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Riya Anne Polcastro headshot

The Paycheck Protection Program May Have Saved U.S. Jobs, But Was PPP Cost-Effective?


Of the $800 billion allocated to small businesses through the Paycheck Protection Program (PPP), a mere 25 percent trickled down to workers, according to a recent report from the St. Louis Federal Reserve Bank. The majority of funds instead went to benefit suppliers, creditors and business owners. While the Fed notes that the PPP may have helped keep small businesses from shuttering, its effectiveness at preserving wages was not only limited, but also came at a high price. This outcome was likely unavoidable, however, due to both the parameters of the program and a lack of supportive structural systems.

The PPP was a temporary program implemented as a part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, the initial federal response to the COVID-19 pandemic. The program aimed to prevent small business closures and accompanying job losses through forgivable, uncollateralized loans — funneling up to $10 million each to firms with under 500 workers. The funds were not earmarked solely for wages and benefits and instead were available to cover other costs related to maintaining employment levels, such as utilities and rent or mortgage payments. The only requirement borrowers faced to having the loans fully forgiven was to attest that funds had been used appropriately within the time allowed, so it’s no surprise that the bulk — 90 percent — were forgiven as of June 20 this year.

But were any jobs actually saved? According to the report, yes. Just under 3 million jobs were saved each week in the second quarter of 2020, with that number dropping to 1.75 million by the fourth quarter. Although, with an annual cost of $169,000 to $258,000 per preserved position, those saved jobs came with a hefty price tag — especially considering that the estimated average compensation package for those jobs was only $58,200. Instead of using the majority of funds on payroll and employee benefits, 75 cents out of every dollar went to suppliers, creditors, owners and shareholders. As a result, 72 percent of the $800 billion allotted through the program ended up in the hands of those whose income was already in the top 20 percent.

The Fed’s researchers compared these results to the two other major pandemic programs — unemployment and stimulus checks — and found that neither allocated monies in such a regressive manner. But while the Fed maintained that the PPP was not the most efficient use of funds, it also argued that the program was necessary to prevent a tsunami of small business closures that would have had a resounding and disastrous effect on the U.S. economy as a whole. The researchers also pointed to the lack of infrastructure for work-sharing and wage subsidies as partially to blame for the failed targeting behind PPP, and they suggested expanding and implementing structural programs in anticipation of future sudden economic downturns.

Perhaps the biggest problem with PPP, however, was the scope of businesses it catered to under the label “small.”  While the name may conjure visions of the local mechanic, mom-and-pop shop or neighborhood restaurant, in reality many larger businesses that would have otherwise weathered the pandemic just fine on their own were also able to use the program to subsidize their bottom lines.

This begs the question: Why did Congress include businesses that employed more than 500 employees, no matter how they were structured? Surely firms of such size should be expected to plan ahead and survive temporary downturns largely on their own. And yet none of this comes as a surprise considering the government’s proclivity to subsidize big business in the first place. 

By allowing loans in the millions while setting such lax requirements for repayment forgiveness, the PPP encouraged businesses that didn’t necessarily need the cash to take it as a windfall anyway. Higher standards for loan forgiveness could have prevented some of this. As the program was written, business owners knew they wouldn’t have to repay the money regardless of how much trickled down to employees and therefore had little reason not to take out the loans and spend the money as they saw fit to improve their profit margins.

Image credit: Viktor Forgacs via Unsplash

Riya Anne Polcastro headshot

Riya Anne Polcastro is an author, photographer and adventurer based out of the Pacific Northwest. She enjoys writing just about anything, from gritty fiction to business and environmental issues. She is especially interested in how sustainability can be harnessed to encourage economic and environmental equity between the Global South and North. One day she hopes to travel the world with nothing but a backpack and her trusty laptop. 

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