Recovery Act Fourth 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 fourth report, we provide an assessment of the effects of the Act through the second 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 (CBO). 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 relative to what it otherwise would have been and has saved or created between 2.5 and 3.6 million jobs as of the second quarter of 2010.
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 June 2010, more than 60 percent 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 and rose even further in the second quarter. As in the first quarter of 2010, much of the higher level of stimulus in the second quarter was due to a surge in tax refunds and reduced final liabilities. However, public investment spending, which now totals $86 billion, also increased significantly. It is expected to continue rising 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 dramatically in the year and a half since the Recovery Act was passed. GDP began to grow in the third quarter of 2009, and has now grown for three quarters in a row. Based on the available data and a range of forecasts, GDP appears to have continued to expand solidly in the second quarter of 2010. Payroll employment grew for the first time since the recession began in November 2009, and rose modestly through the second quarter of 2010. Employment growth, excluding temporary Census workers, averaged 63,000 per month in 2010:Q1 and 123,000 per month in the second quarter. Obviously, much work remains to repair the labor market damage caused by the financial crisis and the severe recession that followed. However, the economy appears to be gradually recovering.
We estimate the role of the Recovery Act in effecting this dramatic turnaround in two ways. One uses estimates of the effects of fiscal policy from standard macroeconomic forecasting models. The second involves a comparison of the actual behavior of GDP and employment with a plausible, statistically-determined baseline. 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.
In previous reports, the CEA has highlighted key portions of the Recovery Act, including the state fiscal relief and the tax reduction and income support components. In Section IV of this report, we focus on the public investment spending. The Recovery Act includes $319 billion of investment spending in everything from roads and bridges to schools to a smarter electrical grid and community health centers. We analyze the broad range of useful investments being made and discuss the progress in finalizing awards and getting projects underway. Our model-based analysis suggests that the investment components of the Act by themselves have already raised employment relative to what it otherwise would have been by more than 800,000 jobs as of the second quarter of 2010, 30 percent more than in the first quarter. A detailed case study of the investment in transportation infrastructure finds that higher Recovery Act transportation spending in a state is associated with higher private employment growth in heavy construction.
Much of this Recovery Act investment spending takes the form of grants that require co-investment by the recipients and tax incentives for certain types of spending. As a result, the public spending is leveraged with other funds to support even larger amounts of total investment. Section V examines these leverage provisions in more detail. The analysis shows that roughly $100 billion of Recovery Act funds have this feature and that these funds will ultimately support more than $380 billion of total investment spending. This implies that every $1 of Recovery Act funds in these programs is partnered with about $3 of other funds, the majority from the private sector. A case study of the Production Tax Credit and other incentives for wind energy suggests that the leverage provisions have an important impact on private sector investment spending and hence job creation.