On March 16, Economics Professor Rob Fairlie testified before the U.S. House of Representatives Committee on Small Business. Fairlie was invited to share findings from his latest research, which examines demographic trends in who benefited from the $278 billion distributed through the third round of the Paycheck Protection Program.
The Paycheck Protection Program (PPP) was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020 in an effort to keep small businesses afloat during the pandemic and prevent layoffs. The program offered government-backed, forgivable loans through third-party lenders to help cover payroll costs and certain other business expenses. Initial funding ran out in weeks, so a second round was authorized in April of 2020, followed by a third round from January to May of 2021.
Early research on the program, including Fairlie’s own prior work, had revealed that, while minority-owned businesses were particularly hard-hit by the economic impacts of the pandemic, minority communities received disproportionately less support through the first round of PPP loans. This disparity started to improve as financial institutions beyond large, traditional banks became more involved in the second round. And the third round, in 2021, sought to address initial disparities with program changes—like priority application periods, reserved funds, and second loan opportunities—all targeted to serving the smallest and most vulnerable businesses.
Fairlie’s newest research set out to determine if these changes improved racial equity in the amount and number of PPP loans received in communities across the country. Fairlie and his coauthor, University of Nevada, Reno Associate Professor Frank Fossen, had initially embarked on this study at the request of the U.S. Senate. The final paper is forthcoming in the American Economic Association journal Papers and Proceedings, but a working version was shared in February by the National Bureau of Economic Research and cited in a White House fact sheet on March 11, prior to Fairlie’s testimony. Fairlie believes the study’s findings are encouraging.
“Our research shows that, In 2021, the program did a much better job with equity issues,” Fairlie said. “It targeted disadvantaged communities and business owners through several new procedures under the Biden Administration, and we found strong evidence that the funds were actually dispersed to minority communities, as intended.”
Specifically, the research identified a strong positive relationship between receipt of PPP loans and minority share in a community, across several different means of measurement. This finding contrasted substantially with prior rounds of the program. The first round showed a negative relationship between minority share in a community and loan support, while the second round showed a slight positive relationship. By the third round, loan support was successfully reaching both businesses with employees and the self-employed in minority communities.
However, the paper also notes that the positive relationship between loans and minority share of the community was stronger for businesses taking out their first loan than their second. Fairlie says this may reflect some persistence in racial inequalities from earlier in the program, since getting a second loan was only possible for businesses that had already received an initial loan.
Fairlie shared these findings during his testimony before the Committee on Small Business and also discussed a related trend that has shown up in his research and in the work of others. He said more banks and financial institutions were involved in the third round of loans, especially online lenders, known as “fintech” companies, and community development financial institutions (CDFIs), which specialize in lending to underserved communities. Fairlie believes this helped to reach businesses in minority communities, and that lesson could inform future recovery efforts.
“We need to continue to provide access to capital for struggling businesses, and one method to do this is to increase the range of financial institutions, both geographically and by type,” Fairlie said during his testimony. “Increasing involvement of a wider range of financial institutions appears to have helped improve access to loans for communities of color.”
Rep. Dean Phillips, who chaired proceedings for the hearing, thanked Fairlie and other experts for their testimony and expressed a desire to apply lessons to future initiatives.
“It's heartening to see that the changes Congress did institute had a profound effect on entrepreneurs that were initially shut out of PPP,” Phillips said during the hearing. “It's also vital that we take the lessons learned from the PPP program and apply them to current and future [Small Business Administration] programs. Making these programs more accessible and equitable will ensure that more entrepreneurs can pursue their dreams and that all small businesses have a chance not just to survive but to thrive.”
