Research estimates that 15 percent of PPP loans were fraudulent
A couple of weeks ago, I spoke to the Pioneer Press 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 stand by that reasoning as a justification for a program like PPP. But that is not to say that there were not problems with the scheme as implemented.
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. As the latter overrode the former, it was inevitable that mistakes would be made. But on what scale?
A fair bit, possibly. 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.
Again, there was always going to be a trade off between speed and targeting in getting these loans out. The question is whether this loss to fraud was more than offset by the benefits of the program. I’ll look at that tomorrow.