is concentrated among high-income households, the program’s impact on the overall household income distribution is highly diminishing…three-quarters of PPP benefits accrue to the top quintile of household income. By contrast, the incidence of federal pandemic unemployment insurance and household stimulus payments is more evenly distributed.
Note that the lack of goals does not necessarily make PPP a bad program. Policymakers could have insisted on better targets and stricter thresholds for accessing funding. Doing so, however, could significantly slow the delivery of aid and reduce the effectiveness of the program.
Some additional info:
- Payment is fast: $505 billion in initial drawdown loans, all but 7% disbursed in 2020, mostly in April and May.
- Business owners, not employees, are the main beneficiaries. 23%-34% of loans backed by the first 2 are for workers’ compensation; 66%-77% of loans go to business owners or creditors.
- Backward stimulus. Purchasing power parity is inherently backwards compared to unemployment insurance or stimulus (see chart below).
Some might argue that the retrogressive nature of PPPs is problematic. Other things being equal, redistribution should benefit the poor. However, if SMEs go bankrupt, it will not only be detrimental to the economy in the short term. If businesses are dissolved, the know-how built up by these businesses may disappear because once a business goes out of business, it is difficult to restructure. Also, if many small and medium-sized businesses (who may have less secure balance sheets) fail, prices could rise due to a lack of competition.
Program Description
Allows businesses to draw down PPP loans worth up to 10 weeks’ worth of payroll costs – including wage and salary compensation of up to $100,000 per worker, plus paid time off, health insurance costs, other benefit costs, and state and local taxes – maximum loan size for $10 million.
While the moniker of the Paycheck Protection Program suggests that the program focuses solely on employment, the loan forgiveness standard reveals another complementary goal: providing liquidity to companies to meet noncompensatory obligations to creditors such as suppliers, banks and landlords. Businesses must do four things to qualify for PPP loan forgiveness: 1) spend at least 60% of the loan amount on payroll expenses; 2) spend (at least) the entire loan amount on total eligible expenses, including wages, utilities , rent and mortgage payments; 3) maintain average full-time equivalent employment at pre-crisis levels; 4) maintain employee wages at no less than 75% of pre-crisis levels.
