Lessons from the Paycheck Protection Program


To deal with future crises, policymakers can learn from the flaws in loan distribution in the age of the pandemic.

When crisis hits, emergency spending increases. But who should receive funds and how much should they receive? In 2020 and 2021, the US government conducted a huge emergency money experiment, starting with the CARES Actpromulgated on March 27, 2020. Its main component been the 800 billion dollars Paycheck Protection Program (PPP). PPP offers two key lessons for distributing emergency cash. First, consider the background adjustments. Second, distribute in descending order of necessity. The two tools mitigate the emergency fund trade-off between speed and accuracy.

These lessons apply when a fund, such as PPP, has inadequate distribution rules. Some funds have adequate distribution rules. For example, the 9/11 Victims Compensation Fund monitoring principles of tort law and the Federal Emergency Management Agency relief for uninsured property damage follows an insurance framework. But the PPP is like other emergency funds, including the 2008 Distressed Asset Relief Programthat to give a lot of latitude to administrators.

The PPP not only lacked distribution rules, but also cast a wide net. PPP authorized requests for forgivable loans equivalent to the lesser of 2.5 times monthly payroll or $10 million for any business with 500 or fewer employees, where the 500-employee limit generally applied per location for hospitality businesses. Loan cancellation requirements, such as the use of funds for payroll and other business expenses, have been not very strict. A article estimates that, even among publicly listed companies, half have been eligible for PPP money.

The PPP’s so-called “hardship certification” did not provide further clarity. Of course, candidates had to State that “the uncertainty of current economic conditions makes the loan request necessary to support the eligible recipient’s ongoing operations”. But it was not a real constraint. This been easy to assume that a candidate has achieved certification because no one really knew what it meant.

Different commentators have suggested conflicting objectives for the PPP: portion specific economic sectors such as in-person service businesses, portion intermediary companies that would not survive without the PPP, and conservation jobs.

PPP’s weaknesses became apparent immediately after the program launched in April 2020. The Small Business Administration (SBA) has set no rules on distribution, declared the program is open on a first-come, first-served basis, and left banks overwhelmed to process requests, which soon outmoded the $349 billion in initial funds. First successful candidates have been bigger; had a banking relationship, particularly a loan relationship; and have been more likely to be white. Initially, the average grant been approximately $239,000 and approximately 47% of the cash go sums in excess of $1 million. By the end of the program in 2021, the average grant had fallen at $42,000 and only 16% of the funds awarded go sums in excess of $1 million. Later in the program, more grants were channeled to businesses that needed more money.

PPP illustrated a fundamental tension of emergency monetary policy: the trade-off between speed and precision. Administrators can Choose either to distribute quickly or to distribute accurately in accordance with a fund’s policy objectives. They cannot simultaneously maximize both.

But PPP also shows that administrators can improve their performance during an emergency fund program and mitigate the speed-accuracy trade-off. This is where PPP offers lessons for the future. Back-end adjustments and distribution in descending order of necessity To allow that the distribution takes place immediately, while anticipating subsequent adjustments to the distribution policy.

A final adjustment is a subsequent modification of the original conditions of a program. For example, in the PPP, Congress relaxed waiver conditions by giving candidates 24 weeks instead of 8 weeks to spend funds on payroll and other business expenses. More controversially, the government has used an execution threat to pressure some companies to return the money. In spring 2020, some large state-owned enterprises that received PPP grants were “Shake Shackled” by critical media coverage in April 2020. Then the SBA released orientation who clarified both “safe harborsof behavior in accordance with the law andsafe shipwrecks” behavior that would attract auditing. In the guidelines, the SBA discouraged requests of $2 million or more and requests from publicly traded companies. After this orientation, 110 public enterprises revenue around $600 million.

Distribution in descending order of necessity means distribute funds first to applicants who most clearly meet program objectives. A fund might distribute smaller amounts first, then larger and larger amounts until the fund is fully claimed. This method would allow reveal information about the candidate pool in the same way that a descending price auction reveals information about buyers competing to buy treasury bills. In particular, he revealed the “matching” grant amount—the level at which all funds will be disbursed. A variant of this idea was used in the law of December 2020 which provided for assistance to operators of closed sites. This program mandatory funds should be disbursed first to sites that have experienced a revenue loss of 90% or more, then to sites with a revenue loss of 70% or more, and then to other sites.

Distribution in descending order of necessity can also a function as an information gathering mechanism. An emergency fund would be invite apps of any size, but only fund those apps up to a certain limit first. This process allow the fund to take out money and simultaneously collect key information about the applicant pool at an affordable price. Administrators can then use this information to improve the correctness of the policy.

As the PPP shows, uncertainty about how to distribute emergency money can lead to administrative paralysis. By default, the market can take over, leading to unregulated competition for resources, which the fittest often win, undermining the purpose of the emergency fund in the first place. The task of administrators when distributing emergency funds is to simultaneously seek speed and accuracy. Next time, back-end tweaks and distributing in descending order of necessity can help.

Susan C Morse is the Agnus G. Wynne Professor of Civil Jurisprudence at the University of Texas at Austin Law School.


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