Report

American Enterprise Institute

Key Points

The Paycheck Protection Program (PPP), established as part of the CARES Act, offers “forgivable loans” (essentially, government grants) to small businesses with the goal of helping these businesses avoid closure and avoid laying off their workers.

Borrowers are eligible for loan forgiveness equal to the amount spent on payroll costs, mortgage interest, rent, and utilities for an eight-week period beginning with the origination of the loan, provided they do not lay off workers or make large reductions in their pay. Business that have already laid off workers due to concerns about the coronavirus can rehire them and receive loan forgiveness.

The program relies on banks to issue these loans. Banks are authorized to charge interest and generous processing fees and are shielded from enforcement activities and penalties by the government related to loan forgiveness for eligible uses. The government pays the fees, not the borrowers.

The Treasury Department will have PPP operational on April 3 for small businesses and sole proprietorships.

To make the program as effective as possible, the government should (1) assure banks that the law’s “hold harmless” provisions will be strictly interpreted and enforced, (2) communicate that more money will be provided for the program if needed, (3) help PPP lenders issue a large amount of loans quickly, and (4) engage in an active program of public messaging to encourage both lenders and small businesses to participate.

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Introduction

This report provides basic information about the Paycheck Protection Program (PPP), established in Title 1 of the Coronavirus Aid, Relief, and Economic Security Act, Congress’ coronavirus economic recovery package (“Phase 3”), signed into law on March 27. The program, scheduled to come online on April 3, offers government grants to small businesses with the goal of helping these businesses avoid laying off their workers. It treats commercial banks essentially as conduits to get critically needed federal money into the hands of business owners.

PPP may prove to be the most important part of the government’s economic-policy response to the coronavirus. Preserving the ecosystem of small businesses and avoiding mass business closures will be essential to ensuring that the US economy can quickly bounce back from the shutdown, once public-health conditions allow for economic activity to resume. And keeping workers paid by their employers—even if there is much less work for those workers to do—will mitigate soaring unemployment rates and avoid a long and painful process in which unemployed workers search for new jobs.

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