‘Enormous chaos and confusion’ caused by Paycheck Protection Program
The Paycheck Protection Program (PPP) was designed to help businesses keep employees on payroll during the coronavirus pandemic, but there has been some confusion surrounding who gets the loans and how much of the loans will be forgiven.
“There is enormous chaos and confusion, some of which is nobody’s fault because you’re pumping $660 billion into the economy in very short order, you have a program that’s never been tried before, so it is not surprising that there’s gonna be a little trial and error,” Horowitz said.
The CARES Act that created the PPP loan forgiveness program was designed to let businesses keep employees instead of laying them off or furloughing, hopefully able to pay two months of employee costs and cover a little bit of extra rent and utilities to help these businesses survive.
“[It’s] not surprising when you take a very blunt instrument to a very big problem, like a failing American economy, it’s a little bit of a square peg in a round hole and it doesn’t always work exactly as intended,” he said.
At the start of the crisis, there was a rush to throw money at the problem. Now, the world looks a bit different two months into the pandemic response, Horowitz said.
“Frankly, some very large companies have availed themselves of the PPP program, and that has created some bad press and bad publicity,” he said. “And politicians respond to that.”
There have since been cut backs to the loan program, which is causing more confusion, especially in regards to how much of the loans are forgivable.
“The way I think about it is that for every $3 you spend on qualifying payroll costs, you could spend $1 on non-qualifying payroll costs, but on qualifying expenses, basically rent, utilities, and mortgage interest,” Horowitz explained.
“In [a] hypothetical example, you borrowed $100. If you spend $75 on payroll costs and $25 on other qualifying non-payroll costs during an eight-week period after you receive your loan, then the entire loan will be forgiven. But if your loan was $150, and you only spent $75 on payroll costs, you could only spend up to another $25 on rent and utilities and mortgage interest, and you end up having to repay $50 of $150 loan.”
This was added by the Treasury Department, and was not part of the statute.
“They’re trying to encourage the payroll protection program be used to protect payroll, not to pay just rent, not to just pay mortgage interest,” he said.
Although that may sound fairly simple, Congress wrote the law in a way that could have been clearer, Horowitz said. Beyond that, the administration interpreted the law to be favorable to borrowers. In the first wave, many of the funds were borrowed by publicly held companies or affiliates of publicly held companies.
“There has been a lot of bad press because people are aghast that a government program designed for small businesses would go to publicly held companies,” he said. “That’s what the statute said. The statute allowed it.”
If you’re a chain restaurant, the statute said it cared about those employees as much as we care about any others, so let’s keep them employed, Horowitz explained.
“The press thought otherwise and the administration responded,” he said. “Then when it came out that the LA Lakers received a loan, that was also objectionable.”
In Horowitz’ mind, teams in the NBA, MLB, and other leagues probably had to make a choice: Do we fire all our employees (not the athletes), or do we get a loan and keep them employed?
“They made a decision. The press attacked them. The Treasury responded by saying you were not intended to be the beneficiaries,” he said. “They give, in the case of the LA Lakers, they give the money back. [But it’d] be interesting to see how many pink slips went out when they gave the money back.”
As show host Mike Lewis explained, part of the argument was when there is a limited amount of money for small businesses and the big businesses take it, the smaller ones are left high and dry.
“There were always gonna be winners and losers in a in a program that was on a first come, first served basis,” Horowitz admitted. ” … The problem was compounded by the fact that big banks in particular, but all banks, not just big banks, were incentivized to make the loans to their existing customers.”
Ironically, Horowitz explained, after criticizing the big banks for favoring their existing customers, the U.S. Small Business Association told big banks they would be taking less applications from them and gave smaller banks an opportunity to send more applications.
“The first time, [some of my friends and clients] were left in the dust because the banks, the big banks, favored their existing customers,” Horowitz said. “The big banks have now gone out of their way to accommodate these small borrowers, and it’s the SBA who’s now cut cut off the access of the big banks.”
Another component of the CARES Act was to provide an extra $600 per person, per week of unemployment.
“There are many people at the minimum wage level who are now taking home more, in some cases considerably more, on unemployment than they were when they were working,” Horowitz said.
When you add the risk of going to work and being exposed to the virus, or having to arrange child care on top of the added money received on unemployment, there’s an incentive for these employees to stay home as long as they can, Horowitz explained.
“So now you have an employer who says come back to work, … and the employees are saying no,” he said. “Now, that’s small segment of the population, but it’s an important segment of the population.”
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