Testimony of Douglas Holtz-Eakin, American Action Forum — Senate Small Business Committee, December 10, 2020

Summary

Written testimony of Douglas Holtz-Eakin, President of the American Action Forum, before the United States Senate Committee on Small Business and Entrepreneurship, dated December 10, 2020, for the hearing Small Business in Crisis: The 2020 Paycheck Protection Program and Its Future. The testimony states that the SBA disbursed $525 billion of the $659 billion appropriated for the PPP as of August 8, with $134 billion remaining. It describes the program's strengths, including the declining average loan size, and discusses criticisms of its single-application structure, loans to publicly traded companies, allegations of fraud, SBA capacity and confusion over forgiveness. It recommends that Congress consider reinstating the program with a revenue-replacement structure and multiple applications. It refers to Figures A through G drawn from SBA data.

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                                     Testimony on:

      Small Business in Crisis: The 2020 Paycheck Protection Program and Its Future




                                  United States Senate

                  Committee on Small Business and Entrepreneurship




                            Douglas Holtz-Eakin, President*
                               American Action Forum




                                  December 10, 2020




*The views expressed here are my own and not those of the American Action Forum. I thank
Thomas Wade for his insight and assistance.
Chairman Rubio, Ranking Member Cardin, and members of the Committee, thank you for
the privilege of appearing today to share my views at this hearing titled “Small Business in
Crisis: The 2020 Paycheck Protection Program and its Future.” I wish to make three main
points:

    •   The $525 billion authorized by the Paycheck Protection Program (PPP) and
        disbursed by our nation’s banks is perhaps the single most effective policy tool
        deployed by Congress in response to the economic stresses posed by COVID-19;
    •   Any weaknesses exposed in the program are far outweighed by its successes, and
        were Congress to reinstate the PPP without any program changes this would likely
        be a significant benefit to the economy; and
    •   Potential PPP reforms include shifting focus to revenue replacement rather than
        payroll retention, simplified forgiveness, and structural improvements at the Small
        Business Administration (SBA) and Treasury.



The Status of the Paycheck Protection Program

Title IV of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law
on March 27, 2020, set aside $349 billion for the relief of small businesses, to be
administered by the SSBA in the form of the P PPPP1. The SBA commenced the PPP on April
3, 2020, and closed the program on April 16, 2020, on the exhaustion of the $349 billion
appropriated by Congress. Congress later provided an additional $310 billion for the PPP in
H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act.2 This
supplement brought the total funds available to the SBA and the PPP to $659 billion.
Per the original drafting of the CARES Act, the PPP program was due to expire at midnight
on June 30 regardless of funds remaining. Just hours before the expiration of the program,
Congress authorized an extension through August 8. This date passed without a second
extension to the program, with the result that the SBA ceased taking applications to the
program.
As a result, the PPP remains frozen in time as of August 8. As of that date, the SBA has
disbursed $525 billion of the $659 billion so far appropriated by Congress to this program,
with $134 billion, or 20 percent of PPP funds remaining available to the program.3 Figures
A through D (below) illustrate the total number and value of PPP loans disbursed to date in
addition to the average value of a PPP loan and the total number of SBA-approved lenders
across the entire life of the program. All data in Figures A through G come from the SBA
website, as interpolated by the American Action Forum.4


1
  https://www.banking.senate.gov/newsroom/press/cares-act-title-iv-summary
2
  https://www.congress.gov/bill/116th-congress/house-bill/266
3
  https://www.americanactionforum.org/research/tracker-paycheck-protection-program-loans/
4
  https://www.americanactionforum.org/research/tracker-paycheck-protection-program-loans/
Figure A




Figure B




Figure C




Figure D
The SBA also made available data on the top 15 lenders by value disbursed, a breakdown of
all lenders in the program by asset size, and a breakdown by loan size, as can be seen in
Figures E through G below.

Figure E




Figure F




Figure G
Strengths of the Paycheck Protection Program

In June I noted in my writings that the PPP has been an enormous success; nothing has
occurred since that time to change my opinion.5 The data presented above are testament to
what the SBA and Treasury have achieved in coordination with our nation’s banks –
distributing $525 billion in financial assistance to small businesses in a time of crisis. In the
first two weeks of April and the first two weeks of May, the PPP distributed a combined
$513 billion, a testament to hard work at the SBA, which is used to handling fractions of
this volume. The $525 billion distributed stands in stark relief to emergency aid to
companies as provided by the Federal Reserve’s s13(3) emergency loan facilities, including
the Main Street Lending Program, which to date has provided about $2 billion of the $600
billion it is authorized to back.6 The total $669 billion authorized by Congress represents
the single-largest component of the policy response to COVID-19 and alone is not far short
of the estimated $840 billion cost of the 2009 Recovery Act.7

Injecting billions of dollars into a supply – and therefore liquidity – shock economic
environment could be deemed a success in and of itself. The PPP went further, however,
and recent research by Hubbard and Strain shows that the PPP “substantially increased the
employment, financial health, and survival of small businesses.”8
Figure C shows that across the entire life of the PPP the average dollar size of each loan
only decreased. This decline means that new loans were steadily smaller; the average loan
size fell from $239,00 in the first week to $100,000 by the end of the program. The PPP is
well beyond serving only “big” firms and reached increasingly smaller ventures. At the end
of the program, loans under $50,000 represented 69 percent of total PPP loans, and 12
percent by value. Loans over $5 million represent less than 1 percent of total PPP loans,


5
  https://www.americanactionforum.org/daily-dish/fixing-the-ppp/
6
  https://www.americanactionforum.org/insight/assessing-financial-support-for-businesses-during-the-pandemic-
the-state-of-play/
7
  https://www.stlouisfed.org/on-the-economy/2017/may/which-bigger-2009-recovery-act-fdr-new-deal
8
  http://ftp.iza.org/dp13808.pdf
and only 6 percent by value. These proportions remained largely unchanged toward the
end of the program.
Figure E demonstrates the vital role of our nation’s banks in providing the loans backed by
the PPP and the SBA. While credit is of course due to JP Morgan Chase and the other
financial titans that provided such a significant percentage of total PPP authority, the list of
top 15 lenders demonstrates a considerable effort by smaller and regional banks,
demonstrating that the program was created to engage the banking industry as a whole.



Weaknesses of the Paycheck Protection Program

Program Structure

The PPP was created as a forgivable loan program where loans effectively acted as grants.
The SBA delegated significant authority to banks to allow borrowers to borrow up to 2.5
times their average monthly payroll costs, capped at $10 million.9 This fairly unique
structure capitalized on existing relationships between small businesses and their lenders
and the capital available within the banking system to disburse large amounts of funds very
quickly. In this the PPP succeeded. Initial criticisms of the program’s structure focused on
the unusual necessity for the involvement of the banking industry and the incentives that
would be required. The PPP was also criticized for the initial $349 billion being too low, a
problem that was corrected.

It is tempting to see the remaining $134 billion unused by the PPP as a failing or a
weakness, and indeed some commentators attempted to pin the blame on confusing
program terms or a lack of clarity on forgiveness (see below). This assertion is refuted
somewhat by the staggering news from the U.S. Census Bureau that nearly three-quarters
of all small businesses in the United States received a PPP loan.10 One of the most common
criticisms of the PPP is that the program limited aid to a single application, and thus that
the program was clearly geared toward a much shorter lockdown period. While this made
sense at the time (particularly when the program was only authorized for $349 billion),
nine months into a pandemic it is likely that businesses will require a second loan or source
of support. This simple change would likely exhaust remaining PPP funds in short order.

If Congress has an appetite for more significant restructuring, the most effective reform
could be to change the PPP’s focus from payroll to revenue. While a useful goal, payroll is
not the most reflective metric of the costs and challenges small businesses face. A revenue-
replacement program would capture the universe of expenses facing small businesses and
would be easier to certify. Such a program would likely be expensive, however, with Strain


9
  https://www.americanactionforum.org/insight/financial-services-provisions-in-the-coronavirus-aid-relief-and-
economic-security-cares-act-final-version/
10
   https://portal.census.gov/pulse/data/
and Hubbard estimating that replacing 80 percent of revenue for 12 weeks for eligible
service-sector businesses would cost $1.2 trillion11.



Allegations of Fraud and Inappropriate Recipients

In the first two weeks of April, publicly traded companies received $365 million in PPP
loans, leading to considerable condemnatory media coverage.12 Some of these recipients,
including Shake Shack and the L.A. Lakers, subsequently chose to return the proceeds. It is
worth noting that none of these firms had acted inappropriately, and any funds they might
have received would have aided them in retaining payroll, the entire point to this program.
Nonetheless, the SBA responded to these criticisms by indicating that any business with
access to capital markets would be unlikely to make a good-faith certification that it was in
need of aid, and Treasury Secretary Mnuchin committed to a review of every loan provided
in excess of $2 million. Figure C above demonstrates that PPP loans only decreased in size,
targeting increasingly smaller businesses.

In addition to singling out individual recipients of aid, the PPP has been criticized for not
targeting industries most impacted by COVID-19, states most impacted by COVID-19, or
minority groups disproportionately impacted by COVID-19.13 The PPP as drafted was not
designed to discriminate on any of these factors. That the program still had funds available
when the PPP expired indicates that “less deserving” recipients did not prevent “more
deserving” recipients from obtaining aid, however those terms are defined. Some potential
recipients of aid may have been prevented from obtaining a PPP loan by virtue of a lack of
relationships with banks and lenders, however.

The SBA inspector general’s office reported that it found “tens of thousands” of PPP loans
disbursed for borrowers in amounts that exceeded what the borrower could claim.14 In
order to expedite the disbursement of aid to small businesses, the CARES Act removed
usual bank requirements to validate and verify loan recipients (with the exception of anti-
money laundering and financing of terrorism checks). Fraud in any government program is
possible, doubly so when some of the safety rails are removed. That “tens of thousands” of
cases of PPP fraud is, at maximum, two percent of all PPP loans provided should be
considered a success. Again, if the program is functioning exactly as intended, it is difficult
to brand this rate of fraud a failure – although if the PPP is reinstated, Treasury and the SBA
can and should do more to reinforce the decision to hold harmless banks involved in
borrower fraud lest banks stop offering PPP loans.




11
   http://ftp.iza.org/dp13808.pdf
12
   https://apnews.com/article/6c5942eec36cc43b25ad5df5afebcfbd
13
   https://www.pgpf.org/blog/2020/08/did-the-paycheck-protection-program-work-the-way-it-was-supposed-to
14
   https://www.sba.gov/about-sba/oversight-advocacy/office-inspector-general
Administration

The unprecedented size of the relief and speed at which aid needed to be deployed to save
jobs would be a challenge for even the largest agency. But the SBA is tiny by the standards
of other cabinet agencies. It had less than 4,000 full-time equivalent employees in fiscal
year (FY) 2019; in comparison, the Department of Commerce had about 52,000 for the
same year, according to its FY 2020 budget request.15 16

The SBA’s capacity presented a major potential implementation challenge. Across its
lending platforms, SBA approved $28.2 billion in loans in FY 2019 – 8 percent of what it is
being asked to distribute in short order17. In order to overcome these challenges, the
process will have to be streamlined to an extraordinary degree. In addition, the agency’s
budget request for 2020 was $820 million, of which less than half would support direct-
lending assistance.18 $349 billion effectively equals roughly one thousand times the usual
annual guaranty amount, delivered in only two months.

The SBA and Treasury’s administrative challenges were not simply limited to personnel,
and the PPP called attention to ageing government and agency IT systems, seen by Strain
and Hubbard as the key factor preventing the U.S. government from having lent directly to
small businesses themselves19.



Forgiveness, Verification, and Validation

In subsequent months, media attention and the force of criticism of the PPP has shifted to
the final piece of the PPP term sheet: forgiveness. Initial SBA and Treasury information was
extremely thin on the ground regarding the eventual forgiveness of PPP loans, the last part
of the process and the step that turns PPP loans effectively into grants.

Subsequent FAQ releases have done some but not enough to explicate the process of
forgiveness and leave lenders lost as to the process.20 Confusion around the terms of the
PPP was not (and is not) limited to the banks involved in the program, with some studies
noting that 3 in 4 PPP borrowers were confused by loan terms.21

As noted above, as drafted, the CARES Act did not provide sufficient guidance on how the
information flowing from borrower to lender to SBA should be verified and validated. A
strict interpretation of the Act implied that significant portions of the usual underwriting

15
   https://www.sba.gov/sites/default/files/2019-12/SBA_FY_2019_AFR-508.pdf
16
   https://www.commerce.gov/sites/default/files/2019-03/FY_2020_DOC_BiB-032019.pdf
17
   https://www.sba.gov/sites/default/files/2019-12/SBA_FY_2019_AFR-508.pdf
18
   https://www.sba.gov/sites/default/files/2019-
04/SBA%20FY%202020%20Congressional%20Justification_final%20508%20%204%2023%202019.pdf
19
   http://ftp.iza.org/dp13808.pdf
20
   https://www.nytimes.com/2020/10/09/business/small-business-ppp-loans-forgiveness.html
21
   https://www.bankingdive.com/news/borrowers-paycheck-protection-program-confusion-loan-terms/578577/
process should be taken on good faith, with what little testing that the Act requires (for
instance, that a business seeking relief be in operation on February 15, 2020) placed the
burden of verification on lenders. This, combined with confusion about the forgiveness
regime, may have made many lenders reluctant to participate in the program.22



Conclusions

The PPP was the single-largest source of support for the economy for the month of April. In
that same month the economy shed 20 million jobs. It is painful to imagine how much
worse this may have been without the prompt intervention of the SBA, although one MIT
paper estimates that as of the first week of June the PPP had saved 2.3 million jobs.23 It
speaks volumes, to my mind, that one of the most pressing criticisms of the PPP was that it
only allowed for businesses to receive one loan. How significant can all other criticisms of
the PPP be if its biggest flaw is preventing businesses from accessing it again?

It does not seem a stretch to say both that the PPP has done much good and that, given the
length of COVID-19 lockdowns, it may be time to reinstate and refund the program. If
Congress does so without making any program changes this would still likely be an
enormous success. If the appetite for change exists, I would strongly recommend that
Congress consider a revenue rather than payroll-retention structure and allow for multiple
applications as the pandemic continues. In addition, Treasury and the SBA must make the
terms and forgiveness of PPP loans as clear as possible while improving program oversight
and resources at both agencies.

Thank you, and I look forward to your questions.




22
     https://prospect.org/coronavirus/unsanitized-why-banks-dont-want-to-help-small-businesses/
23
     http://economics.mit.edu/files/20094


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