At the onset of the pandemic, when many American small businesses faced mandatory closures and a drastic reduction in revenue, the Paycheck Protection Program offered a crucial financial lifeline. In a two-week period in March and April, more than 10 million Americans filed first-time unemployment claims, and widespread, permanent small business closures and job losses seemed inevitable.
Within a week of the passage of the Cares Act, the Small Business Administration, in consultation with the Treasury Department, launched PPP, injecting liquidity into businesses around the country. Very quickly, the number of Americans filing unemployment claims each week began to decline significantly. This wasn’t a coincidence.
PPP was designed to facilitate stay-at-home orders while simultaneously sustaining America’s small businesses and the jobs they provide. By allowing workers to comply with public-health instructions while preserving the relationships between employers and employees, we could prevent layoffs and minimize skill degradation.
The retention of pre-existing employment relationships was necessary to maximize the chances of a V-shaped recovery once the economy was allowed to reopen. PPP had the further benefit of reducing strain on state-administered unemployment-insurance systems and preventing the 25% unemployment rates that many experts were forecasting. The historic speed and strength of the recovery since May has underlined that in a recession preserving jobs and preventing layoffs is far easier than creating new jobs.
PPP coverage was broad, reaching every pocket of the American small-business community. More than 80% of eligible small-business payroll was supported, which amounted to more than 51 million jobs by the time the second tranche of funding closed. By matching PPP loans to census tracts, we found that 27% of PPP funds went to low- and moderate-income areas, commensurate with the 28% of the American people who live in these areas.
Over the summer, academic researchers produced quick evaluations of PPP. Surprisingly, they generally found very small—potentially zero—effects from PPP on jobs, implying that nearly all of those 51 million workers would have kept their jobs even in the absence of PPP.
How could such a finding be possible? Economic theory and evidence suggest that smaller businesses are the most vulnerable to any economic shock. Compared with large businesses, they have smaller cash buffers, limited access to lending and credit markets, and less bargaining power with suppliers and other business partners, and they may face greater difficulties hiring and retaining workers.
There is ample evidence that widespread business failure ought to have occurred. For instance, a 2016 JPMorgan Chase report found that 75% of small businesses had enough cash to last less than 62 days without cash flow. Indeed, perceptions in markets have been that PPP was central to saving the economy; JPMorgan CEO Jamie Dimon suggested that PPP may have saved 35 million jobs. The belief that PPP saved few or no jobs suggests that there would have been few bankruptcies without PPP, and that all small businesses had the ability to withstand months of revenue declines without layoffs. Made explicit, that assumption stretches credibility.
Most researchers find such small effects from PPP because they study firms just above and just below the eligibility threshold for PPP loans of 500 employees and look for differences. That means their results are valid for midsize firms of about 500 employees, which are often large enough to be more resilient to shocks, unlike smaller firms. But these results say little about the true targets of PPP, which were much smaller businesses. A 10-person firm is less capable of surviving a shock than a 500-person firm. And a careful examination of PPP data indicates that roughly 75% of loans went to firms with nine or fewer employees. In fact, less than 0.4% of loans, worth 11% of PPP dollars, went to firms with more than 250 employees.
To overcome this difficulty, in research available on Treasury’s website, we have explored variation in when loans were received. There is evidence that because of differences in the speed with which banks were able to disburse PPP loans, some regions received loans weeks before others. If PPP really saved jobs, the areas where loans arrived early should have seen several weeks of superior job performance, followed by eventual convergence of labor markets across regions as PPP loans saturated the country.
We found exactly that pattern. Counties that received PPP loans early saw smaller unemployment jumps in April and May. The differences among regions diminished over the summer as PPP expanded and disappeared altogether by the fall. We find that moving from the 25th percentile to the 75th percentile of counties by early PPP penetration improved the insured unemployment rate in the spring by more than 12 percentage points, the equivalent of 18 million jobs when extrapolated nationally. Such numbers would imply the cost of each job saved was less than $30,000, indicating that PPP not only was highly effective at saving jobs, but also did so in an extremely cost-effective manner.
PPP’s scale and speedy implementation were crucial to avoiding a slow, yearslong recovery like the one that followed the 2008-09 financial crisis. PPP is one of the main reasons why the unemployment rate peaked at only 14%, and why it took a mere six months to decline by more than half from its peak—a feat that took six years under the previous administration.
These results underline why Treasury, the SBA and many lawmakers of both parties have called for an extension of PPP. Its success has been pivotal in supporting the recovery. Moreover, the large effects we find for all firms, combined with the small effects found by other researchers for larger firms, suggest that future rounds of PPP should be targeted at smaller firms. The best use of taxpayer dollars is to target firms most in need of assistance.
As the largest economic-support program for small businesses in American history, PPP quickly delivered critical economic help for American workers. The evidence shows that PPP provided immediate economic relief to the businesses most in need, saving millions of jobs, staving off bankruptcy risk, and helping to stop an economic depression dead in its tracks. As state and local governments have begun to restore restrictions on small businesses, the time is right for Congress to authorize a second round of PPP.
Mr. Faulkender is Assistant Secretary of the Treasury for Economic Policy. Mr. Miran is Treasury’s Senior Adviser for Economic Policy.
