ARRA: Details, Pros and Cons

What Did ARRA Really Do?

man spending ARRA tax cuts on yellow peppers
ARRA tax cuts gave everyone more money to spend on the everyday items that revitalized the economy. Photo: Steve Debenport/Getty Images

The American Recovery and Reinvestment Act of 2009 was a fiscal stimulus that ended the Great Recession. Congress approved President Obama's plan to put $787 billion into the pockets of American families and small businesses. That would boost demand and instill confidence. It was a necessary follow-up to President Bush's plan, the Troubled Asset Recovery Program. TARP ended the 2008 financial crisis by bailing out large banks.

 

ARRA had seven components. Here are the details of each.

1. Immediate Relief for Families

ARRA stimulated demand by sending $260 billion to families. They received the funds through tax cuts, tax credits and unemployment benefits. Most of the funds were delivered in the first two years.

  • Cut taxes by $400 for individuals and $800 for families through reduction of withholding. That confused many people who expected checks like the Bush Tax Cuts.
  • A payment of an additional $250 each to recipients of Social Security, veterans pension and Supplemental Security Income (SSI) benefits.
  • $70 billion to extend the Alternative Minimum Tax shelter. Congress extends it each year.
  • Greater access to the child tax credit for the working poor and an expanded earned-income tax credit to families with three children.
  • A $2,500 college tuition tax credit for 2009 and 2010.
  • An $8,000 tax credit for first-time homebuyers in 2009 only. (It was later extended through April 2010.)
  • A deduction of sales tax on new car purchases through 2009 only.
  • Unemployment benefits were extended for another 33 weeks.
  • A suspension of taxes on the first $2,400 of unemployment benefits through 2009. 

2. Modernize Federal Infrastructure

ARRA also created jobs by funding shovel-ready public works projects.

This is the most cost-efficient way to create jobs. One billion dollars spent on public works created 19,975 jobs according to a UMass/Amherst study.

  • $46 billion for transportation and mass transit projects.
  • $31 billion to modernize federal buildings.
  • $6 billion in water projects.

3. Increase Alternative Energy Production

This funding jump-started the alternative energy industry in America. It demonstrated that the federal government supported clean energy.

  • $17 billion in renewable energy tax cuts.
  • $5 billion to weatherize homes.

4. Expand Health Care

This component subsidized the greater health care costs that recessions create. It also began to computerize medical records. That facilitated exchange of patient medical information, such as tests, among doctors. Computerized medical records facilitated the Affordable Care Act. Here's what ARRA spent on health care.

  • $24 billion to subsidize 65 percent of COBRA premiums for up to 9 months for laid off workers.
  • $87 billion in matching funds for two years to help states pay for the additional Medicaid needs that usually occur in a recession.
  • $10 billion to National Institute for Health.
  • $17 billion to modernize health information technology systems.

    5. Improve Education

    Education spending is the second best way to create jobs, according to the UMass study. One billion in federal spending creates 17,687 jobs. Here's what ARRA spent on education.

    • $54 billion to school districts and states to pay for teacher salaries and educational programs.
    • $21 billion for school facility modernization and construction.
    • $17 billion to boost Pell Grants by increasing the maximum to $5,350 in 2009 and $5,550 in 2010.
    • $13 billion for Head Start.
    • $12 billion for special ed programs, including job training for those with disabilities.

    6. Invest in Science Research and Technology

    Funding broadband infrastructure in rural areas also helped pave the way for computerized health records needed for the ACA.

    • $10 billion to modernize science facilities and fund research jobs that investigate disease cures.
    • $4 billion to increase broadband infrastructure in rural and inner-city areas. That made their businesses more competitive.
    • $4 billion for physics and science research.

    7. Help Small Businesses

    Small businesses drive 70 percent of all new jobs.  ARRA allocated $54 billion to help small businesses with tax deductions, credits and loan guarantees. These included:

    • Increasing the deduction for machinery and equipment deduction, including SUVs, to $240,000.
    • Allowing a special depreciation deduction for 2008.
    • Cutting capital gains taxes for small business investors who hold their stock for more than five years.
    • Tax credits for small businesses that hire long-term unemployed veterans or students.
    • Increasing the SBA loan guarantee to 90 percent in the 7(a) loan program.
    • Eliminate fees on 504 economic development loans.
    • In the FY 2011 budget, an additional $64 billion in stimulus money was allocated to extend many of the ARRA programs. It added tax credits for any new hires, and increase the Small Business Administration loan limits from $3 million to $5 million.

    (Source: "Stimulus Package on Track for Final Votes," Associated Press, February 12, 2009. "Lawmakers Drop Broadband Tax Credit," Bloomberg, February 13, 2009.  "How It Adds Up," The Wall Street Journal, February 15, 2009.)

    Pros and Cons of ARRA

    The American Recovery and Reinvestment Act had something for everybody. But it was almost too complicated. Many people were unsure whether they, in fact, received a tax break. Polls showed that many others thought their taxes had increased instead of decreased.

    Small businesses complained that loan guarantees and tax deductions didn't help them. That's because the orders just weren't coming in.

    Others criticized the focus on education or helping low-income families. Some said that extended unemployment benefits removed the incentive to look for work.

    But the success of ARRA is in the numbers. The recession ended in July 2009, five months after Congress passed the Act. Economic growth immediately improved. It expanded 1.3 percent in Q3 2009 after shrinking 5.4 percent in Q1 2009.  In the first 18 months after ARRA passed, the economy added 2.4 million private sector and 1.7 million government jobs. That was after losing more than 500,000 jobs a month during the recession.