The Paycheck Protection Program (PPP) covered in excess of 80% of eligible U.S. small business employment, supporting 51 million American jobs through the program’s close on August 8th,2020. Of those supported jobs, how many would have been lost in the absence of PPP loans?To answer this question, Faulkender, Miran, and Jackman propose an empirical strategy to identify the effects of PPP loans on county-level unemployment insurance claims. Specifically, they exploit variation in the timing of loan receipt caused by differences in local banking market structure across US counties. On the margin, the researchers estimate that a 10 percentage point increase in eligible payroll covered by PPP resulted in a 1 to 2 percentage point smaller jump in weekly initial unemployment insurance(UI) claims, as a share of employment covered by UI. With a lag, that same 10 percentage point increase in PPP coverage resulted in an estimated 5 percentage point smaller increase in the insured unemployment rate. In order to compare their estimates with related studies, Faulkender, Miran, and Jackman calculate an aggregate employment effect of PPP loans. Moving from the 25th percentile to 75th percentile of counties by early PPP coverage causes an improvement in the insured unemployment rate of over 12 percentage points, or, extrapolated nationally, 18.6 million jobs. Faulkender, Miran, and Jackman note meaningful caveats to interpreting this paper’s aggregate number; the same caveats that apply to other papers evaluating PPP loans. This paper’s estimates are an order of magnitude larger than previous evaluations of PPP, which have tended to find small employment effects ornone at all.
Faccio and McConnell use newly-assembled data encompassing up to 75 countries and starting circa 1910 to study the impediments to the Schumpeterian process of creative destruction as it “proceeds by competitively destroying old businesses” (Schumpeter, 1934, p. 155). They document that firm size and political connections represent the main obstacles to the destructive part of the Schumpeterian process of replacement of large firms. Consistent with a theory of political capture, when accompanied by regulations that restrict entry, political connections play a formidable role in abetting old large firms remaining large. When connected to the results in Fogel et al. (2008) their results imply that political connections, in combination with barriers to entry, retard economic development.
This paper was distributed as Working Paper 27871, where an updated version may be available.
Alfaro, Bloom, and Lin show how real and financial frictions amplify, prolong and propagate the impact of uncertainty shocks. They first use a novel instrumentation strategy to address endogeneity in estimating the impact of uncertainty, by exploiting differential firm exposure to exchange rate, policy, treasury, and energy price volatility in a panel of US firms. Furthermore, using common proxies for financial constraints, Alfaro, Bloom, and Lin show that ex-ante financially constrained firms cut their investment more than unconstrained firms following an uncertainty shock. The researchers then build a model with real and financial frictions. The researchers show that adding financial frictions: i) amplifies uncertainty shocks by doubling their impact on output; ii) increases persistence by doubling the duration of the drop; and iii) propagates uncertainty shocks by spreading their impact onto financial variables. These results highlight why in periods of greater financial frictions uncertainty can be particularly damaging.
This paper was distributed as Working Paper 24571, where an updated version may be available.
Crosignani, Macchiavelli, and Silva document the propagation through supply chains of the most damaging cyberattack in history and the important role of banks in mitigating its impact. Customers of directly hit firms saw reductions in revenues, profitability, and trade credit relative to similar firms. The losses were larger for customers with fewer alternative suppliers and suppliers producing high-specificity inputs. Internal liquidity buffers and increased borrowing, mainly through bank credit lines, helped affected customers maintain investment and employment. However, the shock led to persisting adjustments to the supply chain network.
Ivanov, Pettit, and Whited re-examine the relation between taxes and corporate leverage, using variation in state corporate income tax rates. In contrast with prior research, the researchers document that corporate leverage increases following tax cuts for both privately held and publicly listed firms. Ivanov, Pettit, and Whited use an estimated dynamic equilibrium model to show that tax cuts result in lower default spreads and more distant default thresholds. These effects outweigh the loss of benefits from the interest tax deduction and lead to higher leverage, especially for privately held firms. Overall, debt tax shields appear to be a secondary capital structure consideration.
Müller and Verner study the relationship between credit expansions, macroeconomic fluctuations, and financial crises using a novel database on the sectoral distribution of private credit for 116 countries starting in 1940. Theory predicts that the sectoral allocation of credit matters for distinguishing between "good" and "bad" credit booms. The researchers test the prediction that lending to households and the non-tradable sector, relative to the tradable sector, contributes to macroeconomic boom-bust cycles by (i) fueling unsustainable demand booms, (ii) increasing financial fragility, and (iii) misallocating resources across sectors. Müller and Verner show that credit to non-tradable sectors, including construction and real estate, is associated with a boom-bust pattern in output, similar to household credit booms. Such lending booms also predict elevated financial crisis risk and productivity slowdowns. In contrast, tradable-sector credit expansions are followed by stable output and productivity growth without a higher risk of a financial crisis. Their findings highlight that what credit is used for is important for understanding macro-financial linkages.
Wang, Yang, Iverson, and Jiang examine the impact of the COVID-19 economic crisis on business and consumer bankruptcies in the United States using real-time data on the universe of filings. Historically, bankruptcies have closely tracked the business cycle and contemporaneous unemployment rates. However, this relationship reversed during the COVID-19 crisis. While aggregate filing rates were very similar to 2019 levels prior to the onset of the pandemic, filings by consumers and small businesses dropped dramatically starting in mid-March of 2020, contrary to media reports and many experts' expectations. Total bankruptcy filings declined by 31 percent between 2019 and 2020. Consumer and business Chapter 7 filings rebounded moderately starting in mid-April and stabilized around 25 percent below 2019 levels, while Chapter 13 filings stabilized around 55 percent below 2019 levels. Wang, Yang, Iverson, and Jiang show that the decline in filings was especially concentrated among homeowners and that bankruptcy filings fell the most in areas with the largest declines in mortgage foreclosure rates, suggesting that loan forbearance is an important factor in the decline in bankruptcy. The researchers also find evidence consistent with liquidity constraints preventing some debtors from filing during the pandemic.
The alarming rise in drinking water pollution across the U.S. is often attributed to cost cutting pressures faced by local officials. Agrawal and Kim know little, however, about why these pressures are so severe for some cities compared to others. In this paper, they argue that one of the root causes of recent drinking water emergencies is the collapse of the municipal bond insurance industry. Public water infrastructure has traditionally been financed using municipal debt partly backed by a small number of monoline insurers. Starting in the 90’s, some of these insurers became increasingly involved with structured financial products unrelated to municipal water bonds, such as residential mortgage backed securities. Agrawal and Kim show that when these products crashed in value in 2007, municipalities that had relied more heavily on these insurers for water infrastructure financing subsequently faced higher borrowing costs. These municipalities then reduced their borrowing and scaled back investments in water infrastructure, which in turn, has led to elevated levels of water contamination. Their findings thus reveal how the U.S drinking water crisis can be partly traced back to financial market failures.