The American Recovery and Reinvestment Act (ARRA)

What is ARRA?

Why is the “stimulus” not working?

Estimate of ARRA costs:

Effects on COGD:

What is ARRA?

The enactment of the American Recovery and Reinvestment Act of 2009, the trillion dollar spending and debt package pushed through Congress by President Barack Obama and Congressional leaders under the guise of “economic stimulus,” marked a return to failed policies of the past.

Following the Keynesian rationale that increased government spending will lead to economic growth, Congress passed, and President Obama signed, a $787 billion package largely consisting of spending with some (albeit overstated) tax cuts. The actual taxpayers‘ cost of the spending component, however, when factoring interest on the debt incurred to finance the package, will be much higher.

The resurrection of Keynesian policies did not come as a surprise, although the magnitude of the stimulus package is unprecedented. During the presidential campaign President Obama had made clear his support for redistributionist policies stating his belief that the economy works best if “we spread the wealth around.”18

The “stimulus” package does indeed “spread the wealth around,” but this redistributionist package that takes money from one group of people (tax hikes) in order to give it to another one (government spending), fails to acknowledge the fact that government is unable to create wealth in doing so.

Why is the “stimulus” not working?

In the 1930s John Maynard Keynes argued that, during a time of economic slump and lagging private demand, increased government spending was a good way to boost economic growth. His theory asserted that a government-induced cash infusion could give short term “stimulus” to help end a recession or depression. However the theory has one major weakness – it overlooks the fact that government spending does not occur in a vacuum. Every dollar spent by government has to be taken out of the productive sector of the economy in the form of tax increases or debt, only to be infused into non-productive areas, and, what’s worse, all too often in the form of political favors.

In other words, the theory of Keynesianism fails to acknowledge that government is unable to create wealth: it merely moves it around. As noted economist Henry Hazlitt once said, government spending merely directs

“labor and capital into the production of less necessary goods or services at the expense of more necessary goods or services.”19

Until the 1970s the Keynesian model was very influential as it provided politicians with the justification for spending more money. The stagnation of 1970s, caused partially by spending increases, and the economic boom of 1980s, triggered by tax cuts and spending restraint, convinced most of the remaining Keynesian economists to abandon the “stimulus” myth. However, the Keynesian rationale still continues to have a following among politicians and the media.

The failed policies under Republican and Democrat presidents Herbert Hoover and Franklin Delano Roosevelt, under whom federal spending rose from 3.4 percent to 10.3 percent of GDP only to see the economy shrink by nearly 10 percent in ten years, underscore the flaws of Keynesianism as a tool to promote economic growth. The experiences of Japan and Argentina in the 1990s serve as further proof that increased government spending is not an adequate tool to address a slumping economy:

During what the Japanese now call the “Lost Decade” of the 1990s, the Japanese government increased spending from 32 percent of GDP to 38 percent in nine years. However, rather than seeing increased economic activity and prosperity, per-capita income fell from 86 percent of the U.S. level in 1991 to only 74 percent in 2000.
In 1997, Argentina embarked on a similar Keynesian experiment, with similar results. After economic activity began to contract in 1997, the government increased spending from 23 percent to 25 percent. However the average real GDP growth was limited to a meager 0.7 percent.

Invoking these failed Keynesian adventures, noted Harvard economist and former Bush Administration adviser Greg Mankiw believes that

“it is becoming increasingly clear that the long-term fiscal strategy of the White House is based on large doses of wishful thinking.”20

However, it may be more than just wishful thinking. Going back to President Obama’s “redistribution of wealth” cynics could argue that perhaps part of the reason the Keynesian model is currently experiencing a revival is its political expediency as it provides the President with an opportunity to put more money in the hands of political allies.

Despite President Obama’s claim that “there is no disagreement that we need action by our government”21 many economists remain highly skeptical that the ARRA will have the desired effects.

These include a number of Nobel Laureates – Ed Prescott, James Buchanan and Vernon Smith who along with 200 other economists signed the letter opposing the bill - stating that it is “a triumph of hope over experience to believe that more government spending will help the U.S. today.”22 Even President Obama’s own economic advisors including Christina Romer, Jason Furman and Larry Summers, before being appointed to work at the White House, criticized the so-called “stimulus” measures. And the CBO report that analyzes the possible effects of ARRA provides us with a word of caution:

“the macroeconomic impacts of any economic stimulus program are very uncertain.”23

In 2001, the U.S. Congress provided rebate checks with the stated goal of promoting economic growth, a measure that was also used in 2008. Economists studied the effects of the 2001 and 2008 checks and came to the conclusion that the rebates did not create a significant increase in consumption, mostly because they were believed to be temporary.24

The refundable tax credits, which are part of the 2009 ARRA, will likely have a similarly negligible effect on consumption for two reasons.

Firstly, people will likely pay down debts or save the money for a rainy day rather than spend it during unstable times. Secondly, due to the fact that the vast portion of the Act is deficit-ballooning spending, taxpayers are aware that sooner or later it will bring much higher taxes. Thus consumers may respond negatively – in contradiction to what the creators of the so-called “stimulus” intended.25

Furthermore there is empirical evidence suggesting that in the long run, the growth of the size of government negatively affects economic growth. Research conducted by macroeconomist Robert Barro concluded that

“public consumption has a robust negative relationship with growth and investment while public investment spending has an insignificant effect on economic growth.”26

Proponents touted the “stimulus” package as a “must-pass-or-else” legislation, painting doomsday scenarios for the job market should Congress refuse to pass the bill. However, several months into the implementation of the “stimulus,” the package has not only not helped create jobs, but the unemployment rate has in fact soared higher than the 8 percent rate economic advisers for the Obama Administration predicted in the absence of the “stimulus” package.

Even the cleverly-devised (because impossible to verify or falsify) arbitrary measure of “jobs created or saved” employed by the Obama Administration cannot distract from the fact that at least 1.5 million jobs were lost between February 18, 2009, the day the president signed the package into law and June 2009, when the unemployment rate had risen to 9.5 percent, up from 7.6 percent at the end of January.27

And, in spite of the promised “unprecedented level of transparency,” taxpayers were still far from being able to track “stimulus” dollars from the federal government level down to the end recipient when this report went to print.

Meanwhile, critics’ fears that “stimulus” dollars would be wasted – in spite of the President’s assertion that the money would be spent “without waste, without inefficiency, without fraud”28 - have already been confirmed on numerous occasions.

In June of 2009, Sen. Tom Coburn released a report detailing 100 examples of questionable projects funded through the package, including the following:

$1.5 million in “free” stimulus money for a new wastewater treatment plant resulting in higher utility costs for residents of Perkins, Oklahoma;
$1 billion for FutureGen in Mattoon, Illinois is the “biggest earmark of all time” for a power plant that may never work;
$15 million for “shovel-ready” repairs to little-used bridges in rural Wisconsin are given priority over widely used bridges that are structurally deficient;
$800,000 for little-used John Murtha Airport in Johnstown, Pennsylvania airport to repave a back-up runway; the ‘Airport for Nobody’ has already received tens of millions in taxpayers’ dollars;
$3.4 million for a wildlife “eco-passage” in Florida to keep animals from wandering onto a busy roadway;
A Nevada non-profit gets $2 million weatherization contract after recently being fired for the same type of work;
$1.15 million for installation of a new guard rail for the nonexistent Optima Lake in Oklahoma;
Nearly $10 million to renovate an abandoned train station that hasn’t been used in 30 years;
10,000 dead people get stimulus checks, but the Social Security Administration blames a tough deadline;
The Town of Union, New York, is encouraged to spend a $578,000 grant it did not request for a homeless problem it says it does not have.29

Estimate of ARRA costs:

Based on the CBO estimates, the ARRA spending during calendar year 2009 alone will amount to $175 billion. During the same time revenues will shrink by $143 billion. Between 2009 and 2018 the total net negative impact of the “stimulus” on the deficit is conservatively estimated to total a staggering $904 billion. That is one of the reasons why in 2009, the federal spending will amount to an overwhelming 28.5 percent of GDP, and the deficit will constitute about 13.1 percent of GDP.

Effects on COGD:

Cost of Government Day in 2009 would fall about 10 days earlier, on August 2, if not for the 2009 expenditures connected with the so-called “stimulus”. That means that COGD would fall only 16 instead of 26 days later than in 2008.

<< Go Back Main Next >>

2009 Report

Case Studies

From the States - Guest Case Studies

Methodology
Chart Room
Media Coverage
Further Resources

2008 Report