Overall, Congress has authorized around $5.9 trillion in spending to address the social and economic consequences of the epidemic, $4.32 trillion of which has already been disbursed or pledged. More than a year into this extraordinary rush of investment, there is enough perspective to evaluate the federal pandemic response, and the early results do not auger well for supporters of “big government.”
I describe the Small Business Administration’s (SBA) bungled execution of two major pandemic initiatives in a new Cato Institute Legal Policy Bulletin. The first is the $813 billion Paycheck Protection Program (PPP), which involves federal loan guarantees with a low interest rate (1%) that can be forgiven provided the borrower spends a specific percentage (about two-thirds) on payroll. The second is the $367 billion Economic Injury Disaster Loan (EIDL) program, which involves government-guaranteed loans with advantageous terms.
Both pandemic projects are massive expansions of unstable systems. The PPP is an expansion of the SBA’s “section 7(a)” loan guarantee program, which was a yearly presence on the Office of Management and Budget’s list of “high priority” programs that demand additional examination owing to poor management of public resources in the years preceding the pandemic.
Similarly, long before COVID-19, watchdogs had raised concerns about key parts of the EIDL program (such as the SBA’s assessment of creditworthiness and applicant eligibility). Despite numerous warnings, the EIDL program reported its highest-ever improper payment rate of 11.98 percent in the fiscal year preceding the pandemic, ranking among the worst in government.
From this inadequate starting point, both programs were overburdened by a massive rise in effort. For example, in a “typical” year, the SBA makes around 62,000 loan guarantees totalling $16.7 billion under the section 7(a) program; in comparison, the agency made more than 9 million loan guarantees totaling $746 billion during the first year of the PPP. The EIDL program, too, exploded: in the first year of the pandemic, the SBA made roughly twice as many direct loans as it had in its entire 67-year history prior to COVID-19.
Overburdened, the SBA cut corners to allow public dollars to flow out the door. The agency loosened underwriting procedures for lenders for the PPP, removing basic documentation requirements such as financial statements and income tax returns. The Government Accountability Office criticized this choice and others in a report titled “COVID-19 Loans Lack Controls and Are Susceptible to Fraud.”
In the case of the pandemic EIDL program, the inspector general ruled that the SBA “lowered the guardrails,” considerably increasing the potential of fraud. His office also claimed that the SBA “ignored” a subcontractor’s system for detecting problematic loans for months.
To summarize, these already unstable programs relaxed their current controls in order to handle their tremendous workload. This is a recipe for disaster, and the effects have been disastrous.
The inspector general issued a warning about “widespread fraudulent activities” about halfway through the PPP program. His office has received more than 77,000 hotline complaints of probable fraud by the end of September 2020, and “the numbers continue to climb” since then. Aside from the hazards posed by scammers, there is also the potential of administrative inefficiencies at the SBA. An independent financial statement auditor reported as possible illegal payments more than 2 million approved PPP loan guarantees totaling $189 billion in December 2020.
Concerning the EIDL, the inspector general has warned of “rampant fraud,” and a preliminary evaluation undertaken by his office identified more than $77 billion in sanctioned loans with “high fraud indicators”—nearly 46 percent of the EIDL applications accepted up to last October ($169 billion). Of course, the SBA has continued to provide loans since then, and as a result, the inspector general warned that “the potential for fraud in the COVID-19 EIDL Program has grown.”
The SBA’s response to criticism for both programs (EIDL and PPP) has been instructive. Various public and private watchdogs have produced a slew of reports in the last year, all of which agree that the SBA’s management problems have jeopardized vast sums of taxpayer money. The agency effectively buried its head in the sand in response. The inspector general, for example, stated in October that “SBA’s management continues to argue that its controls are solid despite overwhelming evidence to the contrary.”
In total, the SBA’s administrative blundering has put more than $260 billion (and counting) in taxpayer money at risk. To be sure, the federal government was confronted with a unique situation. Because of the nature of Congress’ goal to immediately assist those afflicted by the pandemic and its economic implications, federal relief programs were more vulnerable to inappropriate payments. While some waste may be justified in an emergency, the SBA’s dismal performance is out of the question, and serves as a sharp reminder of the limitations of “big government.”
