What Is the American Recovery And Reinvestment Act?
The American Recovery and Reinvestment Act of 2009 (ARRA) is a law passed by the U.S. Congress in response to the Great Recession of 2008. It is more commonly known as the "stimulus package of 2009" or the "Obama stimulus." The package included a series of federal government expenditures aimed at countering the job losses associated with the 2008 recession.
- The American Recovery and Reinvestment Act of 2009 (ARRA) was a fiscal stimulus bill signed by President Barack Obama on February 17, 2009 to deal with the Great Recession.
- The Act consisted of $787 billion in spending (later raised to $831 billion) in tax cuts/credits and unemployment benefits for families; it also earmarked expenditures for health care, infrastructure, and education.
- ARRA was controversial at the time—with supporters and opponents falling mainly into political camps—and its role in ending the Great Recession remains debated to the present day.
Understanding the American Recovery And Reinvestment Act
The American Recovery and Reinvestment Act (ARRA) was a massive round of federal spending intended to create new jobs and recover jobs lost in the Great Recession of 2008. This government spending was to compensate for a slowdown in private investment in that year. Lawmakers began work on the bill months leading up to President Barack Obama's inauguration in January 2009. Aides to the incoming president collaborated with members of the U.S. Congress, and a streamlined amendments process allowed for passage in the House of Representatives on January 28, 2009. The U.S. Senate passed its version on the 10th of February.
Fast-moving conference negotiations followed, and Democratic congressional leaders ultimately agreed to cut back the bill's spending in order to attract a handful of Republican votes. The bill's final price tag of $787 billion represented the largest anti-recession spending package since World War II. President Obama signed the bill into law on February 17, 2009.
Congress added to ARRA spending in subsequent budgets, eventually raising the total cost to $831 billion by 2011.
Objectives of the American Recovery and Reinvestment Act
Among the initiatives introduced by the ARRA:
- Tax relief for families, including withholding reductions up to $800 per family and a $70 billion extension of the alternative minimum tax.
- Over $80 billion in new spending on infrastructure projects.
- Health care expansion, including $87 billion in aid to states to help cover additional recession-related Medicaid costs.
- Over $100 billion in education spending, including teacher salary support and Head Start programs.
The American Recovery and Reinvestment Act Pros and Cons
Contemporary reactions to the ARRA were originally a mix of positive and negative, mostly predictably falling along partisan lines, but with a high degree of good-faith disagreement among economists as to the wisdom and expected results of massive fiscal stimulus.
Supporters felt that the stimulus spending was not sufficient to draw the national economy out of the recession. Economics professor and columnist Paul Krugman, in a November 2009 New York Times op-ed article, declared the ARRA an early success—"working just about the way textbook macroeconomics said it would"—with its only failure being that it did not go far enough in reviving the U.S. economy. Krugman argued that the stimulus had helped reverse unemployment but was not robust enough to fuel further growth of gross domestic product in the years to come.
Opponents of the ARRA felt that the massive government spending would invariably be inefficient and hampered by bureaucratic obstacles. In a June 2009 Forbes magazine opinion article, "The $787 Billion Mistake," economist Lee Ohanion argued that the economy was showing early but promising signs of recovery without the stimulus having yet taken effect. Asserting "the economic arguments for ARRA were badly dated and erroneous," he insisted that governmental incentives to private spending and hiring would prove more powerful than flooding the economy with unearned dollars.
Even more than a decade later, the lack of a conclusive counterfactual scenario makes evaluation of the ARRA difficult. It is impossible to say with precision what direction the economy would have taken without the ARRA. Probably the most reliable way to do so is to compare the alternative economic projections used to justify the Act’s to the actual results.
Harvard economist Gregory Mankiw and others did just this by tracking the actual U.S. unemployment rate in the months following the Act’s passage against the rate projected by ARRA proponents at the President’s Council of Economic Advisers. This demonstrated that actual unemployment results under the massive stimulus greatly exceeded both the baseline “no-stimulus” scenario and the lower projections that purported to show the expected benefits of the massive new federal spending. This suggests that the ARRA may have actually dramatically increased unemployment rates and helped delay the economic recovery.
Economic conditions in the U.S. have undoubtedly improved since the 2008 recession, but the post-Great Recession can be best characterized as an L-shaped recovery. Real GDP took 4 years to recover the losses from the recession and unemployment took nearly 8 years to recover.