Happy Birthday ARRA

A year ago today, Congress and the President enacted the American Recovery and Reinvestment Act, providing $787 billion in fiscal stimulus through a combination of spending increases and tax breaks. Recent estimates from the CBO now put the total cost of the bill at $862 billion, accounting for higher than expected costs for unemployment benefits, food stamps, and build America bonds. Yesterday, CRFB released a paper analyzing the ARRA's spend-out rates, effectiveness, already extented stimulus, and new ARRA extension proposals -- the third installment in our analyses of all the government's actions to stabilize the economy (The Extraordinary Actions Taken by the Federal Reserve and The Troubled Asset Relief Program: Year-End Review).

CRFB tracks all stimulus spending and tax breaks on a regular basis at Stimulus.org, and according to our calculations and data reported on Recovery.gov, we estimate that about $174 billlion in spending and $130 billion in tax cuts have already been disbursed (about $300 billion total). The CBO expects another $160 billion of spending and $140 billion of tax cuts ($300 billion total) to go out by the end of FY 2010.

On the spending side, most of the funds have gone toward providing direct assistance for individuals, including $40 billion in unemployment benefits and $43 billion in Medicaid matches for states. On the tax side, the largest payout has come from the $400 per person Making Work Pay tax credit, which has already disbursed $43 billion in tax breaks. Between the AMT patch, COBRA health subsidies, an expansion of the child care tax credit, the earned income tax credit, and the American opportunity credit, another $45 billion in taxes has gone out.

In our analysis, we also discuss the effectiveness that the stimulus has had so far in improving output and employment levels. Almost all economists agree that the stimulus has mitigated output and employment losses, although some of them disagree over the extent to which it has. Although nearly all economic indicators are worse off than what was originally projected, this cannot be blamed on the stimulus. More likely, economists had underestimated the severity of the economic crisis.

In addition to the $862 billion set to be disbursed, policymakers have already extended several ARRA provisions, for a total cost of $42 billion through 2020 (see Figure 5 in our paper). But the President's budget goes even further, proposing $166 billion in additional temporary extensions and $437 billion in permanent extensions. If enacted, these stimulus extensions would increase the total costs of the stimulus to over $1.5 trillion.

CRFB warned in January 2009 against making some stimulus measures permanent, which we feared would allow the deficit to deteriorate even further. At the time, we made a list of all the measures we believed were likely to be extended, and since then nearly all of them have been.

Additional stimulus may be necessary with the economy not fully stabilized and the unemployment rate still hovering around 10 percent, calls for additional stimulus have abounded. But while deficits can boost economic output, the same deficits can actually be harmful if continued (see CRFB's paper Good Deficit - Bad Deficit). If policymakers do decide to enact another round of stimulus, any such legislation should also come with a credible plan to reduce the debt once the economy recovers. A credible plan can actually reassure markets, reduce interest rates, and spur investment (see the Announcement Effect Club, for a list of prominent economists, organizations, and leaders calling for such a plan).

CRFB will continue to track stimulus spending, and all other government efforts to stabilize the economy, at Stimulus.org.