Paycheck Protection Program's Path to Inclusive Lending

• In Event: The Racialized Politics of American Debt Relief Policy

Abstract

In 2020 and 2021, the US government’s Paycheck Protection Program (PPP) extended over 11.3 million guaranteed (and forgivable) loans to small businesses, totaling roughly $900 billion, to keep employees on payroll and afloat during the COVID-19 pandemic. Critically, the PPP relied on the nation's system of banks and lending institutions to issue loans—a system of institutions with a long record of denying poor and non-white communities access to credit on comparable terms with white communities. This generated predictable results in the first year: lenders issued PPP loans first and mainly to existing clients, which reproduced the banking systems’ long history of racialized and class-based lending, producing relatively high coverage rates for larger small businesses in white communities, and little if any coverage for small business in minority and especially high poverty minority communities.

In a striking shift, however, large numbers of loans flowed to minority communities during the PPP's third round in 2021, producing coverage rates on par with their white counterparts. This pivot toward inclusivity frames our core research puzzle and question: How was it possible in the PPP to direct flows of loans within the American system of banking and credit toward, rather than away from, small businesses in poor and Black and brown communities that have traditionally long suffered from the effects of redlining discrimination and segregation in both mortgage and small business lending?

We break with traditional approaches to public policy and political economy that view economic policies like PPP as outcomes of a political process or as causes of economic outputs. Neither approach adequately explains the pivot toward inclusivity in the PPP. Instead, we draw on the insights of scholars such as Mettler, Hacker, and Pierson to explain 1) how the initial design of the PPP, particularly grafting the program onto the somewhat obscure 7a lending program in the Small Business Administration (SBA) not only “targeted” specific populations of businesses, privileging them substantively and symbolically; and 2) how the initial design of the program and subsequent outputs fueled political mobilization and interest group pressure to support small businesses in poor and minority communities that, in turn, generated a series of targeted policy changes in the PPP. These (primarily) endogenously induced policy changes substantially reconstituted the network of PPP lenders in the program’s 2021 round, shifting existing lenders’ propensities to avoid or engage marginalized communities, prioritizing more inclusive lenders, and inducing organizational entry of new types of lenders that supported credit flows to poor and minority communities. In short, our approach to the political economy of the largest American relief program since the Great Depression examines how policies and policy design established formal and informal institutions that set the program on an initial path toward exclusivity. But new policies create new politics. The program's design created a new political landscape which, in turn, reshaped the policy and created a more inclusive flow of capital to poor and minority communities.

We conduct our analysis using quantitative and qualitative data and methodology. To assess the levels of inclusivity of the PPP, we created a unique dataset from several sources, including the complete loan-level data provided by the Small Business Administration (SBA) merged with data on each type of lender. We use census tract as our unit of analysis and proxy for community, link PPP loan and lender to communities and their socio-economic status, and create our two key dependent variables for all loans and each lender type: a dummy variable indexing whether any PPP loans were made in the census tract, and a count variable of how many loans were made. Our analysis includes the nation's 84,414 census tracts, including those where banks made no PPP loans, which lets us determine where different lenders did and did not lend and how widely they lent across communities. We use Hurdle models to measure the level of inclusivity over three periods corresponding to the three pieces of legislation that changed the program.

To examine the origins and subsequent development of the PPP, we rely on several qualitative sources of data, including semi-structured interviews with Congressional staff who worked on the House and Senate Small Business Committees that helped craft the PPP, trade associations who lobbied Congress on PPP legislation, lenders involved in the program, local government officials, and public interest groups who lobbied to make the PPP more inclusive. All interviews are coded using NVivo. In addition, we use governmental reports from the Government Accountability Office, Congressional Research Service, and the SBA's Inspector General's office. And finally, we draw on secondary periodic and scholarly publications.

Authors

• Michael Schwan, University of Groningen

• Mark Cassell