Obama's Stimulus Package and How Well It Worked

Did Obama's Stimulus Plan Work?

Obama economic stimulus act
••• Credit: Joe Raedle/Getty Images

President Barack Obama outlined the economic stimulus package during his 2008 campaign. Congress approved the American Recovery and Reinvestment Act (ARRA) in February 2009. The Congressional Budget Office estimated it would add $787 billion in budget deficits by 2019.

The economic stimulus package ended the Great Recession by spurring consumer spending. Most importantly, it instilled the confidence needed to boost economic growth. It also aimed to restore trust in the financial services industry. It limited bonuses for senior executives in companies that received the Troubled Asset Relief Program (TARP) funds.

How It Worked

ARRA had three spending categories. It cut taxes by $288 billion. It spent $224 billion in extended unemployment benefits, education, and health care. It created jobs by allocating $275 billion in federal contracts, grants, and loans.

Congress designed the Act to spend nearly $720 billion, or 91.5%, in its first three fiscal years. It allocated $185 billion in FY 2009, $399 billion in FY 2010, and $134 billion in FY 2011.

The Obama administration did better than planned. By the end of FY 2009, it spent $179 billion according to a 2015 report by the Congressional Budget Office. Of that, $68 billion went toward tax relief and credits. Another was spent on $34 billion in health services and $21 billion on education. It also spent $28 billion on unemployment compensation and $13 billion on extra Social Security and veterans' checks.

In the FY 2012 budget, the Congress allocated additional funding.

The CBO published its final ARRA report in 2015. It estimated the total impact on the deficit would be $836 billion by 2019. As of fiscal year 2014, ARRA had added $827 billion to the deficit. Of that, $303 billion went toward tax relief and credits. Another $141 billion was spent on health services and $97 billion on education. It spent $64 billion on unemployment compensation and $48 billion on the Supplemental Nutrition Assistance Program.

How Well It Succeeded

In a 2009 report, the CBO projected ARRA would stimulate gross domestic product by 1.4% to 3.8% for the fourth quarter in 2009. The stimulus was successful in 2009 GDP. The economy grew 1.7% in the third quarter and 3.8% in the fourth quarter. That's a big improvement over the first quarter's 6.7% drop and the second quarter's 0.7% decline.

In 2009, the CBO predicted that ARRA would increase employment by 7 million full-time jobs by the end of 2012. In 2015, it estimated the stimulus created between 2 million and 10.9 million jobs. Most of the increase occurred by 2011.

Most of the success was due to the Stimulus Package. By March 2009, expansive monetary policy had done all it could. It was evident more fiscal policy was needed. No doubt, the economic stimulus package inspired the confidence needed to turn the economy around. 

Once in office, Obama realized he needed to increase the fiscal stimulus from the $190 billion plan he proposed in his campaign. Some components of his campaign plan, such as enacting a foreclosure moratorium, had already been implemented by Fannie Mae. Others, such as eliminating taxes on seniors making up to $50,000, were still part of Obama's economic agenda elsewhere.

Obama's biggest challenge was to create enough of a stimulus to soften the recession, but not big enough to raise further doubts about the ballooning U.S. debt. Unfortunately, the plan was blamed for doing both. It failed to initially reduce unemployment below 9% and added to the debt. Even so, the stimulus plan was not condemned as much as health care reform, Medicare, and Medicaid for the debt.

Success of Each of the Three Components

Obama's tax rebates were supposed to encourage consumer spending, but many experts doubted it. Why? The rebates showed up as less tax withholding. Unlike the Bush tax cuts, workers did not receive checks. As a result, most people weren't aware they got a tax rebate.

The Stimulus for Small Business helped create jobs, increased lending from the Small Business Administration and community banks, and reduced capital gains taxes for small business investors. The aid helped, but many states were so underwater that their losses outweighed the federal assistance.

The public works construction was the most publicized. Signs were posted wherever stimulus money was used to construct roads or public buildings. It was estimated to retain or add 3 million jobs, many of which were sorely needed in the construction industry. 

Economic Stimulus for Small Businesses

Although most of the media attention was on the $105 billion invested in large banks. But the Treasury's TARP program also invested $92 billion to strengthen community banks across the country. These banks were directed to use the funds to help small businesses in their local area. 

Second, the Economic Stimulus Package included $54 billion in tax write-offs for small businesses. Here's the breakdown:

  • Deductions for machinery and equipment, such as computer and office equipment, signs, and vehicles were raised to $240,000. The exceptions were SUVs which were limited to $25,000. Property that didn't qualify for the tax credit could be depreciated by 50%.
  • Investors in small, publicly-held businesses who held their stock for more than five years received a capital gains tax cut.
  • Small businesses could delay paying the 3% withholding tax on goods and services sold to governments.
  • Small businesses that hired unemployed veterans and students who looked for work for more than six months received tax credits.
  • Delay taxes for businesses that reduced their debt.
  • The Small Business Administration 7(a) loan guarantee was raised from 75% to 90% of the value of the loan.
  • Fees were eliminated on the SBA's 504 program, which guaranteed $4 million worth of economic development loans to small businesses.

The FY 2011 budget also allocated $64 billion, broken down as follows:

  • $33 billion in tax credits for small businesses that add new workers or give raises beyond a cost-of-living increase.
  • Raise the limit on SBA loan guarantees from $3 million to $5 million.
  • $30 billion from the TARP program for 8,000 community banks. These banks own assets under $10 billion and do half of all small business lending.
  • $700,000 to eliminate capital gains taxes for investors in small businesses.

Article Sources

  1. Congressional Budget Office. "H.R. 1 Conference Agreement," Accessed Nov. 7, 2019.

  2. Congress.gov. "H.R.1 - American Recovery and Reinvestment Act of 2009," Accessed Nov. 7, 2019.

  3. New York City Mayor's Office of Operations. "The Impact of the American Recovery and Reinvestment Act on New York City," Accessed Nov. 7, 2019.

  4. Congressional Budget Office. "Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output in 2014," Accessed Nov. 7, 2019.

  5. Congressional Budget Office. "Letter to the Honorable Charles E. Grassley," Accessed Nov. 7, 2019.

  6. U.S. Department of the Treasury. "Recent U.S. Economic Growth," Accessed Nov. 7, 2019.

  7. The White House. "Estimates of Job Creation from the American Recovery and Reinvestment Act of 2009," Accessed Nov. 7, 2019.

  8. U.S. Bureau of Labor Statistics. "Unemployment in November 2009," Accessed Nov. 7, 2019.

  9. The Council of Economic Advisers and the Office of the Vice President Elect. "The Job Impact of the American Recovery and Reinvestment Plan," Accessed Nov. 7, 2019.

  10. IRS. "The Making Work Pay Tax Credit," Accessed Nov. 7, 2019.

  11. Social Security Administration and the Internal Revenue Service. "American Recovery and Reinvestment Act Helps Small Businesses," Accessed Nov. 7, 2019.