Problems with the Paycheck Protection Program

Problems with the PPP include unjust distribution of resource, tax avoidance, fraud, and undemocratic control of taxpayer funds.

Forgiving a PPP loan is a Handout to the Rich

Business owners get to pocket the cash when their loans are forgiven. Skeptics may respond that they had to use the PPP money to pay their employees during a pandemic – you know, to “protect” the paychecks. However, workers had to labor, hours and hours each day for months, to get their paychecks. When the loans are forgiven, nothing changes for those workers – they don’t get to have their labor forgiven. Instead, their labor likely contributed to the profit of the business owner (both with and without the loan). Many companies likely saw no downturn in revenue during the pandemic and their profit margins may have expanded. A notable exception are restaurants, but the record-breaking heights of the stock market in early 2021 suggest that many businesses have not suffered financially. Owners benefit in multiple ways. First, they get to keep the profits from the regular operation of their business – just like regular capitalists in a capitalist system. Second, business owners get to pocket that sweet (forgiven) PPP cash.

Much of the loan money was not spent on protecting paychecks, but rather just helping shore up profits for business owners. Loans could be forgiven if just 60% of the proceeds were spent on payroll costs. Loan proceeds can be spent on regular expenses like rent, utilities or software. If the loan goes to pay for these regular expenses the owners pocket the cash that they otherwise would have spent on rent. Again, a forgiven loan that went to pay for the costs of running a business is equivalent to a direct transfer to the owner.

This is corporate welfare. Well maybe not. The owners could give workers a raise and not keep a penny for themselves. This is unlikely the case in many businesses. Maybe if the SBA required that owners share their accounting books and financial records with the workers, then loan proceeds would go toward a broader set of people. Or if the owners of PPP-funded businesses were the workers themselves, maybe the PPP wouldn’t be a redistribution from the many of us to the few of them.

A Foregiven Loan Equals Free Money

Imagine I loaned you $5 at some point and said you had to use it on something that you were already spending money on, like food. Then, you bought some food and I said, “Your loan is forgiven.” That is the precise mathematical equivalent of just giving you $5. Sure, I said you could only buy food with it, but your bank account increased by $5. The PPP gave out more than $500 billion in loans. That’s a lot of money to just gift to business owners.

Republicans Fought for Favorable Tax Treatment of PPP Reciepients

A forgiven loan is essentially unearned income – the business owner received cash in exchange for no work. That scenario is quite different for workers at that business who must sell their labor in exchange for a paycheck. Indeed, if workers were paid during the pandemic, their income was subject to income tax. However, when owners were given income through the PPP (a forgiven loan is income even if it is “free” money!), they might not have to pay tax.

The Internal Revenue Service has developed rules that likely let owners off the hook for taxes related to PPP loans. Republican members of Congress attempted in Dec. 2020 to create new legislation that would prevent the IRS from taxing unearned income related to the PPP.

Big is Small: Loopholes that benefitted large corporations

Here’s some choice language from the CARES Act, which authorized the Paycheck Protection program:

“During the covered period, any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a North American Industry Classification System code beginning with 72 at the time of disbursal shall be eligible to receive a covered loan.”

The 72 refers to businesses in the “Accommodation and Food Services” industry. So, huge restaurants, hotels, casinos, RV parks and campgrounds, mobile food services and more were eligible for this special treatment of a company having multiple locations with 500 employees each. Mind you, 500 employees in a single physical location for a restaurant would make it an enormous business. I rarely, if ever (even before the pandemic), ate in a restaurant that seated 500 people – here, we are talking 500 employees. Moreover, just 500 in a single physical location. So it may be the case that a company with 100,000 employees could get a loan as long as it has 200 locations.

Big Publicaly Traded Corporations Received “Small Business” Loans

The market capitalization of Fuel Cell Inc. was $4.8 billion dollars as of early 2021, yet the corporation received a forgivable loan of $6.5 from the American public purse. See the SEC filing here.

Fuel Cell wasn’t the only one. Shake Shack applied for a loan but decided against it after public pressure. The Los Angeles Lakers basketball franchise did the same. According to an SEC filing, the largest chain of sports clubs in the North East is Town Sports International, with 8,000 employees. The sports club also has sites in Switzerland. The “small” corporation received a 2.7 million loan courtesy of the PPP.

Below is a table of some large companies that received loans, along with their market capitalization so you can see for yourself whether the PPP money went to “small” businesses.

Companies with High Market Values Approved for PPP Loans, ranked by Market Cap

Note: Some companies in the list above returned the loan following pressure and outrage, but most did not. Source: Market Cap was as of Jan. 7, 2020, and may have errors.

Low Interest Rates

Even if the loans aren’t forgiven, they may be a boon for business owners. The annual interest rate for loans through the PPP is 1%. The average interest rate for a home mortgage loan in Jan. 2020 is approx. 2.1%, which is the lowest it has been since at least 1971. Moreover, mortgage loans with that low of an interest rate would nearly always require collateral, something which is not required in the PPP. Other types of loans (e.g., business loans) almost always have higher interest rates.

I don’t think the federal government should charge high interest rates for loans, but some loans will default and the public will be the ultimate loser. With higher interest rates across all loans citizens who funded the loans to begin with could recoup some of the losses.

No Collatoral was Provided for Loans

If you want a home or car loan, the bank will often require collateral – that is, you are required to put up the home or car as security to the bank. This is why you don’t really own a home if you have a mortgage. If you don’t pay back the loan in cash, the bank gets the collateral. In the case of more than $500 billion in loans given to the rich through the PPP, no collateral was requested by the government. Some of the 5 million business owners who received loans will default from bad business decisions or simply take the money and run. With no collateral, the public government is left with less to spend on taking care of human needs like housing, education, and healthcare.

Banks Benefit Big

The SBA pays banks for processing PPP loans. For example, for a $2 million loan, a bank will receive $20,000. For processing a $350,000 loan a bank would receive $17,500. An analysis from Wall Street Journal in July, 2020 found that banks could receive $24 billion in fees. These banks include JP Morgan Chase & Co. and Bank of America Corp, which means some of the biggest banks will benefit big from a Small Business Administration program supposedly aimed to help “small” businesses.

Fraud. Downright Fraud.

Some people got caught stealing money. Some probably didn’t get caught. One analysis suggest malfeanance with 10,000 loans. Here’s some of the more exciting cases of fraud.