Instead of PPP, How About a Credit Lifeline?

• Author: De Rugy, Veronique
• Position: BRIEFLY NOTED

In the throes of the COVID-19 crisis, politicians are doing what politicians do: enact government spending programs based on habitual ideas for "relief." Case in point: the Payroll Protection Program (PPP), Congress's predictable attempt to help small businesses that are experiencing a severe cash crunch and loss of income because of the pandemic.

Legislators had two goals in mind when they created the PPP: help small firms by giving them needed liquidity while also creating incentives for firms to avoid employee layoffs. The latter was to be achieved by offering to convert each loan into a grant if the recipient business retained its workers for two months.

This attempt to preserve the ecosystem of small businesses has merit, in theory. First, it would allow workers to stay connected to their employers, mitigating the financial and psychological hardship of joblessness. Second, by allowing most small businesses to survive, PPP would make it easier for workers who did lose their jobs to find new ones when the economy finally reopens.

Flawed from the start/ Unfortunately, the PPP's design was flawed and counterproductive. That is the inevitable result of policymakers' inability to think creatively and realistically about both the task and the nature of the agencies in charge of administrating the relief.

Like most government relief programs, the PPP is based on the assumption that this recession resembles previous downturns. The program focuses first on injecting liquidity into the capital market to stock up banks so they can lend to businesses. However, there was no liquidity crisis in the financial sector this time around. The epicenter of the crisis was in the nonfinancial sector, with firms and individuals facing a lack of liquidity not because of an inability to borrow, but because firms had lost their consumers and individuals had lost their jobs.

Congress also thought that it was a good idea to turn over responsibility for administering PPP to the Small Business Administration (SBA), an agency with a track record for failing at helping small businesses in previous emergencies. But even if the SBA were the most efficient agency in the world, the idea was bound to fail simply because of the scale of the task at hand. As I wrote in a recent piece for Reason:

In a normal year, the agency makes about 60,000 loans totaling $30 billion. Of that amount, $2 billion are disaster loans and $23.2 billion are 7(a) loans. Under [the PPP], the SBA...