Economic Recovery Measures

CBO Closes the Book on the 2009 Stimulus

CBO unofficially closed the books on the American Recovery and Reinvestment Act (ARRA, or the 2009 stimulus), putting out its final report on the economic and fiscal effects of the legislation. ARRA passed in February 2009 during what ended up being the deepest output and employment decline of the Great Recession; the economy had shrunk by 8 percent in the last quarter of 2008 and was in the process of shrinking another 5 percent in early 2009, while hundreds of thousands of people were losing their jobs each month. The legislation, originally scored as costing $787 billion, included a number of different provisions intended to stimulate the economy, including increased safety net spending, fiscal aid to states, infrastructure projects, and tax cuts for both individuals and businesses. CBO's latest report includes an updated score of ARRA ($836 billion) and adds economic effects for 2014 to the effects they already reported for previous years.

Not surprisingly, CBO finds that ARRA had limited effect on the economy in 2014 given that only 2 percent of the total deficit impact took place in that year. It boosted real GDP by between 0 and 0.2 percent in 2014 and lowered the unemployment by between 0 and 0.2 percentage points. The economic effect peaked in 2010, when nearly half of the deficit impact of the legislation took place, raising real GDP by between 0.7 and 4.1 percent and lowering the unemployment rate by between 0.4 and 1.8 percentage points. Compared to its projections at the time, CBO found much less of a boost to real GDP in 2009 but a greater boost in 2010 and 2011. It also found less of a reduction in unemployment in 2009 and 2010 but a greater effect in 2011 and 2012 than they thought at the time.

Are Accelerated Write-Off Provisions Effective?

Two of the biggest items among the tax extenders that Congress may consider before the end of the year are two provisions that allow accelerated write-offs of investments: section 179 expensing and bonus depreciation. Section 179 expensing provides an immediate write-off for small businesses for a certain amount of investment; both the amount and the level at which the favorable tax treatment phase out decreased significantly when the extenders expired at the end of last year. Bonus depreciation allows all businesses to write off half of certain investments immediately. Both provisions are among the costliest in the tax extenders package, costing a combined $315 billion over ten years if extended permanently.

These two policies, and in particular bonus depreciation, are generally justified as stimulative measures, and since they effect only the timing of write-offs, their temporary nature is central to their effectiveness in that regard. However, the Congressional Research Service's Gary Guenther in a recently updated report finds limited short-term economic benefit.

Though there appear to be no studies that address the economic effects of the enhanced Section 179 allowances enacted in the previous eight years, several studies have examined the economic effects of the 30% and 50% bonus depreciation allowances that were available from 2002 to 2004. The findings indicated that accelerated depreciation is a relatively ineffective tool for stimulating the economy during periods of weak or negative growth. [emphasis added]

Guenther sees many reasons why the effect of accelerated write-offs may be limited, including both their design and the economic context.

Fed and Treasury 'rowing in opposite directions'

The Federal Reserve's efforts to help the economy recover through quantitative easing (QE), twisting, and tapering have made front page news without fail. Although it has gotten less attention, the Treasury Department has also been changing the way it finances the national debt to take advantage of lower interest rates, inadvertently counteracting some of the intended effect of the Fed's policies on the economy. That's exactly what a new Brookings working paper by Robin Greenwood, Samuel Hanson, Joshua Rudolph, and Lawrence Summers argues: during the past 5 years, the Fed and the Treasury have been "rowing in opposite directions."

In 2008, the Fed reduced interest rates to near zero in an attempt to help the economy grow. But nominal interest rates cannot go below zero, so conventional monetary tools stopped working. To further stimulate the economy, the Fed took extraordinary measures and began purchasing long-term government bonds and government guaranteed debt (like Mortgage Backed Securities, or MBS). These measures reduced the amount of long-term debt available for public investors and lowered long-term rates.

But while the Fed was engaging in these unconventional transactions, the Treasury was selling more long-term debt to lengthen the average maturity of the national debt, thereby locking in today's low rates and mitigating the risks of higher interest rates in the future, essentially providing a partial counterbalance to the Fed’s policies.

Senate to Consider Bipartisan Housing Finance Reform Bill

The push among lawmakers to reform housing finance has picked up lately, as proposals have been emerging in recent weeks. The most prominent one in the Senate has been proposed by Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID).

CBO's Latest Estimate of TARP: $27 Billion

Caught up in the release of CBO's baseline and its analysis of the President's budget last week was another CBO update of their estimate of the Troubled Asset Relief Program (TARP). The subsidy estimate for the entire program is in line with analyses of previous years, showing a total net cost of $27 billion. The estimates have been much less than the $356 billion peak cost estimate CBO had in April 2009 and the $700 billion of total funds approved.

Explaining the "Double-Dipping" Provision

As the Senate looks for offsets for an unemployment insurance extension, there is one provision that has gotten some attention: ending "double-dipping" for those receiving both UI and federal disability benefits.

UI Offsets a Good Start, But Fall Short

Today, the Congressional Budget Office released their score of the proposal from Majority Leader Harry Reid (D-NV) to renew extended unemployment benefits in concert with other reductions in spending.

Offsetting A Long-Term UI Extension

The unemployment insurance saga continues. Today, Senate Majority Leader Harry Reid (D-NV) proposed an alternative unemployment benefit extension which would run through mid-November, in place of the three-month extension previously considered.

Unfinished Business for the New Year

The passage of the Bipartisan Budget Act was a positive move away from governing by crisis, and a demonstration that policymakers can meet self-imposed legislative deadlines. Yet substantial unfinished business remains, and much of it has significant fiscal implications. Below are some issues Congress should address early this year:

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