TODAY’S STUDY: RECOVERY ACT CREATED JOBS, STIMULUS SPENDING WORKS

Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output…
August 2011 (Congressional Budget Office)

In February 2009, in response to significant weakness in the economy, lawmakers enacted the American Recovery and Reinvestment Act (ARRA). The legislation’s numerous spending and revenue provisions can be grouped into several categories according to their focus:

- Providing funds to states and localities—for example, by raising federal matching rates under Medicaid, providing aid for education, and increasing financial support for some transportation projects;

- Supporting people in need—such as by extending and expanding unemployment benefits and increasing benefits under the Supplemental Nutrition Assistance Program (formerly the Food Stamp program);

- Purchasing goods and services—for instance, by funding construction and other investment activities that could take several years to complete; and

- Providing temporary tax relief for individuals and businesses—such as by raising exemption amounts for the alternative minimum tax, adding a new Making Work Pay tax credit, and creating enhanced deductions for depreciation of business equipment.

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When ARRA was being considered, the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation estimated that it would increase budget deficits by $787 billion between fiscal years 2009 and 2019. CBO now estimates that the total impact over the 2009–2019 period will amount to about $825 billion. By CBO’s estimate, close to half of that impact occurred in fiscal year 2010, and about 85 percent of ARRA’s budgetary impact was realized by the end of June 2011.

Various recipients of ARRA funds (most recipients of grants and loans, contractors, and subcontractors) are required to report, after the end of each calendar quarter, the number of jobs funded through ARRA. The law also requires CBO to comment on those reported numbers…

During the second quarter of calendar year 2011, according to recipients’ reports, ARRA funded more than 550,000 full-time-equivalent (FTE) jobs.2 Those reports, however, do not provide a comprehensive estimate of the law’s impact on U.S. employment, which could be higher or lower than the number of FTE jobs reported, for several reasons (in addition to any issues concerning the quality of the reports’ data).3 First, some of the jobs included in the reports might have existed even without the stimulus package, with employees working on the same activities or other activities. Second, the reports cover employers that received ARRA funding directly and those employers’ immediate subcontractors (the so-called primary and secondary recipients of ARRA funding) but not lower-level subcontractors. Third, the reports do not attempt to measure the number of jobs that were created or retained indirectly as a result of recipients’ increased income, and the increased income of their employees, which could boost demand for other products and services as they spent their paychecks. Fourth, the recipients’ reports cover only certain ARRA appropriations, which encompass about one-fifth of the total either spent by the government or conveyed through tax reductions in ARRA; the reports do not measure the effects of other provisions of the stimulus package, such as tax cuts and transfer payments (including unemployment insurance payments) to individual people.

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Estimating the law’s overall effects on employment requires a more comprehensive analysis than can be achieved by using the recipients’ reports. Therefore, looking at recorded spending to date along with estimates of the other effects of ARRA on spending and revenues, CBO has estimated the law’s impact on employment and economic output using evidence about the effects of previous similar policies and drawing on various mathematical models that represent the workings of the economy.

On that basis, CBO estimates that ARRA’s policies had the following effects in the second quarter of calendar year 2011 compared with what would have occurred otherwise:

- They raised real (inflation-adjusted) gross domestic product (GDP) by between 0.8 percent and 2.5 percent,

- Lowered the unemployment rate by between 0.5 percentage points and 1.6 percentage points,

- Increased the number of people employed by between 1.0 million and 2.9 million, and

- Increased the number of full-time-equivalent jobs by 1.4 million to 4.0 million, as shown in Table 1.

(Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers.)

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The effects of ARRA on output peaked in the first half of 2010 and have since diminished, CBO estimates. The effects of ARRA on employment and unemployment are estimated to lag slightly behind the effects on output; CBO estimates that the employment effects began to wane at the end of 2010 and continued to do so in the second quarter of 2011. Still, CBO estimates that, compared with what would have occurred otherwise, ARRA will raise real GDP in 2012 by between 0.3 percent and 0.8 percent and will increase the number of people employed in 2012 by between 0.4 million and 1.1 million.

CBO’s current estimates reflect small revisions to its previous projections of the timing and magnitude of changes to federal revenues and spending under ARRA.

Although CBO has examined data on output and employment during the period since ARRA’s enactment, those data are not as helpful in determining ARRA’s economic effects as might be supposed because isolating the effects would require knowing what path the economy would have taken in the absence of the law. Because that path cannot be observed, the new data add only limited information about ARRA’s impact…