Recovery Act Third Quarterly Report - Introduction
The American Recovery and Reinvestment Act of 2009 (ARRA) is the boldest countercyclical fiscal expansion in American history. It was enacted at a time when U.S. real gross domestic product (GDP) was contracting at an annual rate of more than 6 percent and employment was falling by more than 750,000 jobs per month. The Act was designed to cushion the fall in demand caused by the financial crisis and the subsequent decline in consumer and business confidence, household wealth, and access to credit. Together with policies to stabilize the financial system, increase liquidity and credit, and stem the tide of foreclosures, the ARRA was part of a comprehensive policy response to the economic turmoil that gripped the United States and the world economy in the fall of 2008 and early 2009.
As part of the unprecedented accountability and transparency provisions included in the Recovery Act, the Council of Economic Advisers (CEA) was charged with providing quarterly reports to Congress on the effects of the Recovery Act on overall economic activity, and on employment in particular. In this third report, we provide an assessment of the effects of the Act through the first quarter of 2010.
As discussed in our previous reports, identifying the impact of policy actions is inherently difficult, and the estimates must be understood to be subject to large margins of error. For this reason, the CEA prepares estimates of the impact of the ARRA from two approaches, and reports estimates from a wide range of private analysts and from the Congressional Budget Office. We also regularly analyze in more detail the impact of specific programs and provisions of the Act in order to more thoroughly understand and evaluate its effects.
Our multifaceted analysis indicates that the Recovery Act has played an essential role in changing the trajectory of the economy. It has raised the level of GDP substantially in its first full year of existence and has saved or created between 2.2 and 2.8 million jobs as of the first quarter of 2010. The tax relief and income support provisions of the ARRA alone account for roughly half of the beneficial employment effects.
The report begins in Section II with a summary of the spending and tax reductions that have occurred under the ARRA to date. As of the end of March 2010, nearly one-half of the original $787 billion included in the Act has been outlayed or has gone to American households and businesses in the form of tax reductions. Importantly, the fiscal stimulus provided by the Act increased substantially in the first quarter of 2010. This was largely due to a surge in tax refunds and reduced final tax liabilities related to the Making Work Pay tax credit. Government investment spending on items such as infrastructure and clean energy totaled $16 billion in 2010:Q1 and is expected to rise through the end of the year.
Section III contains the key analysis of the overall economic impact of the Recovery Act. It shows that economic conditions have changed radically in the 14 months since the Recovery Act was passed. GDP began to grow in the third quarter of 2009, grew 5.6 percent in the fourth quarter of 2009, and appears to have grown solidly in the first quarter of 2010. Payroll employment grew by an average of 54,000 per month in the first quarter of 2010, and the unemployment rate has declined from an average rate of 10 percent in the fourth quarter of 2009 to an average rate of 9.7 percent in the first quarter of 2010. The economy is obviously far from healthy, but it appears to be firmly on the road to recovery.
We estimate the role of the Recovery Act in effecting this dramatic turnaround in two ways. One involves a comparison of the actual behavior of GDP and employment with a plausible, statistically-determined baseline. The second uses estimates of the effects of fiscal policy from standard macroeconomic forecasting models. The two methods indicate that the ARRA has raised both GDP and employment substantially relative to what they otherwise would have been. A compilation of estimates from prominent private-sector and public-sector analysts shows that our estimated impacts are similar to those of economists across the ideological spectrum. We also examine the available direct job creation data provided by a fraction of ARRA fund recipients and find that the results provide further corroboration of our estimates of the overall impact of the Act.
The Recovery Act included a wide range of tax reductions and income support payments for families. These components of the Act have provided tax cuts to 95 percent of working families, extensions and expansions of unemployment insurance for workers who have lost their jobs in the downturn, and other vital types of support. Section IV of the report presents a compilation of these provisions and shows that without them, real per capita disposable personal income would have fallen substantially in 2009, instead of rising as it actually did. Microeconomic analysis of the distribution of the tax cuts and income support payments across income quintiles, education groups, and states shows that the tax cuts and income support payments were particularly important for middle- and low-income families. We estimate that the tax reduction and income support payments played a crucial role in the rebound of consumer spending in 2009, and likely were responsible for roughly half of the total number of jobs saved or created by the Recovery Act as of the first quarter of 2010.