Research Highlights Podcast
August 28, 2024
Broader economic impacts of the Paycheck Protection Program
Brent Ambrose discusses the spillover effects of the PPP on the commercial real estate market.
Source: HalfPoint
The Paycheck Protection Program (PPP) was launched at the height of the COVID-19 pandemic in the hopes that it would keep businesses from laying off workers during government shutdown measures taken to contain the spread of the disease.
Initial estimates of the direct impacts have been mixed, with some studies suggesting that the cost was hundreds of thousands of dollars per job saved.
But a paper in the American Economic Journal: Economic Policy looked beyond the labor market at a second order effect showing a clear and positive benefit. Authors Sumit Agarwal, Brent W. Ambrose, Luis A. Lopez, Xue Xiao found that the PPP reduced mortgage delinquencies for commercial real estate by roughly $36 billion in 2020 and likely played an important role in averting wider distress in financial markets.
Ambrose recently spoke with Tyler Smith about the impact of PPP loans on the commercial real estate market and ways in which the program could have been better targeted.
The edited highlights of that conversation are below, and the full interview can be heard using the podcast player.
Tyler Smith: What was the Paycheck Protection Program (PPP), and what were its primary goals?
Brent Ambrose: Back in 2020, COVID-19 hit the world and caused a global pandemic during the spring. It seemed like the world was shutting down. Governments were forcing people to close businesses and shelter at home and so forth. That was obviously a very traumatic event for the world economy and the United States economy. So Congress immediately enacted a number of provisions to try to help the economy withstand this massive shock. One of the things that Congress enacted was something called the CARES Act, which was a program that they set up to give money loans to small businesses to help them because the government had mandated that they essentially close during the pandemic period. And so that was called the Paycheck Protection Program. The idea was that the small businesses would get these loans from the government, and they could use the money to make payroll to their employees. But they could also use the funds for other things.
Smith: There have been a number of studies that have taken a look at the direct impacts of the PPP. Was the PPP as effective as people had initially hoped?
Ambrose: I think the evidence is rather mixed. On the one hand, you had a few studies out there with evidence that the PPP was a very expensive program, that it was saving jobs but on the order of costing hundreds of thousands of dollars per job to save. And then there are some studies on the other extreme that pointed out that the critical studies were focusing on the upper end of the employment area—meaning firms that are employing 500 employees—to study the effect of the PPP. So another group of economists argued that if the majority of the firms are in the 20 to 30 employee range, you need to be looking there. And when they looked at that area, they found that the PPP was actually fairly effective at reducing unemployment and keeping people employed. So it was a mixed bag at the time. Our idea was to take a step back. We know that the PPP program can help because it was being used by firms to make payroll. But perhaps there were other spillover effects of this program. And in particular, we were interested in the effects on commercial real estate. Were firms able to continue to make their rent payments to their landlords? And did the landlords in turn make their mortgage payments to the lenders?
Smith: How did you tease out the impact of the PPP on these mortgage payments in particular?
Ambrose: First of all, we're focusing on the probability that a borrower, the owner of the property, will default on their mortgage. We're looking at defaults on mortgages. The PPP was actually rolled out in several waves. It was initially started in April of 2020. Then there was another wave in May because they exhausted the funds very quickly. And that creates econometric problems for trying to tease out the effects. And then if you look at a map of where the PPP funds were distributed, it essentially touched every part of the United States. Again, that also creates an interesting challenge for trying to understand the effects of this program. We adopted some econometric techniques called a two-way fixed effects model that allows for different treatment times affecting the loans that we're studying. We tied the mortgages to the PPP loans and then calculated a percentage of how much of the debt service was potentially impacted by the PPP loans that were to businesses in those properties. That's the treatment intensity. And then we looked at the timing of when those loans were rolled out during the program and estimated the effects for the average treatment response.
Smith: It sounds like if PPP loans were having a big impact, those places that are really exposed, that got a lot of loans, should be seeing less delinquencies, and they should be shortly after the PPP loans were disbursed to those areas. Is that roughly the idea?
Ambrose: Yes, that's exactly right. The greater the intensity, the more exposure that an area has to PPP, the more businesses that were getting PPP loans, the lower the mortgage delinquencies should be in those areas relative to other areas that had fewer PPP loans.
The PPP saved $36 billion of mortgages from going into default, which then would have cascaded through the financial system and could have caused much more damage.
Brent Ambrose
Smith: What do you find when you apply your econometric techniques?
Ambrose: There was a spillover. And at the beginning, mortgage delinquencies were about 1 to 1.5 percentage points lower in higher-intensity treated areas than in lower-intensity treated areas. To put that into perspective, the default likelihood is about 5.6 percentage points lower for a mortgage that was in the 95th percentile area of having intensity treatment versus a mortgage that was in a 5th percentile treatment intensity area. And 5.6 percentage points is a pretty sizable shift in mortgage delinquency rates. It saved quite a bit of mortgages from going into delinquency, which then may default. And we know that can ultimately cascade through the financial system as defaults go ricocheting around.
Smith: Do you think these results indicate that the PPP was cost effective?
Ambrose: I think it shows that it did have a positive benefit. I think it's clear that the PPP was a program that was aimed at averting a financial catastrophe as a result of government-mandated shutdowns. I hate to think about what could have happened to the economy. Make no mistake, our paper is about a second order effect, which is looking at commercial real estate prices and mortgages, but the spillover effect there is actually pretty sizable. If the PPP loans were actually used to pay rent—as we would anticipate that they were—about $20 billion in PPP funds averted about $36 billion in mortgage defaults. That's a pretty nice trade-off if you want to think about it in those terms; we saved $36 billion of mortgages from going into default, which then would have cascaded through the financial system and could have caused much more damage.
Smith: How could the PPP have been adjusted to make it a little bit better?
Ambrose: First of all, like any program it is not perfect. This program was put into place very quickly as we started shutting down the economy during the onset of COVID-19. One of the things that happened was that the loans were not targeted. They basically just made the loans available to anybody and everybody. If we just wanted to focus strictly on the spillover effects into the commercial real estate market, we can see that the effect didn't really happen in warehouses and office buildings. Those are leased on much longer terms, and they're not predicated on businesses that need face-to-face interactions to do their business. Whereas retail is predicated on that face-to-face interaction in order to generate revenues to pay the expenses, and hotels obviously need the customers coming in and staying in their properties. If we targeted the PPP loans much more directly to the businesses that were engaged in face-to-face interactions, that would have helped more than the loans that went to the office and warehouse space. But again, I just want to make clear that that is a spillover effect; we still have the first order effect of helping businesses that may be in warehouses and offices make their payroll. But from a real estate standpoint, it could have been better targeted. We think there's also a potential to target geographically as well. Some areas had more shutdowns than others. So to the extent that we could have had a better targeting there, it would have made the program more efficient too.
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“Did the Paycheck Protection Program Help Small Businesses? Evidence from Commercial Mortgage-Backed Securities” appears in the August 2024 issue of the American Economic Journal: Economic Policy. Music in the audio is by Podington Bear.