Welfare for the Rich

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K Graham
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Welfare for the Rich

Post by K Graham »

Ajax of course isn't bothered by this, as the rich are mostly white males.

Remember the $800 billion Trump pushed through for "small businesses" two years ago?

The benefits of the landmark small-business relief program designed at the height of the pandemic mostly went to business owners rather than workers, a study from leading economists finds.

The study from authors including famed Massachusetts Institute of Technology economics professor David Autor, as well as several Federal Reserve economists, examined the $800 billion Paycheck Protection Program. It was circulated by the National Bureau of Economic Research, and tapped into data from payrolls processor ADP.

The PPP initially was signed into law by President Donald Trump in April 2020, and President Joe Biden signed an extension in March 2021. Both the initial law and the extension were overwhelmingly bipartisan.

The far-reaching PPP ended up sending loans to approximately 93% of small businesses, in just two months. The end result, the authors estimate, is that the program preserved up to 3 million “job years” of employment at a cost of between $170,000 to $257,000 per job-year retained.

Put another way, between 23% to 34% of PPP dollars went directly to workers who otherwise would have lost jobs, the study found. The program also was highly regressive, with three-quarters of PPP funds accruing to the top quintile of households.
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Res Ipsa
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Re: Welfare for the Rich

Post by Res Ipsa »

Good morning, Kevin.

I think there's something off about both the analysis you linked to and your conclusion that PPP represents corporate welfare.

Although the ostensible purpose of the program was to preserve jobs, the vehicle for doing that was offering loans to small businesses. It's not an easy task for government to preserve jobs in the private sector, especially when it's responding to a disaster. The theory of the program was, if government can help small businesses stay afloat, they won't close permanently, resulting in permanent job loss. In addition, if small businesses received financial support, it would reduce temporary job losses.

Now, think about small businesses impacted during the pandemic. The costs of running a business can be divided into fixed costs and variable costs. Fixed costs are those that don't change with the volume of business. For, say, a gym, those would likely be the amount spent to rent space (or payment on loans taken out to purchase a space) and financing of all the equipment. Employees are a variable cost. If you have to shut down, you don't have to pay any employees. If you operate at reduced hours or with occupancy limits, you can get by with fewer employee hours.

It is the fixed costs that drive a small business out of business during periods of economic downturns. Regardless of how much money a business brings in each month, it has to pay out the same amount every month for fixed costs. So, naturally, we should expect the bulk of funds spend in the PPP to be used by small businesses to pay for things other than salaries. To prevent a permanent loss of jobs, the program had to keep small businesses from going out of business. To keep small businesses from going out of business, the loans would have to be used to pay mainly fixed costs.

The analysis doesn't say that small business owners got to pocket the money that wasn't spent on salaries. There was a substantial benefit to employees in terms of jobs retained through the program, and the employees don't have to pay any money back. The business owners have to pay the loans back. That's generally not "welfare" as we commonly use the term.

Certainly, there were businesses that never should have received the loans intended for small businesses, which skews the benefit of the loans in favor of the top quartile. But it's likely that the distribution was also affected by the income of business owners contrasted with that of laborers. So, that's not the fault of the PPP.

If you think the PPP was corporate welfare, what do you think the government should have done to preserve jobs? Just let small businesses owners be driven into bankruptcy by their fixed costs?
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K Graham
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Re: Welfare for the Rich

Post by K Graham »

Res Ipsa wrote:
Tue Jan 18, 2022 6:57 pm
Good morning, Kevin.

I think there's something off about both the analysis you linked to and your conclusion that PPP represents corporate welfare.

Although the ostensible purpose of the program was to preserve jobs, the vehicle for doing that was offering loans to small businesses. It's not an easy task for government to preserve jobs in the private sector, especially when it's responding to a disaster. The theory of the program was, if government can help small businesses stay afloat, they won't close permanently, resulting in permanent job loss. In addition, if small businesses received financial support, it would reduce temporary job losses.

Now, think about small businesses impacted during the pandemic. The costs of running a business can be divided into fixed costs and variable costs. Fixed costs are those that don't change with the volume of business. For, say, a gym, those would likely be the amount spent to rent space (or payment on loans taken out to purchase a space) and financing of all the equipment. Employees are a variable cost. If you have to shut down, you don't have to pay any employees. If you operate at reduced hours or with occupancy limits, you can get by with fewer employee hours.

It is the fixed costs that drive a small business out of business during periods of economic downturns. Regardless of how much money a business brings in each month, it has to pay out the same amount every month for fixed costs. So, naturally, we should expect the bulk of funds spend in the PPP to be used by small businesses to pay for things other than salaries. To prevent a permanent loss of jobs, the program had to keep small businesses from going out of business. To keep small businesses from going out of business, the loans would have to be used to pay mainly fixed costs.

The analysis doesn't say that small business owners got to pocket the money that wasn't spent on salaries. There was a substantial benefit to employees in terms of jobs retained through the program, and the employees don't have to pay any money back. The business owners have to pay the loans back. That's generally not "welfare" as we commonly use the term.

Certainly, there were businesses that never should have received the loans intended for small businesses, which skews the benefit of the loans in favor of the top quartile. But it's likely that the distribution was also affected by the income of business owners contrasted with that of laborers. So, that's not the fault of the PPP.

If you think the PPP was corporate welfare, what do you think the government should have done to preserve jobs? Just let small businesses owners be driven into bankruptcy by their fixed costs?
Hi Res,

So, I have some personal experience with this because I applied for the Business Loan early 2020. I was told by my accountant that the loan was 100% forgivable, but only if the money were to go to pay employees. I don't remember the exact numbers but the loan amount was based on the monthly salaries our company paid out to everyone who worked in the company. We have five employees, so the loan amount was roughly $20,000. At the end of the year I had to simply provide paycheck stubs proving that we paid employees at least $20,000. So when 2021 came around, we heard there was another round of loans that would be passed out so I applied again, only to find out that there were stipulations this time around. In 2021, you only could get 100% forgiveness on your loan if you can prove your year end profits were at least 20% less than the previous year. Business was doing well so I assumed we wouldn't qualify, so I didn't bother to apply.

ETA: but I do get your point about gyms and businesses that have fixed expenses.
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Re: Welfare for the Rich

Post by Res Ipsa »

Thanks for the information. My only experience with the program is friend's that own my favorite boardgame pub. I hadn't realized that the loans were forgivable to the extent they went to pay employees, which makes a ton of sense. I believe they used the program both times, and it literally saved their business. I think they kept all their employees except one, who got a better job offer. They hired a new employee to replace her. A sample of one -- I know.
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Re: Welfare for the Rich

Post by cinepro »

K Graham wrote:
Tue Jan 18, 2022 7:16 pm
So when 2021 came around, we heard there was another round of loans that would be passed out so I applied again, only to find out that there were stipulations this time around. In 2021, you only could get 100% forgiveness on your loan if you can prove your year end profits were at least 20% less than the previous year.
The second round loans were based on reduced revenue, not profit. So a business that laid off a bunch of people after the period of the first loan and reduced their expenses and revenue, but still made a profit, could still get a second-round loan.

https://home.treasury.gov/system/files/ ... aw-PPP.pdf


There was also the Employee Retention Credit, which was tied to "a significant decline in gross receipts."

https://www.irs.gov/coronavirus/employe ... ion-credit

To the point of this thread, the PPP program was well intended but horribly executed if getting the money to workers was its intended purpose. Since it wasn't tied to business performance and profit, a successful business (or one that maintained their revenue during the pandemic) could still get a PPP loan and "allocate it toward payroll", while increasing their profit the same amount. And since the period for PPP terms was only 8 - 24 weeks after getting the loan, a business could keep staff for that period and then lay them off and pocket the rest (depending on how their revenue worked out).

In the end, if fairness and fiscal responsibility were the focus, the PPP should have had a 100% tax on profits that exceeded the pre-pandemic levels. So if a business made $500k in 2019, but then got a $500k PPP loan and made $1m in 2020, they would pay back the $500k. But I don't think that was ever discussed.
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Re: Welfare for the Rich

Post by Res Ipsa »

cinepro wrote:
Tue Jan 18, 2022 9:48 pm
K Graham wrote:
Tue Jan 18, 2022 7:16 pm
So when 2021 came around, we heard there was another round of loans that would be passed out so I applied again, only to find out that there were stipulations this time around. In 2021, you only could get 100% forgiveness on your loan if you can prove your year end profits were at least 20% less than the previous year.
The second round loans were based on reduced revenue, not profit. So a business that laid off a bunch of people after the period of the first loan and reduced their expenses and revenue, but still made a profit, could still get a second-round loan.

https://home.treasury.gov/system/files/ ... aw-PPP.pdf


There was also the Employee Retention Credit, which was tied to "a significant decline in gross receipts."

https://www.irs.gov/coronavirus/employe ... ion-credit

To the point of this thread, the PPP program was well intended but horribly executed if getting the money to workers was its intended purpose. Since it wasn't tied to business performance and profit, a successful business (or one that maintained their revenue during the pandemic) could still get a PPP loan and "allocate it toward payroll", while increasing their profit the same amount. And since the period for PPP terms was only 8 - 24 weeks after getting the loan, a business could keep staff for that period and then lay them off and pocket the rest (depending on how their revenue worked out).

In the end, if fairness and fiscal responsibility were the focus, the PPP should have had a 100% tax on profits that exceeded the pre-pandemic levels. So if a business made $500k in 2019, but then got a $500k PPP loan and made $1m in 2020, they would pay back the $500k. But I don't think that was ever discussed.
That would have been a good modification to PPP. I don't think the actual point of PPP (regardless of how it was described) was to get money to employees. I think the point was to preserve small-business jobs.
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cinepro
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Re: Welfare for the Rich

Post by cinepro »

Res Ipsa wrote:
Tue Jan 18, 2022 9:57 pm
That would have been a good modification to PPP. I don't think the actual point of PPP (regardless of how it was described) was to get money to employees. I think the point was to preserve small-business jobs.
I agree, but if what I've seen just from people that I know who own businesses (or are in management at businesses that qualified for a PPP loan) is true, a lot of that money ended up being distributed as profits.

So my reaction to the findings of the study in the OP is "Yeah, that sounds about right..."
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Re: Welfare for the Rich

Post by K Graham »

cinepro wrote:
Tue Jan 18, 2022 9:48 pm
The second round loans were based on reduced revenue, not profit. So a business that laid off a bunch of people after the period of the first loan and reduced their expenses and revenue, but still made a profit, could still get a second-round loan.
Well in my line of work, the two are basically synonymous. I run an S-corp, which doesn't pay corporate taxes.
"I am not an American ... In my view premarital sex should be illegal" - Ajax18
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