Was the American Recovery & Reinvestment Act of 2009 effective or not?
The Great Recession was widely recognized as the worst economic downturn for the U.S. economy since the Great Depression. Upon coming into office, one of the first acts of President Obama was to get the American Recovery and Reinvestment Act (ARRA)of 2009 through the Congress. The ARRA was a fiscal stimulus package of $789 billion. The package was about 2/3 increases in government spending and 1/3 tax cuts to individuals and businesses.
The question for this online discussion is was the ARRA effective or not? Did the ARRA stimulate the economy, or would we have been better without it? After all, while the recession is technically over, the economy is still not growing as fast as it should and unemployment remains high.
We will explore this question in several steps:
1. What is the theory behind the fiscal stimulus? How was the stimulus supposed to work?
2. Do you believe the theory? Why or why not?
3. What is the evidence in favor of or against the effectiveness of the stimulus?
4. Based on your reading of the evidence, how effective *was* the stimulus?
Question 1: What is the theory behind the fiscal stimulus? How was the stimulus supposed to work?
The ARRA tax cut was intended to ease the financial burden on those affected by increasing their net income. The ARRA spending was supposed to increase economic growth by creating jobs.
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LikeDislikeHow is a tax cut supposed to affect the economy beyond increasing recipients’ net income? This sounds just like a welfare payment.
How does in increase in government spending create jobs and economic growth?
(Hint for both of these: What does the Sexton text say?)
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LikeDislikeReducing the economic burden of a downturn by increasing the net household income has a stimulating affect on the economy. This is because it allows the household to maintain their level of consumption. This prevents the exponentiation of economic downturn, which would otherwise cause hardship which leads to less spending, which leads to further downturn, which leads to further hardship, which leads to less spending, etc.
Okuns law states that for every 1% increase in unemployment there is a 2% decrease in economic output. Therefore, by creating jobs the government maintains or increases the overall GDP. The ARRA did this by increasing government spending, which went towards preventing layoffs and cutbacks, job training to better match labor supply to labor demand, and infrastructure and research which directly created jobs that need to be filled, as well as pushing our production possibility frontier to the right.
Government spending doesn’t create jobs; rather,it creates demand which creates jobs. For example, when govt spends on interstate highways, govt doesn’t build the highway, but hires contractors to do so. It’s the contractors who create the jobs. There are some exceptions but this is the norm.
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LikeDislikeThe theory for ARRA was from Keynesian macroeconomic theory, which states that, during recessions, the government should offset the decrease in private spending with an increase in public spending in order to save jobs and stop further economic downfall.
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LikeDislikeA fiscal stimulus is a reduction in consumer demand has resulted in an unusually high number of idle resources such as unemployed workers and closed factories. Once consumer spending rises enough, the government can slow their spending, as they are no longer needed to pick up the slack. The fiscal stimulus will only work if it uses idle resources (not used by the private sector). When the country is in recession, it must first be recognized, then the stimulus package can be created after it goes through the necessary checks and balances. Government spending will necessarily raise GDP, because in the calculation of GDP the value of any government project is determined by its cost, not its value.
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LikeDislikeFiscal stimulus is NOT a reduction in consumer spending, but rather it’s a reaction to a reduction in private (consumer or business spending).
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LikeDislikeThe theory behind the fiscal stimulus was the Keynesian theory. This says that during economic recessions, the government should make up for the decrease in private government spending by increasing public government spending in order to save jobs and stop the economic downfall.
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LikeDislikePrivate govt spending is an oxymoron. The sentence should read “The govt should make up for the decrease in PRIVATE spending by increasing GOVT spending…
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LikeDislikeThe theory was The ARRA was intended to use government spending to help putting consumers back to work. With their newly found income these workers will be able to spend again, increase consumer demand . This will increase confidence in the state in the state of economy and will increase their spending. Once consumer spending rises, the government can slow down on their spending and would not be needed. The ARRA was suppose to increase consumer demand. by stimulate the economy, to save current jobs and to create new jobs, federal tax relief, expand unemployment benefits, domestic spending in education, and healthcare.
The theory behind the stimulus is that the package will stimulate or spark one or more areas of aggregate demand, in order boost output in an economy, and create jobs and increase income during an economic recession. The stimulus is designed to manage the rate at which aggregate demand is growing. The stimulus is is is there to ease the recession, and boost consumer confidence, create jobs and increase income during times of trouble. Jobs could be created by increasing demand, because if there is more demand for a product, they are going to make more of that product, and they will need more people to make it.
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LikeDislikeThe idea behind fiscal stimulus is rather simple. A reduction in consumer demand results in an unusually high number of unemployed workers and closed factories. The government can take the place of the private sector by increasing spending, which is supposed to encourage the re-hiring of unemployed workers and re-opening of closed factories. With their newly found income these workers will be able to spend again, increase consumer demand. Also, workers who already have jobs will have increased confidence in the state of the economy and will increase their spending as well. Once consumer spending rises enough, the government can slow their spending.
ARRA’s main purpose was to instill the confidence needed to restore economic growth. Tax rebates were supposed to encourage consumer spending. This spending would ultimately lead to more demand causing suppliers to employ more workers.
Wow, you and Hannah must be reading the same book. Did you see my tweet about reading what everyone else has posted so you don’t say the same thing?
A fiscal stimulus is when the government attempts to intervene with the private sector’s spending habits by increasing usage of previously shutdown businesses or providing jobs for unemployed workers. The reason the government chooses this route is a decrease in consumer demand, which can be devastating to the economy. The government takes the role of the private sector consumer, spending money where necessary to try to boost the demand and support the economy.
As it looks as if “theory” has been pretty well covered, perhaps I could take a stab a bit back further than the actual 2009 ARRA as to what the Bush/original stimulus was supposed to do? It has been my understanding, and perhaps wrongly, that the stimulus money was to be used to buy the “toxic/bad assets/securities” sold world-wide as mortgage securities from the affected banks. The failing/defaulting loans of which caused a loss of confidence by the public and each other, such that one would not loan to each other (savers did not save/invest, bankers feared the risk of lending to others including other banks). The theory was that if the government backed the bad loans that confidence would eventually be restored, and banking/confidence would return to normal and therefore stave-off a recession. So, in this capacity the first goal was to stop the financial panic of the public and banks/lenders. Additionally, as these toxic mortgage securities were world wide, the plan had been to rescue banks, somehow, globally. Again, stopping the financial panic and restoring confidence world-wide. Additionally, as this money was to go towards the mortgage related securities/assets, it was meant to slow down/stop the slide in home prices. However, that is not what eventually happened. In the days before ARRA, no one really knew where the money was going to go. There were some groups that were able to try and ride the situation out quite long term, thus seeing this as a money making opportunity… and then when this became public, it further lowered the confidence of both the public and lenders. Then, the government did want to bail out the offending institutions, but use the money to partially nationalize the banks/businesses… like Europe has/had done and failed. Again, this lowered public and private confidence. By then, the original main goal/window of buying the bad assets to stop the slide of home prices had came and gone. In it’s place was nationalizing banks and, in my opinion, a total lack of transparency in the process which further eroded the confidence of banks and citizens. Hello to the hell that has followed.
Rereading this post, I find that my info on the TARP vs. ARRA timeline might not be quite clear and I could not edit, so this is a link. Bush created TARP and bailed out banks. Obama has had his own record of bail outs later.
1)difference between goals of TARP and 2009 ARRA http://questions.economooc.com/was-the-american-recovery-reinvestment-act-of-2009-effective-or-not/#comment-64316
2) Info on GM bail out. http://www.post-gazette.com/opinion/editorials/2013/12/04/Fruitful-bailout/stories/201312040026
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LikeDislikeThe ARRA stimulus was intended to save jobs and create more employment opportunities, increase economic activity, and raise the level of trust and openness in the government. All of this was to be accomplished by providing $787 billion in tax cuts and benefits, relief programs, and federal incentive programs. The theory behind this fiscal stimulus was the Keynesian theory.
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LikeDislikeThe theory behind this Act was to immediately create jobs for the unemployed. It was suppose to create jobs and help out the people that was affected by the recession.
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LikeDislikeThe main theory behind the American Recovery and Reinvestment Act of 2009 was that of the Keynesian macroeconomic theory. This idea argued that while a recession is occurring, it is the government’s responsibility to offset the lack of private spending with an increase in public spending, such as on infrastructure building, public works, etc. By increasing public spending, jobs are both saved and created in certain sectors, which aids in preventing further economic downturns. By keeping the public employed, the theory argues it would allow consumers to have a spendable income that can be used to reinvigorate the economy.
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LikeDislikehttp://www.recovery.gov/About/Pages/The_Act.aspx
Great link to the goals of the ARRA
Question 2: Do you believe the theory? Why or why not?
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LikeDislikeI believe the theory behind the ARRA was very solid in the short term sense, because monetarism says most changes in output and employment are caused by changes in the money supply, which the ARRA positively affected. The problem is, it comes with a deficit increase that has long term consequences. However, Keynes said, “in the long run, we’re all dead,” so there’s a logic in accepting the consequences.
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LikeDislikeI don’t see a clear articulation of the theory yet.
Also, how do changes in tax rates and government spending affect the money supply?
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LikeDislikeWhen tax rates go down, people spend more and save less. When government spending goes up, it’s the same as any other kind of spending, it adds to the overall economy. In the case of increasing spending at the cost of a deficit, the money is literally created by the fed to supplement the money supply by “purchasing” bonds with non-existent money. The theory behind this is the Keynesian idea that the government needs to counter decreased private spending with increased government spending to keep a steady flow in the economy.
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LikeDislikeOkay, a couple points here aren’t quite right.
1. Both spending and saving come out of disposable income. So, a tax cut by raising disposable income should stimulate BOTH spending and private saving.
2. You said that budget deficits are paid for by the Fed printing money. This is NOT generally the case in the U.S. (though it’s common in other countries). What you may be thinking of is the Fed’s policy of Quantitative Easing where the Fed is purchasing $80billion of mortgage-backed securities each month to inject liquidity into the financial system. These mortgage-backed securities are not the result of Federal deficits.
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LikeDislikeI believe in the Keynesian theory of economics because it has proven in the past to stimulate the economy and provide jobs for people. While on occasion it causes disagreement between the private and the public sector, it seems to balance in other ways.
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LikeDislikeWhat are some examples of when the Keynesian theory “has proven in the past to stimulate the economy”?
Also, I don’t understand your “disagreement” point. Can you clarify?
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LikeDislikeI believe the theory behind ARRA was a good one, but it was only half the story. If we increase the demand and let output rise that is only part of it. We need to worry about deficit spending, as it still needs to be financed. If the fiscal policy were so readily effective at raising output and lowering unemployment, countries with underperforming economies would have been doing it for years. There needs to be some adjustments to the fiscal policy.
What evidence is there that the U.S. is having trouble financing its deficit spending? What would such evidence look like?
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LikeDislikeYes I do believe the theory because the housing market has increased, there is more consumer spending and the job market has increased in the economy. Even though the economy is showing growth slowly, it is still an improvement the economy since 2008 & 2009.
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LikeDislikeI believe in the Keynesian macroeconomic theory. Economic output is strongly influenced by total spending in the economy, especially during recessions. The implementation of fiscal stimulus raises the market for business output, raising cash flow and profitability, creating business optimism. It makes sense the government should aid the resources that would not otherwise be used by the private sector.
I think that, in theory, it would be effective. However, the government is already low on funds as is from other spending areas. And the theory relies on the private sector eventually picking up the slack from the government spending, and if the economy was poor prior to the stimulus, the private sector might be cautious spending their money.
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LikeDislikeI think that the theory behind the ARRA stimulus was a good starting place. The United States, however, already have a massive deficit and therefore cannot support the effects of the government spending increase. The money supply is too small and therefore the US cannot support the ARRA stimulus without going into even deeper debt.
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LikeDislikeI don’t believe in the theory because people struggle everyday. These kind of Acts only protect certain groups of people. The Act also hurts people because while the government is trying to help one group of people they are hurting another.
I believe that the use of the Keynesian theory in the ARRA was a positive step in the right direction to helping the economy out from the recession. Although signs of growth have been slow and are still occurring five years late, two main factors show that the theory was a success. First, the unemployment has steadily decreased since 2009, at which point the unemployment rate was at approximately 9.2%. In 2012, the rate dropped to 8% and the outlook for 2013 is to drop to 7.5%; so far, unemployment has not grown over 7.9% at any point during this year. Although the growth has happened slowly, it has been occurring and continues to do so. Secondly, consumer spending, especially around the holidays, has continued to increase each year. During 2008-2009, consumer spending was down 3.7% during the holidays. In 2010, ’11, and ’12 there were increases of 1.5%, 4.5%, and 5.2% respectively.
I do believe that the theory worked. Slow and steady changes are still steps in the right direction, more government spending, even on things that are useless, lowers interest rates and increases the money in the peoples pockets, which will motivate them to spend money which will increase demand, and create more jobs. More jobs will lower the unemployment rate and increase consumer confidence, we have not seen great changes but they are slow and steady.
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LikeDislikeQuestion 3: What is the evidence in favor of or against the effectiveness of the stimulus?
The theory behind Keynesian stimulus is simple. The economy is under performing; for whatever reason total demand from the private sector–consumption, investment, and the international sector–plus government demand is inadequate to allow the economy to operate at full employment. The proposed solution is to increase public-sector demand and let output rise to meet the higher level of demand but,deficit spending must still be financed. People generally acknowledge the long-term budgetary costs, but ignore the consequences that are said to propose the Keynesian stimulus useless.
So what are the consequences of budget deficits?
The consequences of budget deficits are it can lead to government spending being higher than tax revenue. It represents a negative value in national saving, which will reduce the whole value of national savings. Total savings of the economy will shrink, shifting the supply curve in the loanable funds market left. This will raise the real interest rate and encourage foreigners to invest in the domestic economy, and can lead to exchange rate appreciation. This can make domestic goods and services more expensive relative to foreign goods. So the country imports more and exports less, increasing the trade deficit.
Large budget deficits lead to higher rates of monetary expansion which, in turn, fuel inflation. They add to the stock of national debt, driving up the cost of interest payments and draining the government of resources.
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LikeDislikeHolly said it very well. This stimulus is effective in the short-term. Unemployment rates have been reduced, there has been an increase in the number of full-time equivalent jobs, and real GDP in on the rise. However, there are long-term consequences that arise because of the stimulus. ARRA’s long-term impact on the economy will stem from the increase in government debt. This might cause people to hold their wealth in government securities rather than in more usable forms. It is hard for one to measure the effectiveness of the stimulus because we are unable to account for the changes that might have occurred without it.
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LikeDislikeI agree that there may be long term consequences to the stimulus, but the immediate consequences without the stimulus could have been much worse. It is true that it will take work and compromise to get out of the debt we have incurred, but this approach was better and more beneficial than taking a Laissez Faire approach and letting the economy try to correct itself.
The evidence that favor the effectiveness of the stimulus are the stimulus had a significant, positive effect on employment and growth. It reduced unemployment and promoted economic growth and the housing market has also increased. According to Congressional Budget Office (CBO) report estimates 500,000 to 3.3 million full-time jobs were created by the stimulus. CBO also estimates that the stimulus will raise GDP by 0.1 percent to 0.8 percent next year and employment by 200,000 to 1.1 million jobs.
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LikeDislikeDepending upon which side politically this question is raised to, there are two very different answers. Conservatives will argue that not enough was done, while liberals will argue that although growth was (and still is slow), it was better than the current situation was at the time. Like any political policy, the program did have it’s flaws, such as being sluggish and taking time to get up and running properly – wasting time that could have been used helping create jobs. However, it did prevent things from getting any worse, it kept unemployment at a stagnant point prior to decreasing the percentage with the creation of new jobs, and consumer spending has increased with each year.
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LikeDislikeEvidence in favor would be that there have been little changes, and a change is a change no matter how minimal, the unemployment rate has dropped, the housing market is picking back up. People are spending money, a spark as happened, but its not a significant spark, because Even though government spending has increased it had a minimal affect, the government spends so much money that adding billions has had no significant affect, they would have to spend a whole bunch more to have any affect. The government has put themselves so deep in a whole that they cant allow to spend that sort of money. So slow and steady changes is all we are going to be seeing.
Question 4: Based on your reading of the evidence, how effective *was* the stimulus?
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LikeDislikeThough it seems fairly debatable even between economists vs , the ARRA seems to be generally accepted as having a positive effect to some degree.
Let me try that again:
Though it seems fairly debatable even between economists vs , the ARRA seems to be generally accepted as having a positive effect to some degree.
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LikeDislikeOkay, what is the evidence that it’s had a positive effect?
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LikeDislikeThe Washington Post article you cite here, is a very good survey of the studies done as of last year. Why did you choose the one study you specifically mentioned? I ask because it was fairly negative.
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LikeDislikeBased on the reading, the Keynesian theory of economics has been effective for the most part but not necessarily 100%.
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LikeDislikeWhat specific evidence can you offer to support this statement?
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LikeDislikeFrom what I have seen, as Erin says, our real GDP has grown. And to add to that, there has not been a significant increase in the price level of goods.
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LikeDislikeI’ve looked at several statistics from the U.S. Bureau of Labor Statistics. It seems as though the stimulus has been effective, but to what degree is debatable. Conservative would argue unemployment is still near double digits and economic growth is slow. Liberals might argue that real GDP is rising and unemployment is declining. While each economist has a different outlook on the stimulus the “improved” area seem to be:
*Raised real GDP by between 0.1 percent and 0.8 percent
*Lowered the unemployment rate by between 0.1 percentage and 0.6 percentage
*Increased the number of people employed by between 0.2 million and 1.2 million
*Increased the number of full-time-equivalent jobs by 0.2 million to 1.3 million
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LikeDislikeFrom the different articles I read that were cited in the Washington Post link below I found that the majority of people believe that the ARRA stimulus had a positive effect on employment rates and output in the United States. Some economists, however do not agree. From what I read it really depends on the different factors and social groups that are being analyzed.
http://www.washingtonpost.com/blogs/wonkblog/post/did-the-stimulus-work-a-review-of-the-nine-best-studies-on-the-subject/2011/08/16/gIQAThbibJ_blog.html
http://www.nber.org/papers/w16759.pdf
http://www.stanford.edu/~waw/papers/Chodorow-Reich_Feiveson_Liscow_Woolston_state_fiscal_relief__aug_2011.pdf
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LikeDislikeI would argue that the stimulus package was very effective in helping the economy out from the recession. Based upon multiple readings and research, the ARRA is responsible for creating approximately 2.5 million jobs, aided 3.85 growth in the economy, and kept the employment rate from reaching extraordinary rates of over 12%. Additionally, according the New York Times article (http://nyti.ms/1hywzPR), the policy made “crucial investments in neglected economic sectors that are likely to pay off for decades.”
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LikeDislikeI agree with you that the stimulus package was very effective. While there was some misuse, overall it had the intended affect.
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LikeDislikeThe stimulus had some affects, but they were not really significant enough to make any sort of assumption that it definitely worked,there are lots of mixed opinions and studies and are for it, and there are just as many against it.
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LikeDislikeThe theory for the financial stimulus with ARRA was from Keynesian theory, which states that, during recessions, the government should increase in public spending in order to stop more economic downfall and hopefully save jobs.
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LikeDislikeThis is exactly what the government did with the stimulus. I think we have to look at what would have happened had the government not stepped in. We could have moved into a much worse recession or depression.
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LikeDislikeBut we are going to have to run a surplus budget for the foreseeable future in order make up for this stimulus. Helped now, but hurt the next generation.
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