Apr 23, 2020 - Economy & Business

How to improve the Paycheck Protection Program

Felix Salmon, author of Edge

Illustration: Eniola Odetunde/Axios

Of all the economic stimulus programs, the most controversial and least popular is the Paycheck Protection Program, or PPP. That's a bit weird, since it's basically free money for small businesses, which is something you'd expect to be popular.

The state of play: The program managed to get $342.3 billion to small businesses (including Axios) in the space of just a few weeks. That's pretty impressive. Most of that money will go straight into paychecks, keeping Americans employed. And there's another $322 billion where that came from.

Why the anger? The biggest flaw with the PPP was just that it was underfunded. Almost all small businesses are eligible, as well as some larger ones. That created a two-class system where some businesses got funded and others didn't, which is unfair. Worse, many of the funded businesses seem to be the ones that needed the money least — they were already rich, or had access to capital markets.

  • Businesses had to apply through banks, and many banks, large and small, failed their clients. Technology crashed, phones weren't answered, and a lot of CEOs got very angry and frustrated.
  • The government wanted the banks to act like simple utilities. But banks aren't set up to do that. Instead, they're built to maximize complexity and cross-selling. Simpler and smaller banks seem to have done better at just getting applications in.
  • America's lenders earned $10 billion in fees for this underwhelming display of general incompetence, which turbocharged the anger.

What other ideas are out there? Here are three.

1. Free small-business overdrafts. Mark Cuban emails to suggest that instead of asking for 2.5 months of payroll in advance, small businesses should simply be automatically reimbursed every time they go overdrawn to pay workers. The overdraft is supplied by their bank, which has their payroll information, and then the bank is made whole by the Fed, using funds from Congress.

2. Don't use the banks at all. Instead, use the tax withholding system, whereby employers pay taxes on a pay-as-you-go basis to the government. Those withheld taxes can then be sent straight back to the employer as an employment subsidy.

3. A paycheck guarantee, which would be a bit like the system that Denmark has implemented. Set a cap of around $90,000 or $100,000 per year, and then the government covers 75% or so of workers' earnings up to that cap, by reimbursing employers.

Between the lines: All three of these ideas have the advantage that many small businesses don't trust the government to forgive their loans in seven weeks' time. If loan forgiveness happens overnight, or if there's never a loan at all, then businesses will feel much more comfortable using government money to pay workers.

Go deeper: The story behind the coronavirus job losses

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