A major current problem for US policy makers is the exhaustion of the $350bn earmarked for the paycheck protection program, part of the $2trn of the congressional coronavirus stimulus money
The great success of the PPP program — the money has gone out the door quickly — is also its greatest failure. In less than two weeks since first launched on Friday April 3rd, all of the $350bn allocated to the program — some 1.6% of GDP is apparently now exhausted. And this covers only 2.5 months of payroll.
Some vicious politics has now ensued, with a congressional battle between Republicans who want the fund increased by a further $250bn with no strings attached and Democrats who want this to be accompanied by further money for hospitals, states and cities to cope with the additional costs of meeting their public health obligations.
There are though at least two major questions about the payroll protection scheme, that surely also need to be asked as more money is approved. If necessary the program must surely be tweaked if these apparent problems are real (the statistics I use here on US small business are all calculated using the 2017 SUSB Annual Data Tables)
Question One. Why are so many firms eligible to apply? It appears that any small business, regardless of the impact of the coronavirus, can apply for this money which will then be turned into a grant. There are 5,976,761 small firms with less than 500 employees in the US. According to the Financial Times some 1,637,000 have now been approved for PPP lending. The money — provided it is used to for payment of payroll — will convert to a grant and there is no interest payment for the first six months. So it is a no-brainer. This is a honey pot. Every small firm should apply. We can expect four times the number of applications approved so to be fully funded it needs not just another $250bn , it needs another $1,050 trillion !
The application form is very simple, requiring, only two items of information (average monthly payroll, number of employees plus a number of further questions to prevent fraud, double payment of misuse). Why is there no question about revenue and revenue loss since the onset of the crisis? Surely eligibility could be limited to fewer firms and it is not necessary to pay all their payroll?
Question Two. Why is the average loan amount of $207,086 so large? Are firms with more than 500 employees getting in on the act? The average monthly payroll of the 5,976,761 small firms in the US with less than 500 employees is $454,000. A loan of 2.5 months wage bill plus the additional $10,000 suggests the average loan should be 105,000. Two explanations occur to me.
- Explanation (i). The first, an innocent one, is that firms with five or less employees have largely not been able to apply so far.
- Explanation (ii) The second more worrying explanation is that large firms, who employ more than 500 people and who account for 53% of total employment and 59% of the total wage bill, have been getting in on the act?
Lets hope the first innocent explanation is correct. Then the impact of Questions One and Two on the final bill go in opposite directions. In this case average loans size may come down. Covering wage bills for all small firms should require only $565bn. The additional money requested from Congress will be enough (at least as long as the support is limited to 2.5 months)
If the other explanation applies … well the program is then in deep trouble. More money will be needed. If as may well happen it also turns out that 2.5 months is not enough and it is extended to 5 months of wage bill then it could require $2.1 trillion or 10% of US GDP !
One final thought. Suppose this really is as poorly designed as it appears to be, and the money is going where it really should not be going. Then early applicants will get money, late applicants none. In this case we can expect it all to end up in litigation. As always, it will be the lawyers who win in the end.