The Essential Stimulus

The Essential Stimulus

Lessons from the American Recovery and Reinvestment Act
Veronique de Rugy | Sep 09, 2011

On February 13, 2009, President Obama signed into law the American Recovery and Reinvestment Act (ARRA), popularly known as the “stimulus.” Divided into three main pieces—$288 billion in tax benefits such as a refundable tax credit; $272 billion in contracts, grants, and loans (the “shovel-ready” projects); and $302 billion in entitlements such as food stamps and unemployment insurance—the $787 billion stimulus came with several promises.

The administration promised that ARRA would “create or save” 3.5 million jobs over the next two years, mostly in the private sector. The administration also promised that under ARRA not only would unemployment not increase beyond 8.25 percent, but that it would also drop to 7.25 percent by end of 2010. The administration argued that spending $787 billion would have this effect because when government spends money where it is most needed, that expenditure creates jobs and triggers economic growth. The administration assured skeptics that it would spend the money in a good Keynesian fashion: the spending would be timely and temporary. It also explained the reason that the returns on government spending would be so high: for every dollar the government spent, the economy would grow by 1.57.

Unfortunately, the stimulus has failed to live up to the promises.

' '