Two weeks ago, Congress appropriated $350 billion to help small businesses stay whole as they weathered the coronavirus pandemic. But by Thursday morning, the Paycheck Protection Program (PPP) had already burned through every last cent. Only a tiny fraction of small businesses in the country have gotten any aid so far, and Congress is deadlocked over what to do next.
How the PPP came to this impasse involves a whole host of colliding factors: the Republican Party's nihilism; congressmembers' bad instincts when it comes to designing fiscal policy; their ignorance about monetary policy; and the raw health threat the coronavirus poses to any large gathering of people — including Congress itself.
The first issue is the PPP's $350 billion allocation, which was meant to cover two-and-a-half months of payroll. But add up all the small businesses in America — defined as those with fewer than 500 employees — and their combined payroll expenses over that time period come to around $700 billion. The program works on a first-come, first-serve basis, so businesses with established relationships with the banks got to it first. Poorer businesses, those with fewer connections and clout, and those in mostly black neighborhoods and other marginalized communities got left out in the cold. The PPP also included provisions that let bigger companies with more than 500 employees get loans under certain circumstances, like if they ran restaurant chains. The fact that the program's rollout was a logistical nightmare didn't help matters either.
All told, only 1.64 million applications for loans were processed through the program — less than six percent of the 29.6 million U.S. businesses with under 500 workers. Meanwhile, something like four out of five small businesses only have enough cash on hand to weather two months, at most. You can rest assured that those businesses with the least amount of buffer are also the most marginalized, and thus probably last in line for the PPP's now-empty pot.
In other words, a few minutes of research on Google should've made it blindingly obvious to Congress that $350 billion was a woefully inadequate sum. Nothing prevented lawmakers from setting it higher. In fact, there's no reason they needed to specify a dollar cap on the program at all.
The way the PPP works is that private banks originate the loans, under terms set by the government. Then, if the small business abides by certain rules — particularly keeping its workers on and using at least 75 percent of the loan to meet their payroll — the loan is forgiven. Of course, that loses the bank money, so the point of the $350 billion Congress appropriated was to plug the hole in the banks' balance sheets. Policymakers could've just written the law so that banks could give out as many PPP loans as the small business community asked for, and Congress would commit to spending as much as needed to make that happen. They could do that right now! But instead, for no reason other than raw ideological opposition to big spending, Democrats and Republicans are batting around the idea of adding another specific dollar amount — probably $250 billion — to the program.
But the situation is even more ridiculous than that. Alongside Congress's fiscal efforts, the Federal Reserve also rolled out a huge series of monetary policy programs to combat the coronavirus recession. One of those programs is an offer to accept PPP loans as collateral in exchange for cheap credit. Basically, the Fed told the banks originating the PPP loans that it will take those loans off their books for them, in exchange for that bank taking another loan out from the Fed. Since the entire financial system is desperate for super cheap credit from the central bank right now, that's going to look like a pretty sweet deal.
This does mean that the loss from forgiving the PPP loans will now fall on the Fed's books, rather than the originating bank's. But the Fed is not like private banks; it doesn't have to keep its balance sheet positive lest it go under. The central bank is an arm of the U.S. government, and shares the U.S. government's ability to create infinite U.S. dollars. It can absorb all the losses it wants. (The Fed likes to keep its balance sheet positive for appearances' sake, but it doesn't need to.)
Technically speaking, this backing from the Fed means the sky's already the limit on how much lending the PPP program can do. It would probably behoove Congress to make the situation official: amend the PPP program to specify there is no dollar cap, and the Fed is expected to take all the PPP loans from the private banks. But as Nathan Tankus, the research director at the Modern Money Network — who has done yeoman's work explaining all the actions the Fed has taken in the coronavirus crisis — points out, this announcement by the Fed effectively renders congressional spending for the Payroll Protection Program moot.
Unfortunately, congressmembers' imaginations are not nearly so expansive. As I said, they're debating another infusion of $250 billion into the program. And it's not even clear they'll be able to do that. Perversely, both sides agree on the need to fund the PPP more. But the Democrats also want to include more help for hospitals, state governments, and local governments — all of whom are facing their own fiscal crisis — as well as some adjustments to the PPP's rules to make sure minority-owned businesses and other firms with less access get more priority. Republicans, in turn, are balking at those asks and demanding the $250 billion infusion be passed as a standalone measure.
I wrote a while back that all of these ideas are good and necessary, and thus should lay a foundation for an easy deal. But I apparently underestimated the GOP's intransigence. The White House and Senate Democrats are reportedly trying to hammer out an accord, but as of this writing things were still up in the air.
The final X-factor here is the coronavirus itself. Congress is officially on recess until May 4, and lawmakers are reluctant to physically gather again for health reasons. Whether this is forgivable caution or a dereliction of public duty, I will leave to readers to decide. They can still technically pass laws in a "pro forma" process, but that requires all bills be agreed to unanimously. Given the disagreements over how to design the next injection of money for the PPP, that's a pretty big hurdle. Some lawmakers are scrambling to put together a system for holding official votes remotely, but Congress has never done that before, and both Democratic and Republican leadership in the House and the Senate is resistant.
One way or another though, Congress will have to step up, and fast. Small businesses employ roughly half the country, the Payroll Protection Program was the one big bulwark defending them from the coronavirus' economic devastation, and it just went away.
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