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24 Seiten, Note: 1,00
2. Analysis of the ARRA purposes
2.1 Job Creation and Promotion of Economic Recovery
2.2 Assisting Those Most Impacted by the Recession
2.3 State and Local Government Budget Stabilization
2.4 Long-term Investments to Increase Economic Efficiency
The American Recovery and Reinvestment Act of 2009 (ARRA) was the main response by the US government to avert the negative impact of the recent economic recession. It was the biggest stimulus package of its kind, costing approximately $831 billion. This paper analyses the impact of the ARRA to answer the question whether the stimulus was an appropriate crisis response. This is done by looking at the official purposes of the Act. A review of the work done in this area shows that the stimulus was quite successful in creating jobs and lifting people out of recession despite not being able to undo all adverse effects. In addition, while going in the correct direction, the impact of the ARRA on income inequality is rather negligible. Despite these minor weaknesses, the stimulus was successful in pulling the US economy out of recession, while having a positive psychological impact on the domestic industries and labour market and can thus be seen as an example for good Keynesian government intervention.
The Effects of the American Recovery and Reinvestment Act of 2009: An Evaluation
Since the oil shock of 1973 and the accompanied stagflation of the 1970s the economic theories of John Maynard Keynes and his followers lost much influence and had to give rise to neoclassical and neoliberal ideas such as supply-side economics and monetarism. Many examples of the use of these economic policies can be seen by looking at the politics of Ronald Reagan and Margaret Thatcher in the 1970s and 1980s (Brokaw, 2013).
The global financial crisis of 2007-08, however, marked a break with those classical policies and a return to Keynesian ideas by many policymakers worldwide. These were the same ideas Keynes already had proposed during the 1930s as a response to the Great Depression.
One of the most prominent examples for a stimulus package based on the macroeconomic ideas of Keynes is the American Recovery and Reinvestment Act of 2009. It stands in contrast to the ongoing development towards smaller governments and more supply-side policies. Signed into law by Barack Obama just one month after he assumed office, the ARRA focusses among others on heavy government spending, tax breaks and other federal tax incentives. The whole stimulus is expected to costs at least $831 billion between 2009 and 2019. It is thus bigger than the stimulus packages of Japan ($687.7 billion) and China ($585.6 billion) and the biggest stimulus in US history (Ruggeri, 2009).
It is important to note that the package had been passed with 244-188 votes in the House of Representatives, without a single Republican congressman voting in favour of the bill. This supports the general impression that most Republican politicians favoured supply-side policies over heavy government spending (Calmes, 2009).
Because of its high costs, which led to an increase in the already extraordinarily high federal debt of the US, the stimulus package led to wide discussions among the public and the media but also to an ideological debate among national and international economists.
To show disapproval of the plan to the public, the Cato Institute, a libertarian policy and research institution, issued an advertisement in national newspapers, namely The New York Times and The Wall Street Journal, which published the names of about 200 (mainly classical) economists opposing the American Recovery and Reinvestment Act. Among the signers were many influential economists such as Nobel Prize laureates James Buchanan and Edward Prescott. The petitioners were advocating a reduction in tax rate and government burden instead of extensive government spending (Harris, 2014, p. 115-116).
As a response, approximately 200 economists, such as the neo-Keynesians Robert Solow and Paul Samuelson, sent a letter to Congress supporting the course of action of the ARRA (Center for American Progress Action Fund, 2009).
However, even some supporters of the stimulus package have criticized the plan, not for following the wrong path but for not being big enough in order to balance out the loss of private spending. Paul Krugman, Nobel Prize winner of 2008, said in an interview about the ARRA: “It’s helpful, but it does not cover even one-third of the gap, so it’s disappointing” (University of Pennsylvania, 2009).
This paper attempts to settle the argument between economic theorists by answering the questions whether the American Recovery and Reinvestment Act was an appropriate response to the recent financial crisis and what could have been improved in retrospect. This is done by critically analysing to what extent the ARRA fulfilled its statement of purposes as declared in section 3 of the Act.
These purposes are:
(1) To preserve and create jobs and promote economic recovery.
(2) To assist those most impacted by the recession.
(3) To provide investments needed to increase economic efficiency by spurring technological advances in science and health.
(4) To invest in transportation, environmental protection, and other infrastructure that will provide long-term economic benefits.
(5) To stabilize State and local government budgets, in order to minimize and avoid reductions in essential services and counterproductive state and local tax increases
(American Recovery and Reinvestment Act, 2009, p. 1-2).
While the specific purposes will first be analysed individually, a general conclusion will be drawn to capture the overall strengths and weaknesses of the stimulus package in order to give policy recommendations for the future.
When looking at the statement of purposes one notices that these purposes can easily be categorized into two different groups. Even though these groups are not completely mutually exclusive one can say that purposes (1), (2) and (5) are goals to smooth out the business cycle and achieve fast recovery while purposes (3) and (4) are mostly structural goals for long-term improvements of the economy and the society.
Many of the investments made to achieve these last two goals were integral parts of Obama’s campaign when running for president and were thus not primarily there to promote fast economic recovery. These background information are important to keep in mind when analysing the individual goals of the ARRA but also when evaluating the stimulus package as a whole.
This paper will first discuss the effects of the typical Keynesian interventions which were aimed at achieving fast economic recovery, before analysing the impact of the structural policies.
The measurement of job creation and economic recovery is probably the most important criterion to evaluate the effectiveness of the ARRA. In economic research this has been done by estimating the amount of jobs created due to the American Recovery and Reinvestment Act, the cost per job and the GDP growth with and without ARRA. Since the announcement of the Stimulus Package extensive studies have been done on this topic.
In this paper the focus will lie mostly on the cost per job since this indicator seems to be the easiest to compare across time spans and methods used. However, Keynesian multipliers and GDP growth will also discussed briefly, when applicable.
One of the earlier papers on this issue had been published by Zacharias, Masterson and Kim just a few month after the introduction of the ARRA. Since no past data on the effects of the ARRA had been available they used a microsimulation approach based on a self-constructed baseline scenario of what would have happened without Keynesian government intervention and an analysis of the total budgetary costs split into the categories of tax cuts, transfers and subsidies. In total, they tested four different scenarios that estimate job gains of 6.1 million to 8.8 million (Zacharias et al., 2009).
These findings are impressively similar to the early estimates by the Congressional Budget Office (2.6-7.7 million) and the Council of Economic Advisers (6.8 million) (Congressional Budget Office, 2009; Council of Economic Advisers, 2009a). The results by Zacharias et al. imply a cost per job of $52,000 to $69,000 in spending and $69,000 to $110,000 in tax cuts.
Daniel Wilson (2012) used an approach that is different from the models employed by the organisations and researchers mentioned before in two aspects. Firstly, Instead of using a macroeconomic model based on historical data prior to the ARRA, Wilson uses observed data on employment and actual ARRA spending, possible because he conducted his study several years after the estimates by the CBO and the CEA. Secondly, he uses cross-sectional, geographic variation in announced and actual ARRA spending, as opposed to the use of time series variation, in order to derive the economic impact of the stimulus (Wilson, 2012).
Cross-sectional variation enables one to separate the effects of the stimulus package from the effects of other factors, such as monetary policy, which were also heavily used as a tool for economic recovery but are independent of the geographic distribution of ARRA funds. Wilson concentrates his work solely on the government spending under ARRA and does not analyse the effect of tax reductions.
Using his model, Wilson arrives at a job multiplier of 8.1, indicating that each million dollars of announced ARRA funds creates 8.1 jobs in the nonfarm sector. This corresponds to a job cost of approximately 125,000$. Based on these findings, the authors expects that government spending created or saved 3.4 million jobs by the first quarter of 2011, with the highest gain in the sectors private nonfarm, construction and state and local governments and the lowest increase in jobs in health and education (Wilson, 2012) .
These numbers are similar to the estimates of the CEA (2.5-3.6 million) and the CBO (1.2-3.3 million) for the same time frame (Council of Economic Advisers, 2011; Congressional Budget Office, 2011). However, while Wilson’s result is already on the upper end of the approximations by the other two institutions, one has to be reminded that it still does not take into account ARRA tax reductions, which are also expected to have had a significant impact. In addition, the use of cross-sectional state level analysis fails to account for nationwide and global effects in the form of spillovers and outsourcing.
Using Wilson’s estimate of job creation one can derive the effect of the ARRA on the Gross Domestic Product of the US up to the first quarter of 2011. This can be done by using Okun’s Law relationship between employment and GDP, which states that a one percent decrease in the unemployment rate leads to an increase of the GDP by two percent over the course of a year (Investopedia, 2003).
Taking the Worldbank estimate of the size of the US labour force in 2010 (approx. 157 million people), an increase of 3.4 million jobs equals a change in unemployment by 2.17 percent points (Worldbank, n.d.). Based on these numbers, one can conclude that in 2010 the GDP was 4.34 percent higher than what it would have been without the ARRA. Even though this is just a vague approximation, the number is more or less consistent with the high estimate by the CBO of 4.1 percent for 2010 (Congressional Budget Office, 2011). While one could argue that these numbers might both be slightly inflated, they do show that the ARRA is expected to have had a significant impact on the GDP especially in the first years of recovery.
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