The Paycheck Protection Program wasn’t just trying to funnel money to workers through businesses. We wanted those workers to stay and attach to those businesses. And we wanted those businesses to stay intact so that on the other side of this pandemic-induced recession, we would have a small business sector that was operating and for workers to come back too.

Yeah, that’s exactly right. You wanted to keep workers attached to their employer, where they were working in February. That would reduce the unemployment rate, that would reduce pressure on state unemployment insurance systems, and that would allow the economy to snap back faster than would be possible if the unemployment rate climbed up into the 20-percent-plus range. You also wanted to keep those businesses intact so that unemployed workers had businesses that would hire them. If we lost all those businesses, then the unemployment rate would stay much higher for much longer because you would have to go through the process of business creation first, before there would be enough businesses around to hire unemployed workers. And of course there are many other things too.

These small businesses are able to be productive because they’re embedded in networks. They have good relationships with suppliers. They have good relationships with customers. They are rooted in their local communities. They figured out how to make money. They figured out how to provide goods and services that are valued. Losing all of that knowledge, losing all of that business-specific capital, losing all of those relationships, would be devastating to the economy and it would take years to recover. So it’s an important program. I think it’s very likely that the PPP program played a large role in the labor market recovery that we saw in May.

The program has distributed over $500 billion to small business. The average loan size is something like $160,000 as of late May. The number of borrowers totals 4.4 million. Over 99 percent of those loans were for less than $2 million. 79 percent of those loans were for less than a $100,000. And of the total dollars lent in the program, about $8 in every $10 were lent as part of loans, that’s for less than 2 million. As of mid-May, nearly 70 percent of small businesses received financial assistance from PPP. So this is going to a huge share of the nation’s small businesses. And in order for those loans to become grants, businesses have to spend a large portion of the money on payroll expenses. So I think it’s pretty likely that this program in particular really helped support the labor market in the month of May and is responsible for a lot of the good news that we’re celebrating today. Of course, that’s not the end of the story.

Indeed, one of the concerns that people have been bringing up is that we’re at the end of that program and all of these people who were state-attached are going to become unattached because the economy is still recovering. Rather than serving as a bridge to a stronger economy, they are concerned that this program is going to end up being a bridge to unemployment.

Yeah, that’s exactly right. And that’s one of many reasons why we shouldn’t conclude from the good news from this morning that we’re out of the woods. The program is set to expire, and the program shouldn’t just be renewed in its current configuration. The challenge facing the economy and the challenge facing Congress this summer is really a lot different than what we faced this spring.

The goal of PPP was essentially to freeze the small business sector in place where it was in February. And then, as you say, the PPP would create a bridge to the summer and unfreeze the economy, preserving as much of it as possible. Now that we are into the summer and the phase of this pandemic where all the states have reopened to at least some degree, the challenge is different.

And the challenge is harder. We don’t want public policy to unnecessarily impede the process of some industries growing, some industries shrinking, some firms expanding their payroll, some firms reducing their payroll. In order for the economy to get back to health, those sorts of adjustments need to take place. For example, it would not be good for the economy if the number of people who work for the airline industry is the same in August as it was in February. Or if the number of people who work in movie theaters is the same in August as it was in February. There’s going to be less demand for travel and there’s going to be less demand to go to the movies for many months, if not longer. And so for the economy to return to health, those industries need to shrink and other industries — like package delivery industry, for example — need to expand.

The same thing needs to happen within firms. If a restaurant can be profitable at 80 percent of its former workforce, then that restaurant should lay off 20 percent of its workforce and those workers should be supported through public policy to get new jobs. You don’t want that restaurant to have to keep its full complement of workers if that means it’s going to be unprofitable. So the next phase of small business support should allow for those types of reallocations to happen, while also providing businesses with some revenue replacements so that they don’t go out of business and that they can actually have the space to make those changes.

So what does that next phase look like?

Yeah. So I think it’s important to recognize — and this goes back to what we were talking about earlier about the difference between levels and changes — we’re going to see significant economic improvement every month for the next few months. The unemployment rate is going to drop quickly. GDP is going to recover quickly. But even if all the workers who are on temporary layoffs were rehired immediately and so the only problem we had were workers who have permanently lost their jobs, which is just the minority of job losses to date, we would still have recession-level unemployment. The unemployment rate would still be above 7 percent. We would still have lost a half decade of employment gains.

So this is a bad situation. And rapid improvement in a bad situation is good, but we’re still going to be in a bad situation come August or September, even if we rapidly improve in June and July. And that’s a message that’s important. It’s something that I think Congress needs to take very seriously.

Congress’s work is not done, right?

Their work is far from done.

But that work going forward shouldn’t just be, “Look at what we’ve done so far. Let’s just do more of that.” Right? It needs to be different.

Yeah. We need to do some things very differently. So small business support needs to look different. It needs to help businesses that are struggling, while also not stopping them from changing the way they produce goods and services or from shrinking their workforces.

So different requirements on that aid?

Different requirements on that aid. Unemployment insurance is going to look a lot different. Right now something like two thirds of workers who were eligible for unemployment insurance benefits would be getting a raise if they were unemployed, relative to what they would make in their jobs. That’s not good. It’s not a good use of taxpayer money, even during the shutdown. But from a macroeconomic perspective, it’s not terrible during a shutdown. But now that all the states have partially reopened and we’re moving toward a full reopening, that’s a serious problem. And that needs to change as well.

A big component of the CARES Act was checks to households. That was a fine thing to do, but I don’t know that we need to do that again. The CARES Act allocated $454 billion — that’s roughly 25 percent of all the money in the CARES Act — to the Treasury Department to support Federal Reserve lending programs. Hardly any of that capital has been put to work. Hardly any lending has taken place under those Fed programs. That money is just sitting there, and so the Treasury Secretary and the Treasury Department really need to put that money to work to support the economy. I don’t know that we would need any additional money for Fed lending in the next congressional package, because the Treasury Department hasn’t put any of the money to work that Congress appropriated in March. So that’s a big problem as well. I think we really do need another round of legislation.

How large should this next package be? About trillion dollars? And do you know what it would look like?

I’m not sure what the dollar figure for it should be, but I would be surprised if we need less than a trillion dollars of additional support. We know we’re going to need several hundred billion dollars just for small businesses. We know we’re going to need several hundred billion dollars to support workers who are unemployed. We know we’re going to need several hundred billion dollars to help fill the tax revenue hole that states are experiencing. So just some pretty quick back of the envelope math gets you in the ballpark of $1 trillion.