PPP shows that ‘government failure’ is as real as ‘market failure’

On Wednesday, I wrote about how, in a recent interview with the Pioneer Press, I spoke about some of the schemes the federal government used to aid businesses during the COVID-19 pandemic, such as the Paycheck Protection Program (PPP):

“The problem that we faced was we were shutting down the economy to fight the virus, but we wanted to make sure there was an economy at the other end of it,” said John Phelan, an economist at the Center of the American Experiment, a Golden Valley-based think tank. “What we were trying to do effectively is put the economy in deep-freeze.”

Phelan added that while the PPP program and others amounted to government intervention on a massive scale, he felt they were effective.

“If the government is shutting your business down and making it impossible to function, then the government has a duty to make sure you can survive that,” he said. “If I smash a baseball through the neighbor’s window, I’m responsible for paying for the neighbor’s window.”

I noted that there was a trade-off:

The federal government had to balance getting the money to the businesses which needed it — and targeting takes time — and getting the money to them quickly. 

I also noted that, given this tension, mistakes were bound to be made and that new research had attempted to quantify this:

New research by economists John M. Griffin, Samuel Kruger, and Prateek Mahajan estimates that around 1.8 million of the program’s 11.8 million loans — more than 15 percent — totaling $76 billion had at least one indication of potential fraud. A more restrictive calculation by the researchers, of loans with at least two suspicious characteristics, identified 1.2 million potentially fraudulent loans, totaling $38 billion.

The question was whether this loss to fraud was more than offset by the benefits of the program. On Thursday, I looked at a bunch of research which showed that it probably wasn’t:

Taken together, this research suggests that the PPP saved relatively few jobs at a high cost and was a poor allocation of capital.

So, mea culpa? Not quite.

If were found ourselves in similar circumstances, I would still defend a program like PPP in principle. It remains true that, if the government is going to shut your business down and prevent you from generating revenue that the government also has a duty to help your business through that shutdown, however long it is.

But that is in principle. The actual experience of PPP would give me some pause before advocating for such a scheme again in practice.

There is an important lesson here. Economics students will spend a good deal of time looking at ‘market failure’. These arise when the real world deviates from some theoretical construct like perfect competition. Government intervention is often prescribed as the remedy. But, as the experience of PPP shows, government can fail as well. Like a perfectly competitive market, PPP was fine in principle. In practice, however, it was no more robust. Students of economics will rarely encounter a module on ‘government failure.’ Maybe they should.