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American Recovery and Reinvestment Act of 2009

Introduction

Following the world economic recession in the dying months of 2008 and early 2009, the US’s real gross domestic product (GDP) had been falling at a rate of 6 percent per annum and employment was dipping at a monthly rate of 750,000 jobs (Council of Economic Advisers, 2010). It was against this backdrop that President Obama signed the American Recovery and Reinvestment Act 2009 (ARRA) into law; the Act was meant to cushion not just the decline in demand resulting from the financial crisis caused by the recession but also the resultant “fall in business and consumer confidence, access to credit and household wealth” as stated by the committee (Council of Economic Advisers, 2010). The ARRA, along with other policies also meant to “address the explosion of the housing bubble, increase liquidity and access to credit and ultimately stabilize the failing financial system” (Council of Economic Advisers, 2010), ARRA was therefore part of an intensive and comprehensive policy in response to the shocks caused by the recession.

The main objectives of the $787 billion policy were several and included: (1) providing a total of $288 billion in benefits and tax cuts for businesses and working families, (2) providing $224 billion increase in federal funds meant for entitlement programs like unemployment benefits, (3) availing $275 billion for federal grants, contracts and loans, and (4) the recipients of ARRA funds availing to the public quarterly reports on how the money is spent through the accountability and transparency Recovery Act websites (Recovery.gov, 2011).

But even more than this, ARRA was meant for long-term economic growth and sustainability; this was to be achieved through the development and enhancement of infrastructure, for instance, it suggested that 75 percent of over a million private homes and federal buildings be weatherized (Recovery.gov, 2011). Infrastructure development was meant to include not just the construction of new roads and bridges but also the repair of existing ones, improvement of scientific research and the expansion of wireless and broadband services were also included (Blank Rome Editors, 2009). This was a move to ensure that ARRA would be focused not only on getting the economy back on track in the face of the recession, but also to facilitate long-term economic growth.

The purpose of this paper is to use available data to evaluate the ARRA from every aspect so as to; (1) assess and evaluate the economic circumstances that necessitated the proposal and eventually the enactment of ARRA, (2) track the Act, Codes and Agencies that have been involved in the ARRA in an effort to trace its implementation, (3) evaluate the impact of ARRA on both business and society at large and (4) finally check if ARRA has achieved the reasons for its enactment. This is necessary so as to justify any successes or failures and make recommendations for future policies based on what has been learnt from the ARRA.

History of the Act

The economic recession of 2008/2009 was the worst that the world had faced since the famous Great Depression; as already mentioned previously, in the US credit was frozen, purchasing power of the consumers was at an alarming decline and the loss of jobs was alarming. There was no doubt that action had to be taken fast, not only to deal with the immediate recession situation, but also to provide a framework for a more stable economy, one which would help avoid such a crisis in future; that response action came in form of ARRA.

From the perspective of the recession, ARRA was necessary since it would be “the first crucial step towards creating and saving about 4 million jobs as well as stabilizing and jumpstarting the US economy” (CIN News Room, 2009). Stabilizing and jumpstarting that economy would involve several activities namely: finding and using clean and efficient energy, defining the role of Science and Technology in the transformation of the economy, defining education in the 21st century, modernizing infrastructure, creating jobs through tax cuts, cutting costs of healthcare, saving jobs in the public sector and protecting important services (CIN News Room, 2009).

The implication of this as already mentioned is that ARRA was not only meant for stabilizing the economy in the face of the recession, it was also a strategy for long-term economic goals of the US, which would also ensure economic stability for the rest of the world. There were two major reasons why ARRA was necessary, not exactly as ARRA, but as a crucial step towards solving the economic challenges of that time; these are discussed below.

Public policy prescription

This measures required provisions for the public sector, something that was really needed if the US was to restore the confidence of its citizens in its quest to lead them away from the economic hardships. Although most of the ARRA provisions have provided assistance to the US states, there are also those that have had direct impact on the budgets of the state or/and public sector. These are mainly: “the $53.6 billion set aside for the State Fiscal Stabilization Fund and $86.6 billion to be spent through a temporary Federal match rate enhancement as provided for in the Medicaid program” (Senate Fiscal Agency, 2009).

Other important ARRA spending provisions that were expected to have impact on states included education programs, infrastructure programs, energy programs, medical programs and programs for job training and programs for unemployment assistance (Senate Fiscal Agency, 2009).

Market or Government Failure

There was also the need to correct the failure of the market as well as that caused by the government that contributed to the recession; the 2008 recession for instance was partly blamed on the explosion of the housing bubble. The exuberance that followed the housing market since 2000 misled many Americans to buy houses that they actually could not afford as they suspected a rise in housing prices. As predicted: “the bursting of the housing bubble in the US altered hoped-for returns to housing assets, which further created a reallocation of capital, not just in the US but between countries as well, and eventually created knock-on effects on the economy of the world” (McKibbin & Stoeckel, 2006). In 2006, housing prices started going down and most Americans suddenly had loans they could not afford to service because their houses were selling at lower than the mortgage prices they had paid for, many then at that time took to foreclosures and the banks came tumbling down.

So when George Bush left office, the US and the whole world was in unfathomable crisis, at the time Americans felt that George Bush’s government had manipulated the market and misled people. With Obama coming in, there was hope and the government was under pressure to answer to the world-wide euphoria that accompanied that hope. The need to give that answer was not merely a political tactic, but a very necessary one, and this came in the form of ARRA.

The stimulus plan was designed to provide $185 billion in 2009, while the long-term outcome of the plan have been questioned based on current ratings, as will be seen in this paper, it did “halt a four-quarter GDP decline by the third quarter of 2009” (Amadeo, 2011) and with it, the recession was ended. In a nutshell, as much as the market failed, Bush’s government failed to foresee this burst and put in place mitigation measures. And even after the world got into recession and all signs were pointing towards worse economic times, the Bush government failed to take quick and decisive actions. Thus, the recession was both as a result of the failures of the government and housing market and ARRA was a step towards correcting both.

Implementation of the Act

There was need to put in place comprehensive guidelines and policies to ensure accountability; towards this end of transparency and accountability, it was decided that ARRA would be implemented through major government departments. A memorandum in 2009 from the Director of Office of Management and Budget that was addressed to all Department and Agencies heads clearly set out the guidelines for accountability and transparency requirement in the implementation process (Orszag, 2009). It set out the policies for proper implementation which included: prompt and fair distribution and awarding of funds, transparency in public reporting on the recipients and uses of funds, mitigation of abuse, fraud, waste and error, avoidance of time wasting and cost overruns and ultimately the achievement of ARRA goals (Orszag, 2009).

This was in line with guidelines from Obama administration, mandating all departments to create a Recovery Act website through which to avail to the public weekly reports on the steps made in the implementation of ARRA, the first of which was released on November 2009 (Blank Rome Editors, 2009). These were merely preliminary reports, but today, the reports have become more detailed; the Recovery Act websites also provide for the public to report suspected frauds and abuses.

The departments involved include:

  1. Department of Agriculture (USDA)
  2. Department of Commerce (DOC).
  3. Department of Defense (DOD)
  4. Department of Education (ED)
  5. Department of Energy (DOE)
  6. Department of Health and Human Services (HHS)
  7. Department of Homeland Security (DHS)
  8. Department of Housing and Urban Development (HUD)
  9. Department of Justice (DOJ)
  10. Department of State (DOS)
  11. Department of the Interior (DOI)
  12. Department of transportation (DOT)
  13. Department of treasury (TREAS)
  14. Department of Veterans Affairs (VA)
  15. Environmental Protection Agency (EPA).

Each department sets objectives for implementation of its activities, including dated deadlines and sources of funds, for instance, the Environmental Protection Agency (EPA) Recovery website outlines certain sources of funds contributed by various stakeholders that fall under the department (Recovery.gov, 2011). Based on this, Brownsfields Program for example was to issue $100 million in competitive grants for the evaluation and cleaning up of former commercial and industrial sites while State Revolving Funds was to issue $6 billion in order to help communities with wastewater and drinking water infrastructure (Recovery.gov, 2011). A fraction of the fund was meant for green infrastructure, energy and water efficiency and other environmentally relevant projects.

As part of the accountability and transparency provisions in the ARRA, not only were the departments and agencies involved required to release Recovery Act quarterly reports in their websites, but an overall Executive quarterly report by the Council of Economic Advisor; answering directly to the White House was also mandatory (Recovery.gov, 2011). The contents of the quarterly reports were to reflect the progressive levels of implementation. As stated earlier, ARRA was meant to distribute funds mainly in three ways: first, through Tax Benefits, here ARRA aimed at providing $288B through benefits and tax cuts for businesses and working families (Recovery.gov, 2011). Secondly, ARRA aimed at availing $275B for federal grants, contracts and loans and finally, ARRA aimed at a $275B increase in funds for Entitlement programs such as unemployment benefits (Recovery.gov, 2011).

The Recovery Act website published the overview of funding as of October, 2011, so far Tax Benefits has received a total of $298.5B (Recovery.gov, 2011). These benefits have been paid out through broad tax categories such as Individual Tax Credits, Making Work Pay (i.e. tax credits offered to working individuals/married couples), Business Tax Incentives, Energy Incentives, COBRA (i.e. assistance in addition to Health Coverage) and Manufacturing and Economic Recovery, Refinancing Infrastructure (Recovery.gov, 2011). The top beneficiary has been the Individual Tax Credits (receiving $136.4B) while COBRA has received the least amount of $3.7B (Recovery.gov, 2011).

Contracts, Grants and Loans have mainly been paid to various departments, notably: Education, Transport, Infrastructure, Energy and Environment, Housing, Health, Public Safety, Job Training and Unemployment, et cetera; so far $212.4B has been paid out through contracts, grants and Loans with Education receiving the highest amount of $87.9B and Public Safety receiving the least, $1.3B (Recovery.gov, 2011).

For entitlements a total of $212.3B has been paid; Medicaid and Medicare received total of $85.8B while Unemployment Insurance Programs, family Services, Economic Recovery payments, Energy, Housing and Agriculture received the least amount of $0.9B (Recovery.gov, 2011).

The Impact of ARRA on Business and Society

As already mentioned, ARRA was not only meant to deal with the immediate problem that was the recession but was also intended to be a new economic master plan that would not only boost the country’s economic performance but also be a working security against any potential risks such as financial meltdowns in the future. Today, as an effort to monitor the progress of the implementation of ARRA, there are questions on the impact that it has had on business and society at large. All this can be looked at under the impact of ARRA on employment and economic growth since its enactment.

During its consideration, the Congressional Budget Office (CBO) together with the staff of the Joint Committee on Taxation estimated that ARRA would see “budget deficits increase by $787 billion in the next 10 years”; 2009-2019, but it was later estimated that the impact of ARRA would amount to a total of $830 billion (Congressional Budget Office, 2011). “Almost half of that impact was realized in the 2010 fiscal year, and by the end of that year 70 percent of ARRA’s budgetary impact had occurred” (Congressional Budget Office, 2011). But now one must answer the question on the extent to which these statistics have had impact on the economy and employment.

The quarterly reports of the recipients are not a satisfactory way of measuring that impact as they overlook the role of the law on employment (Congressional Budget Office, 2011). These reports for instance assume jobs that may have been there even without having ARRA in place and are unable to differentiate between the lower-level subcontractors and individual people, finally, they also overlook the role of the other ARRA provisions such as transfer of payments and tax cuts (Congressional Budget Office, 2011).

The best way therefore to measure the impact of ARRA on employment and the economy at large requires using evidence from relevant mathematical models and available historic data meant to represent and make assumptions on how the economy works. The Committee of Economic Advisors (CEA) mainly uses two models to measure the impact of ARRA; the first one uses the multiplier effects of different ARRA provisions to measure the economic impact (Congressional Budget Office, 2011). The second model constructs a scenario of the economy without the stimulus (“statistical baseline”) and measures it against the actual performance of the economy (Congressional Budget Office, 2011). By using these models, in the second Quarter of 2010, the CEA estimated that the GDP had grown by 3.2 percent and employment had increased by 3.5 million jobs (Congressional Budget Office, 2011).

But CBO used different models to estimate these impacts namely: one, Macroeconomic Forecasting Models, which estimates growth based on historical relationships among economic, two, General-Equilibrium Models and three, Extrapolations from historical data which as the name suggests uses historical data to estimate the effects of government policies based on the past behavior of economic variables in relation to government revenues and spending (Congressional Budget Office, 2011).

Based on these models, the CBO May 2011 report made the following conclusions on the effects of ARRA’s policies in the first quarter of 2011: “real GDP rose by 1.1-3.1 percent, the rate of unemployment came down by about 0.6-1.8 percentage points while the number of employed people rose by about 1.2-3.3 million” (Congressional Budget Office, 2011). The actual figures arrived at by the models used by CBO are different from those arrived by the models used by CEA, but it’s notable that for the 2nd quarter of 2010, the “CEA figures fell between the ranges of CBO’s high and low estimates” (Congressional Budget Office, 2011); this indicates that the margin for error is within acceptable boundaries.

In any case it is unlikely that any two bodies can show the same results in any of the variants of economy used to measure the impact of ARRA. But most of them, if not all, show an upward trend or improvement in the economy and employment; by looking at these trends, the impact of ARRA on society can easily be guessed. According to Service Employees International Union (Service Employees International Union, 2010), these positive impacts have been achieved through: one, infrastructure spending on fiscal and tax relief programs which have helped forestall an even worse recession, and two, the vital resources allocated to state governments which have facilitated human services economy (Service Employees International Union SEIU, 2010). This has helped create more jobs to assist the delivering of healthcare, childcare, transportation services, job search and education (Service Employees International Union, 2010).

Unfortunately, there have been critics who argue that ARRA has not really improved the economy (the analysis of this is in the next subsection). For those who believe so, ARRA has probably raised their cynicism on the ability of the government to put them out of their economic miseries.

Policy Analysis

To date, the impact of ARRA has amounted to a total of $830 billion, more than the originally expected $787 billion, but there is little evidence on just how positive this impact has had on the economy. But most of this evidence is based on the comparison of the situation in the recession and the situation today as well as estimations based on what is and what would have been hadn’t there been the stimulus package (i.e. statistical baseline). But one may still wonder if the stimulus package has really restored confidence in the people of US and whether it is going to be a satisfactory security against future economic recessions.

This section basically focuses on whether the stimulus package has really worked for the long-term good. If yes, then what are the components of it that have helped this success (strengths)? If no, then what weakness does it has and what then can be learnt from these weaknesses and strengths to inform and define future policies.

Did the Policy Work?

In October 2009, during the recession (the main motivation behind the stimulus package), unemployment, for instance, stood at 10.2%; today, unemployment falls between the narrow range of 9.0 to 9.1 percent despite the implementation of the stimulus package (Bureau of Labor Statistics, 2011). This decline in unemployment or rise in employment, albeit minor, is attributable to persistent mass job layoffs. In recent times there have been increased warnings for the possibility of another economic recession not just in US but in the whole world as well. Economic Cycle Research Institute (ECRI) for instance has warned the US of this possibility; these fears are not based on just a few leading indexes, but on a whole range of economic indicators key of which are the U.S. Long Leading Index, followed by the Weekly Leading Index (Economic Cycle Research Institute, 2011).

In the light of these facts, among others, critics of the stimulus plan have argued that it has been a failure and even questioned the accuracy of the employment statistics being attributed to the stimulus injection. For instance, that what is seen as hiring may simply have been shifting of jobs around while no evidence exists that shows high employment is solely attributable to the impact of ARRA. Even the CEA has stated that some of the statistics do not separate the projects that existed before ARRA from those that have been specifically funded by ARRA.

But these debates are many, with each side supporting their arguments with seemingly believable facts, so it is only time that will tell whether ARRA did ever work or not. Meanwhile, in spite of the theories arguing for the possibility of another recession, it can be argued that ARRA did avert an economic catastrophe when it mattered most. But this is not an effort to evade the question on whether ARRA worked or not, on the contrary, it is an acknowledgement of both the successes and limitation of ARRA.

Strengths and Weaknesses of ARRA

Briefly, the main strengths of ARRA have to do with its implementation process. These components of implementation can be discussed under: the control environment, control activities, risk assessment and monitoring and information & communication (Environmental Protection Agency, 2011). As part of the effort to be accountable and transparent much regulation has been integrated in the policy which has strengthened it, also the Recovery Act websites have been a good platform for the inclusion of the public in the whole process.

The biggest weakness of the policy however has to do with the lack of a system of measuring the progress of the ARRA; as a result most of the projected statistics are not based on a single model, but many models which in the end do not give same figures. This means there is simply no definite way to know whether ARRA has really led to economic growth or not, or even the extent that ARRA can be credited for the current economic turnaround. Although it is not possible to have uniformity in the figure calculated, it is still important to be able to quantify progress or failures, and by how much so as to assist in making necessary and relevant adjustments.

Another failure in this respect has to do with the fact that there is no clear way of separating ARRA-assisted economic factors from those that are independent of it. It is hence not easy to tell if ARRA is responsible for any positive economic turnarounds or if these are attributable to other non-ARRA factors.

Recommendations for Future Policy Makers

This year, 2011, ARRA funding starts to wind down as the funding process gradually comes to an end, and what now remains is sustainability. From estimations, in the short-term, ARRA is going to be a major boost for biometric research, new innovations and eventually commercialization all of which will spur economic development and create new jobs (Pirie, 2011). Unfortunately, the pace of science is not well suited to the ARRA two-year funding period; it is also possible that funding rates will go further down due to renewal of applications by the granting agencies (Pirie, 2011). Thus, a number of projects are likely to be eliminated or phased out.

Future economic policy makers must therefore put emphasis on sustainability, fortunately this is possible in commercial investments and infrastructure as these are capable of being self-sustaining and will continue to function independent of government funding (Pirie, 2011). Infrastructure does not only come with sustainability, but also “combines direct employment (e,g. planning, construction, etc) and other upstream effects like the production/manufacture of material for construction” (Weinstein, 2010). Hence, improved infrastructure is the best and sustainable way to ensure and insure commerce.

References

Amadeo, K. (2011). Causes of Economic Recession. Web.

Blank Rome Editors (2009). ARRA Implementation Begins—Federal Agencies Post Initial Reports. Web.

Bureau of Labor Statistics. The Employment Situation- September 2011. U.S. Department of Labor. Web.

CIN News Room. Stimulus Bill Summary: American Recovery & Reinvestment Act of 2009. Community Investment Program. Web.

Congressional Budget Office. Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from January 2011 Through March 2011. Web.

Council of Economic Advisors. The Economic Impact of the American Recovery and Reinvestments Act of 2009: The Fifth Quarterly Report, Nov. 18, 2010. Executive Office of the President.

Economic Cycle Research Institute (2011). U.S. Economy Tipping into Recession. Web.

Environmental Protection Agency. (2011). Information Related to the American Recovery and Reinvestment Act of 2009 (Recovery Act). Web.

McKibbin, W. & Stoeckel, A. (2006). Bursting of the US Housing Bubble Economic Scenarios. Web.

Orszag, P. (2009). Initial Implementing Guidance for the American Recovery and Reinvestment Act of 2009. Office of Management and Budget Washington. Web.

Pirie, C. (2011). Recovering Entrepreneurship: ARRA. Entrepreneurship Review. Web.

Recovery.gov. (2011). The Recovery Act. U.S. Recovery Accountability and Transparency Board. Web.

Senate Fiscal Agency. (2009). Federal Stimulus Package. Web.

Service Employees International Union (2010). The Social and Economic Impact of ARRA. Web.

Weinstein, B., L. (2010). Economic Impacts of Cement Industry regulations: The Proposed Portland Cement NESHAP Rule. Web.