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PPP sucked, but Dems can't cry "hypocrite!"
PPP was not fast, efficient, fair or racially balanced. But Democrats used the "hypocrisy!" attack in 2020. It's a tired, meritless argument.
I think President Biden’s move to forgive up to $10,000 of student loan balances by executive fiat is a moral hazard, possibly illegal, and really bad policy. For political reasons, Democrats decided to call “hypocrite!” against Republicans who supported the Paycheck Protection Act during the Trump administration. I’ll get to that in a bit.
As for student loan forgiveness, it’s a moral hazard to punish those who did pay back their loans by giving cash to their peers who didn’t. It’s a moral hazard to incentivize people to not pay back loans in hopes someone will make the balances disappear. It’s a moral hazard for taxpayers to absorb loans that some people accepted due to their own poor judgment (to get a Masters degree in art history or womyn’s studies, for instance).
Biden will also test the Higher Education Relief Opportunities for Students Act, and the ability of the federal executive branch to use a law and funds allocated to the Department of Education to enable “authority [that] can be exercised categorically to address the situation at hand” as that department’s spokesperson asserted. The Supreme Court, as it’s currently constituted, has shown its contempt for such sweeping use of power.
The Justices ruled 6-3 to clip the EPA’s wings in West Virginia v. EPA, with Chief Justice John Roberts citing the “major questions doctrine” in his opinion; Justice Neil Gorsuch expanded on it, as a bulwark against “the explosive growth of the administrative state since 1970.” Given the Court’s direction, it’s likely at the first opportunity, some judge-shopping plaintiff could win an injunction against Biden’s action.
Finally, it’s not clear that this $300-plus billion giveaway will do anything to offset the ballooning of tuition costs. And the law itself—the HEROES Act which was passed under the Bush administration in 2003—isn’t really designed to do what Biden is doing, regardless of whether courts allow it. Pausing student loan collections is one thing, paying the loans is something completely different.
This is also the core of the argument that Republicans make to defend the Paycheck Protection Program.
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Democrats and anti-Trumpers went after Rep. Marjorie Taylor Greene for borrowing $183,504 in forgiven PPP loans. As much as I despise MTG as a politician and a grifting, conspiracy-flinging, CrossFit housewife of privilege who was born into a family business, this criticism is totally meritless.
First, MTG wasn’t in Congress at the time the CARES Act and its follow-ons that enabled PPP loans were voted on or passed. This is her first term in Congress (I know, it seems longer). Second, MTG’s husband runs the family construction business. In case you didn’t know, the construction industry was impacted pretty heavily by the pandemic. So it makes sense that Taylor Construction would take a loan, and comply with the conditions for loan forgiveness. It’s not like the Taylor family put $183,504 in its pocket. Third, that money was spent on things that the PPP loan forgiveness requirements dictated, and before the White House decided to criticize her, I’m sure someone did their due diligence with the SBA or the bank. (Or maybe they didn’t, because Biden’s comms staff is like that.)
The last two defenses also apply to all the Republicans who took PPP loans that were forgiven. Remember, PPP was passed primarily not to give the owners of businesses a buffer so they could survive shutdowns, but to incentivize those business owners to give employees paychecks for not working.
And one more thing. Many conservatives objected to profligate spending, but recognized the immediate importance of aid as the economy came to a screeching halt in 2020. The Washington Post, in July of that year, ran a thinly-disguised “hypocrite!” article featuring conservative groups and government watchdogs that were happy to take PPP loans. Some groups justified their use of government funds, stating “[had] we laid off our staff, they would have qualified for unemployment benefits at a significant cost to the taxpayers. We determined the better path was to apply for the federal funds and provide employment continuity to our employees.”
The “hypocrite!” attacks are old and tired by now, and do not in any way justify or offer equivalence for Biden’s act to pay off $300+ billion in student loans. The only qualification for getting your loan paid (provided it qualifies as a federally backed loan) is that you haven’t paid it. This was not true of PPP, flawed and grift-friendly as it was.
The forgiveness aspect of PPP had strings attached. At least 70% of the loan money had to be spent on payroll. The rest had to be spent on things like rent or operational expenses. The expenses had to be supported by payroll reports. The reporting requirements could be quite daunting for small businesses, though in early 2021 the process was significantly reformed.
PPP had a good idea behind it: Workers who were idled because of pandemic-related shutdowns didn’t deserve to be furloughed if their employers could simply pay them through the shutdown, even if they didn’t work. Other countries had similar programs. But “similar” doesn’t mean “the same.” France directly reimbursed companies for hours not worked, up to 70% of their gross wages. Germany’s public employment service reimbursed companies using an existing government program, Kurzarbeit, that subsidizes cuts in working hours. Japan used its existing Employment Adjustment Subsidy.
In the U.S., the CARES Act paid employee salaries through a direct tax credit (at the time payroll taxes are paid, for most companies, that’s when payroll is run) up to two weeks when those employees were out due to COVID-19, including caring for someone who couldn’t work or for children. This program worked well, since companies could protect their workforce and not suffer any financial difficulty or cash flow hit from paying those employees.
But the PPP program didn’t work that way at all. I argued that it should have, because the government has quarterly 941 payroll tax reports from all employers, so the IRS knows exactly what payrolls are. To me, it would have been pretty easy for the IRS to simply fund some percentage of the paychecks of employees who were paid by companies that were closed or cut workers due to pandemic-related shutdowns. Just let the companies pay employees who were already on the rolls, up to the average quarterly 941 payroll amount, I argued. It’s also what most other developed nations did. Maybe that approach had some legal and logistical hurdles, but it’s a far better way than what PPP did.
The legislation used a model of existing SBA loan and funding programs (known as 7(a) loan guarantees) to implement PPP. The government guaranteed PPP loans, which were underwritten by banks. Banks took PPP loan applications, conducted the underwriting, approved the loans, funded the proceeds, handled the paperwork with the SBA, and handled the forgiveness applications. But banks were woefully unprepared to handle the giant wave of PPP demand.
The largest banks pivoted quickly, but favored their own existing clients, of course. There was no equality in the way PPP was rolled out, administered, or in how the funds were actually distributed. Of all the lenders qualified to make the SBA PPP loans, only 2.1% were banks and institutions with more than $10 billion in assets, but they accounted for 27.1% of loans, which was matched by institutions with less than $10 billion in assets. Fintech companies like Womply and Kabbage accounted for nearly 20% of the total, focusing on smaller loans.
Here was the problem: If you were a typical small business, you may have had to apply to two or three banks, and maybe a Fintech company, to find one ready to actually process your application and provide you with an “SBA number” which is the path to approval and funding. The larger banks worked with existing clients, which means banks like JP Morgan Chase (#1), Bank of America (#2), PNC Bank (#11), TD Bank (#13), Truist Bank (#14, formerly SunTrust and BB&T, which merged), and Wells Fargo (#15) processed their best clients first, and the rest, who also needed the money and probably more immediately, were left wanting.
While they were waiting, the smaller companies may have ended up laying off staff. Though only 18% told the Federal Reserve in a survey that they were not going to apply, out of 11.5 million loans made, that would mean only 14 million businesses even thought of applying. The SBA says there’s 31.7 million small businesses in America; that means more than half never applied or applied and were denied, while 707 borrowers received the maximum of $10 million (math: that’s $7.07 billion).
The Brookings Institute called PPP “a ‘Herculean’ response with a painful execution.” In a September 2020 study, it found that access to PPP loans “varied considerably based on neighborhood demographics, with small businesses in majority-white neighborhoods receiving PPP loans more quickly than small businesses in majority-Black and majority-Latino or Hispanic neighborhoods.” I don’t think this was because the Trump administration, or the banks themselves, had some wide conspiracy to suppress Black and minority loans. It’s simply the nature of how banking is done, and smaller banks were simply not equipped to deal with the mountain of paperwork and electronic systems necessary to process those loans.
Many businesses that truly didn’t need the money took the loans anyway. Companies that were in “essential” businesses and didn’t lay anyone off took the loans. Top financial advisors told CEOs “it’s free money, take it.” I’m sure some CFOs and company executives in those businesses pushed back, and some didn’t take the money, but most did. Every loan made and forgiven to companies that were operating through the pandemic was a moral hazard and really rewarded large capitalists for no reason at all.
Every company that ended up closing despite receiving the PPP loans was a moral hazard. Although 88.6% of PPP loans were partially or fully forgiven, 11% were not forgiven at all, meaning that the companies could not show they used the money for payroll or any other valid expense. Companies that continued to operate, regardless of whether they obtained operating income, or were profitable, only needed to show that they used the money for payroll to receive full forgiveness. This means that yes, indeed, some conservative (and liberal) organizations that could easily have operated and not laid off employees took the money and ran. I searched the Washington Post’s SBA database of PPP loans over $150,000 and did not find the Post itself or the New York Times (they likely didn’t qualify because they were too large). I did find a couple of Trump properties in New York with under 500 employees.
PPP’s mission of getting money to small businesses was not fast, efficient, or fair.
“Businesses in that top 5 percent likely have access to other capital,” [Liz Hempowicz, director of public policy for the nonprofit Project on Government Oversight] said. “These are not the ones you would traditionally think of as a small business. It really raises questions about what the priorities of this SBA are. … Is it to help small business, or is it to return money to the top segment of the economy?”
The second round of funding was better—that’s when the Fintech companies got rolling and were able to reach much smaller businesses. But by that point many small businesses—restaurants, nail shops, retailers—had already furloughed everyone or closed their doors permanently.
I won’t defend PPP. It didn’t benefit the companies it needed to in order to really preserve jobs that should have been preserved. Besides, it was literally better for many workers to sit at home, and become unemployed. Those employees left their work and took the $600/week federal unemployment benefit, along with two rounds of stimulus, and months of federally-boosted state unemployment benefits. The “great resignation” has its roots in the wrongheaded and self-defeating policies initiated by big spenders in Congress and the Trump administration that rewarded indolence, padded the pockets of executives who didn’t need the money, and paid banks and financial advisers to ply their clients with “free money.”
The SBA claims 89.9 million jobs were “retained,” but I’m willing to bet that as many as half of them were not really “retained,” because they weren’t at risk of layoffs in the first place, or the numbers in the reports that justified forgiveness didn’t reflect churn and turnover among employees. Many companies opted for “safe harbors” that made reporting opaque.
PPP was a disgusting mess, and I’m ashamed our government did it. It would have been better to adopt the German, Italian, or Japanese approaches and simply have the government pay people to “stay” at their jobs while they don’t work. I don’t know how many fraudulent loans escaped government and bank scrutiny. The Secret Service has recovered $286 million in stolen funds, according to a recent report. That’s 0.03% of the total forgiven, which is $742 billion (with a “b”). It’s doubtful that any meaningful fraudulently obtained funds (and I’m willing to bet it’s a lot more than a billion dollars) will be recovered.
As much as I dislike PPP, Democrats are still wrong to use it to bash Republicans who rightly oppose Biden’s terrible student loan forgiveness policy. Our government is dysfunctional in too many ways to count, but this political and media idiocy is really scraping the bottom of the barrel.