The Paycheck Protection Program is one of the most successful government programs ever created. It distributed $800 billion of forgivable loans during the once-in-a-century pandemic to over six million small businesses, supporting 55 million jobs. The PPP was a lifeline for small businesses that government officials forcibly closed for two weeks, then two months, and then, in some areas, nearly two years.
The PPP helped stave off a second Great Depression that many forecasters predicted and set the stage for the fastest economic recovery in history. It was historically responsive, distributing loans within three weeks of a national emergency declaration. Former Congressional Budget Office Director Doug Holtz-Eakin called the PPP “the single most effective fiscal policy ever undertaken by the United States Government.”
Unfortunately, the PPP has come under recent undeserved criticism for supposed widespread fraud. Former U.S. attorney Matthew Schneider claims, “It is the biggest fraud in a generation.” Sam Kruger, a University of Texas at Austin professor, says, “Fraud on this scale is enormously costly.” The House Small Business Committee is holding a hearing on this issue on Thursday.
While some scammers certainly took advantage of the program, a new Small Business Administration Office of Inspector General fraud report finds widespread fraud concerns are largely misplaced. The study estimates that there was $64 billion worth of fraud in the $800 billion program. This 8 percent fraud rate is lower than many standard government programs. For instance, the IRS estimates that around 25 percent of Earned Income Tax Credit payments are made in error.
Most PPP fraud was committed with loans distributed by fintech — online lenders generally not associated with banks. Many of these tech upstarts did not have the proper guardrails in place and did not have the same strong relationships with small business borrowers as traditional banks. One study estimates that just two fintech lenders made one in every three PPP loans in 2021. These bad actors, not the PPP program as a whole, deserve criticism. When you exclude fintech, the PPP fraud rate falls to only about 4 percent.
One reason PPP is getting a bad rap is because the SBA’s alternate relief program, Economic Injury Disaster Loans, was rife with fraud. The SBA OIG report estimates $136 billion of this $400 billion program was fraud, a 34 percent fraud rate. Many commentators — and even the SBA — are improperly conflating the fraud in these two programs.
The significant fraud discrepancy between these two programs is partly due to how the loans were distributed. PPP loans were given out by third-party lenders, mostly community banks, while EIDL loans were distributed by the SBA itself. Banks have far more robust fraud controls than government agencies.
President Biden and congressional Democrats have also repeatedly criticized PPP loans from a different angle. They have claimed PPP backers who oppose the Biden administration’s student loan bailout are hypocritical. This attack was Biden’s go-to response after the Supreme Court struck down his student loan bailout.
But there is no comparison between Biden’s bailout and the PPP lifeline. The bailout was illegal executive overreach, while the PPP was overwhelmingly passed by Congress. Student loans were never meant to be forgiven, while PPP loans were designed to turn into grants. PPP loans were a necessary response to forced government shutdowns of businesses, while the student loan bailout was unfair and failed to address the root of this problem: unaccountable colleges that overcharge students.
We now know that the government’s forced business closures during the pandemic did little-to-nothing to stop the spread of the disease. But that information is cold comfort for the millions of shutdown small business owners. Even with the benefit of hindsight, the PPP performed exactly as intended, saving America’s small business economy. It accomplished this feat with a relatively low level of fraud, making its success even more remarkable.
Alfredo Ortiz is president and CEO of Job Creators Network and author of “The Real Race Revolutionaries: How Minority Entrepreneurship Can Overcome America’s Racial and Economic Divides.”