A restaurant owner in New Jersey had a succinct reply when asked about the role the Paycheck Protection Program played in his business: Were it not for that program, “I wouldn’t be here!” he said. Indeed, his bank account was down to his last $3,000 before the second PPP installment arrived, he added. 

Through that program, he was able to keep a skeleton crew of longtime employees on the payroll during the COVID-19 crisis. And it allowed the restaurant to scrape by on takeout orders until warm weather arrived and customers could dine and drink outside. 

Still, it became evident among the restaurant community that PPP funds were not being distributed equally and were not helping the smaller establishments that needed them most. Analysis at the Federal Reserve Banks of St. Louis and Boston confirmed those perceptions.

The PPP was run under the authority of the Small Business Administration, with loans made by lending institutions and then guaranteed by the SBA.

William R. Emmons and  Drew Dahl of the St. Louis Fed found that, to policymakers’ credit, the program was implemented quickly, only three weeks after declaration of a national emergency. It provided billions of dollars to maintain payrolls, hire back employees and cover important overhead. And it wound up most of its operations within two years, with more than 90% of the nearly $800 billion of PPP loans forgiven as of June 2022. 

The program had a clear impact on preserving jobs. Research by the economist David Autor and others at the Massachusetts Institute of Technology estimated that taking out a PPP loan boosted firm employment by 4% to 10% in May 2020 and by 0% to 6% by the end of the year.

The program had a clear impact on preserving jobs. Research by the economist David Autor and others at the Massachusetts Institute of Technology estimated that taking out a PPP loan boosted firm employment by 4% to 10% in May 2020 and by 0% to 6% by the end of the year.

But the cost was steep. The authors estimate that the program cumulatively preserved between 2 million and 3 million job-years of employment over 14 months at a cost of $169,000 to $258,000 per job-year. 

That implies that only 23% to 34% of PPP dollars went directly to workers who would otherwise have lost jobs. The balance flowed to business owners and shareholders, including creditors and suppliers of firms receiving PPP funds.

But the PPP was a government-guaranteed loan and grant program to small and medium-sized businesses, with the goal of preserving jobs at those firms.

An analysis by Gustavo Joaquim and J. Christina Wang at the Boston Fed also looked at the effects of the program. Its first stage ran from April 3 through Aug. 8, 2020, with more than 5 million loans amounting to just over $525 billion. In the end, the program disbursed roughly $800 billion in loans.

Only small businesses with 500 or fewer employees were eligible for the program. The loans were fully guaranteed by the government, and the maximum loan amount was 2.5 times a firm’s average monthly payroll costs in the preceding year, up to $10 million. 

A firm could apply for a second PPP installment if it met several conditions: It had spent all of its first-round loan only on authorized expenses, it had no more than 300 employees, and it could demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. The maximum loan size for a second-round PPP loan was $2 million. 

PPP loans did not require collateral or personal guarantees and would be fully forgiven if funds were spent in accordance with the rules, such as those on permitted expenses (chiefly payroll) and on maintaining employment levels.

Joaquim and Wang found that more creditworthy firms were more likely to receive a PPP loan and to receive it earlier. In addition, firms that received loans in the earliest stages of the program were less risky (in terms of credit scores) than those receiving loans at later stages. 

Finally, firms that received any PPP assistance were less risky than those that did not. Overall, a PPP loan significantly improved the recipient firm’s financial condition, leading to an 18% reduction in credit risk on average, Joaquim and Wang found.

The authors also said that later loan recipients exhibited greater financial improvement compared with earlier recipients within the same state, industry, age group, and size group, and even more so if the comparison was restricted to firms with the same pre-COVID financial and commercial viability. In our opinion, this confirms that businesses that were last in line for relief were the ones that needed it most.

The St. Louis Fed authors found the PPP to be a “critical but imperfect policy.”

The MIT authors wrote that the program essentially disbursed aid without clear target recipients because the United States lacked the administrative structure to properly identify them. Other high-income countries with modern administrative systems were better able to target pandemic business aid to firms in financial distress. 

Only about a quarter of PPP funds supported jobs that would have disappeared otherwise, the MIT authors added, and PPP benefits flowed disproportionately to wealthier households rather than to the rank-and-file workers. Other crisis programs, including unemployment insurance and economic impact payments, were targeted much more successfully to wage earners.

The MIT authors concluded that building similar administrative capacity in the United States would enable improved targeting when the next pandemic or other large-scale economic emergency inevitably arises.