Some fixes needed for Payroll Protection Program
Without dispute, the Paycheck Protection Program has helped some struggling businesses stay afloat. To date it has provided $511 billion in forgivable loans (essentially federal grants) to millions of distressed businesses and organizations. But because the application didnâ€™t require an effective demonstration of need, there is also little doubt that a significant number of businesses that werenâ€™t in danger of going under also received these grants.
Although the economic devastation from COVID-19 is shocking, many businesses continue to operate profitablyâ€”and obtain PPP loans. Of the businesses that received money in the first tranche of PPP spending ($342 billion) only 8.9 percent belonged to the hard-hit accommodation and food-services sector, which includes hotels and restaurants. More than half went to professional, scientific and technical services; construction; manufacturing; wholesale trade; transportation and warehousing; finance and insurance; and mining. Did all the businesses that received PPP loans in these categories truly need them?
The programâ€™s primary objective, as stated by its sponsors, was to provide financial support to employees by keeping them connected to their employers, regardless of whether there was work for them to perform. This helped accomplish a corollary goal of reducing the number of people seeking unemployment benefits. But with 40.7 million Americans filing initial unemployment claims in the past 10 weeks, itâ€™s hard to claim that PPP and the Cares Act were as effective at limiting layoffs as we had hoped.
With the House passage of a $3 trillion â€śPhase 4â€ť relief package, now is the time to evaluate seriously the $2.9 trillion weâ€™ve already put into lawâ€”particularly given that less than half that amount has been spent or obligated. Before we authorize another dime, we should determine if there are better ways of spending the remainder.
PPP loans were disbursed, for example, based on the assumption that 75 percent of the loan would provide financial support for eight weeks of payroll. Because many employers who took the loans didnâ€™t retain enough employees to spend all that money within eight weeks, the House just passed a bill that would extend the period in which companies can spend PPP funds to 24 weeks.
Iâ€™m not opposed to this change, but itâ€™s not the only one thatâ€™s needed. Congress also should enact reforms that will prevent future funds from flowing to organizations that donâ€™t need them. This crisis is far from over, and pressure will build to authorize even more spending. Our ability to expand federal debt is not unlimited. Any funding must be carefully distributed.
When the PPP and Cares Act were passed, no one knew how this crisis would unfold. As we get a clearer picture, itâ€™s necessary to make adjustments. We now know that until an effective therapy, cure or vaccine becomes available, fear of Covid-19 will preclude certain otherwise viable businesses from reopening. To survive the shutdown, some may need a plan to close all or a portion of their businesses temporarily, and all will need sufficient capital to reopen. Neither the PPP nor the rest of the $2.9 trillion relief packages adequately address this need.
Starting with the PPP, Congress should make sure any additional funds appropriated for small businesses are provided only to organizations that need them by requiring a demonstration of needâ€”such as the percent of revenue lost because of the crisis so far. PPP loan forgiveness should also be based on an entityâ€™s ability to repay, measured by its 2020 after-tax income. The program was intended as a lifeline, not a profit protector or enhancer. No one should be allowed to make money off it.
Finally, Congress needs to design a program that combines loans and grants to restore capital to the full spectrum of viable nonpublic businesses. Many businesses are caught in the middleâ€”they either donâ€™t qualify or have run out of PPP funds, and they canâ€™t afford to recapitalize with 100 percent debt.