America’s Covid job-saving programme gave most of its cash to the rich

It was known as the “American peculiarity”. Weeks into the first pandemic-induced lockdowns in March 2020, America was suffering from anomalously high job losses. The unemployment rate more than quadrupled between February and April, leaping from 3.5% to 14.7%. Elsewhere in the oecd, a club of mostly rich countries, the average increase was much less steep. Unemployment rates in Britain and Germany barely budged, rising from 4% to 4.1% and 3.5% to 3.7% respectively. Many governments staved off damage by paying businesses to keep workers employed. But America had little experience with anything approaching that sort of drastic intervention. Its hastily designed scheme sent much of its relief money to people who didn’t need it.

A study by economists at the Massachusetts Institute of Technology and America’s Federal Reserve quantifies these failings. The cares Act, a $2.2trn covid-19 economic-relief package, passed in March 2020, boosted unemployment benefits and introduced stimulus cheques of up to $1,200 per person. It also initiated the Paycheck Protection Programme (ppp), a scheme offering loans of up to $10m to businesses with fewer than 500 employees (covering 47% of workers). Loans were forgiven if firms sustained pre-pandemic employment and wages six months after receiving the funds.

The study found that ppp payments were targeted with less precision than stimulus cheques or unemployment benefits (though a surprising share of the latter went to the richest households, because a lot of well-off people lost their jobs). Business loans from the federal government did prevent job losses, but only to a limited extent: less than a third of ppp dollars went to workers who would otherwise have been laid off. Roughly three-quarters of the programme’s spending went to business owners and shareholders. Almost $366bn—72% of funding in 2020—went to households making more than $144,000 per year.

The ppp was poorly designed. Any small business that could prove it was “substantially affected by covid-19” was eligible. Firms could apply if they had fewer than 500 employees per site, rather than in total. Shake Shack, a fast-food chain with roughly 220 branches in America and a market capitalisation of almost $2.5bn, received a multimillion dollar loan. So did the Los Angeles Lakers, a basketball team valued at more than $5bn. Both subsequently returned the money amid mounting political pressure. Other big firms did not.

European countries did better: governments encouraged struggling employers to keep workers on their payrolls with reduced hours, and then made up some or all of the pay gap. Unlike the ppp, such programmes were usually aimed only at struggling firms that needed to cut salaries (though they were not always well targeted: a share of beneficiaries in Britain continued to pay dividends). Yet despite the flaws in America’s programme, the study’s authors argue that Congress was incapable of doing better. Crafting a targeted policy would have been hard, expensive and slow. Many countries that kept workers in jobs had programmes in place already: some of the most successful—including France, Japan and Germany—simply increased coverage and benefits at the onset of the pandemic. If America hopes to waste less money in future crises, it should plan ahead. ■

Editor’s note (January 31st 2021): The author of this piece worked with David Autor, a member of the team who wrote the paper referenced in this article, until December 2021, but took no part in this research.

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