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The Paycheck Protection Program and Type I & Type II Errors

Summary:
See The Paycheck Protection Program Is a Mess. Here's Who Is Benefitting From the Dysfunction by Christian Britschgi of Reason Magazine.I use the book The Economics of Public Issues in my micro classes. Chapter 1 is called "Death by Bureaucrat." It discusses how the Food and Drug Administration can make either a Type I error or a Type II error.Type I error: The FDA approves a drug before enough testing is done and when people take it, there are harmful side effects.Type II error: The FDA tests a drug longer than necessary to stay on the safe side. But people might suffer because the drug is not yet available. 80,000 people died waiting for Septra to be approved.The FDA would rather make a Type II error because the public can blame the FDA if a Type I error occurs.Something like this

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See The Paycheck Protection Program Is a Mess. Here's Who Is Benefitting From the Dysfunction by Christian Britschgi of Reason Magazine.

I use the book The Economics of Public Issues in my micro classes. Chapter 1 is called "Death by Bureaucrat." It discusses how the Food and Drug Administration can make either a Type I error or a Type II error.

Type I error: The FDA approves a drug before enough testing is done and when people take it, there are harmful side effects.

Type II error: The FDA tests a drug longer than necessary to stay on the safe side. But people might suffer because the drug is not yet available. 80,000 people died waiting for Septra to be approved.

The FDA would rather make a Type II error because the public can blame the FDA if a Type I error occurs.

Something like this might be happening with the "PPP." If we wanted to help businesses keep their employees, the money had to get out quickly. But that meant it would be harder to make sure it only went to "deserving" companies (Type I error). If we took more time to look at each application to make sure only "deserving" companies would get the money, then it might take too long (Type II error).

Excerpts from the article:

"The list of companies and organizations that received loans through the federal government's flagship coronavirus relief program includes firms linked to powerful politicians, celebrities, lobbyists, and government spending hawks.

On Monday, the Small Business Administration (SBA) released a list of organizations that each received more than $150,000 through the Paycheck Protection Program (PPP).

That program, first approved as part of the $2.3 trillion CARES Act in late March, allocated $670 billion to purchase loans made by banks to businesses and non-profits with fewer than 500 employees. The government would forgive those loans so long as the recipients spent a certain portion of the money on retaining or hiring back employees.

Politico reports that PPP borrowers included companies owned or founded by members of Congress, as well as the educational arms of the Congressional Black Caucus and the Congressional Hispanic Caucus. Several lobbying firms, technically barred from receiving loans if over half their revenue comes from lobbying, also benefited from PPP."

"Congress has tried to reform PPP by passing a law that gives recipients more time and flexibility when it comes to spending the money received from the program. But Congress has devoted very little time to winnowing down who is actually eligible for the program in the first place.

To be sure, that's a difficult task. Any government program of sufficient size and complexity is going to send some benefits to those who don't deserve them or who won't use them efficiently. Stricter eligibility requirements necessitate more red tape that can slow down or deny relief to even the most worthy recipients. Or maybe ARI is right and anyone who paid taxes is definitionally a worthy recipient."

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