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Where Did $800 Billion Go?

Our various governments allocate money. Then the money goes into a black hole. Readers of this column know I tried to find out where Los Angeles City spent $1 billion on homelessness in a recent year and hit a brick wall. As you know our federal government has allocated amounts in the trillions and we never find out where the money goes. Remember President Obama’s “shovel ready jobs?” Where did that money go?
There is now a study on the Paycheck Protection Program (PPP), so I decided to dig into it.

The study is available here.

The study was performed by a team at the National Bureau of Research (NBER) headquartered in Cambridge Mass. The study was headed by David Autor who is MIT’S Ford Professor of Economics. Professor Autor was initially responsive especially after I sent him a misrepresentation of the program from a Left-wing author. Unlike the errant Leftist, I have intimate knowledge of the program as I helped some clients make applications and answered hundreds of their questions.

I found fault with the study from the beginning since it did not adequately explain the genesis of the program. The study did identify that it was a completely new program that was envisioned to work through our banking system (banks did the loan package review) with final approval of the loans by the SBA. The study properly cites there were initially some unanswered questions. Considering that the program was new, the amount of unanswered initial questions was minor. The biggest one was whether there would be federal loan relief with proof of proper fund usage. It was determined that the loans would be relieved.

Overview of program: In 2020, the federal government decided they would do a shutdown of businesses with the idea that it would stem the pandemic. The idea of the program was to provide funds for small businesses to stay alive and keep their workforces intact so that when the pandemic subsided the businesses would be able to gear up quickly not causing a major economic upheaval. The employees would be kept in place and off unemployment. Of course, COVID was not as short-term as initially believed, but the U.S. was only in an economic downturn for two months and PPP helped to steady business owners through an uncertain time.

The study stated, “The program deserves high marks for timeliness.” Other systems were in place to deliver money to people, “but these systems struggled to handle the flood of initial unemployment insurance claims.” “Despite obstacles, PPP succeeded in delivering a staggering sum of money over a two-month period in the spring of 2020.”

The study produced some bizarre (unexplained) statistics. It stated that the per job preserved cost was between $170,000 and $257,000 each. Since the program was aimed toward eight weeks of payroll and the most it could cover of any employee’s salary was based on an annual amount of $100,000 — or $15,384+ related payroll taxes — the authors’ calculation of cost per job saved made no sense.

The authors stated the program had a 94% participation rate. With an estimated 31.7 million small businesses as per the Small Business Administration (SBA), that made no sense either because 30 million businesses did not participate. The authors also stated 66% to 77% of the PPP funding did not go to wages. It is a mystery how they came to that conclusion since to get loan relief you had to prove that you spent 60% of money on wages.

Why certain small businesses got funded while others did not is something the authors correctly questioned. These are small businesses that generally do not carry significant in-house accounting staffs geared to applying for such programs. The companies that had relationships with outside consultants (like CPAs) that could perform the calculations quickly were able to get their loan packages in promptly and get approval in the first group of loans. Other owners who were not as astute were left without funding in the initial group of loans. By the time they woke up, they were able to get funding in the second group of loans in 2020.

Also, the fact some businesses had strong banking relationships helped to grease the wheels during the loan process. Others who did not know their banker faced greater challenges. Listen up: know your banker.

The authors criticized the program because banks largely processed loans from their existing clientele (thus shutting out others) due to the volume of loans requested. This turned out to be a godsend for protecting the integrity of the program. Since the banks were largely dealing with existing clientele, it cut significantly into the fraudulent outlays experienced in other programs due to funding “faceless” people (i.e., unknown) during this period of upheaval.

The authors did draw a conclusion with which I wholeheartedly concur. There was a third release of PPP loans in 2021 which was based on requirements of reduced levels of revenues in 2020 for the applying businesses. This aspect of funding was largely unnecessary since the economy had already bounced back and the stimulus was overkill.

The authors came to two conclusions showing their true colors which was either left of center universities or the federal reserve (quasi-governmental employees). The first conclusion was that “building U.S. administrative capacity prior to the next pandemic” would be an enhancement to the program. No, it would not. It would just add layers of government employees that have no sense of urgency to administer a program. These employees would be there waiting for another pandemic while we paid them for doing nothing. It is nonsensical recommendation. The program as designed turned out to be genius. Experienced professionals working through the existing banking system reviewed loan packages of largely pre-existing relationships cutting down time and assuring the integrity of the applications. No, we do not need more government employees.

The authors also concluded that the unemployment system payments went more directly to households, so they believed that the program was more successful in distributing money to lower income individuals. That may be correct in a small regard because it was getting money to people that were now unemployed because their employers had been crushed by the government mandated operational shutdowns. The authors did not mention the overwhelming amount of fraud in this program, estimated at a $20 billion minimum in California alone. The GAO estimated the 2021 fraud in the program nationally was $78 billion. Yet the authors suggested the unemployment system was more effective than PPP.

The other aspect the authors left out was that the people trying to receive the benefits faced an unemployment benefit bureaucracy that during good times is largely unresponsive. During the pandemic it was simply overwhelmed with increased applications while the government employees worked out of their homes with inadequate computers and communication systems.

The overarching conclusion in reviewing the study is to not rely on studies like these. The authors had no firsthand experience with the program. In fact, they probably have never had firsthand experience with any program. They create complicated formulas with biased outcomes toward governmental run programs because that is what they understand.

PPP — except for the unnecessary funds laid out in the second year of the program — was remarkably successful in keeping small businesses in place and the economy running. It was successful because it was designed by people who had real world experience as opposed to lifelong government wonks or think tank eggheads. Did it have flaws? Yes. Considering it was developed on the fly in the middle of a unique crisis it worked out pretty darn well with a minimum of fraud.