President Barack Obama signed the American Recovery and Reinvestment Act (ARRA) on February 17, 2009. The Congressional Budget Office estimated it would add $787 billion in budget deficits by 2019.
The economic stimulus package helped end 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
The American Recovery and Reinvestment Act had three spending categories. It cut taxes by $288 billion and earmarked $224 billion in extended unemployment benefits, education, and health care spending. Also, the Act created jobs by allocating $275 billion in federal contracts, grants, and loans.
Congress designed the Act to provide nearly $720 billion in benefits, 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, the adverse effect on the budget deficit was only $179 billion. 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.
The report estimated the total impact on the deficit would be $836 billion by 2019. As of the 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. By 2010, the CBO said that ARRA's policies increased the number of full-time-equivalent jobs by 2 million to 4.8 million.
No doubt, the economic stimulus package inspired the confidence needed to turn the economy around.
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 reduce unemployment below 9% initially 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.
The Effectiveness 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 lower 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 businesses 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.
Economic Stimulus for Small Businesses
Although most of the media attention was on the money invested in large banks, the Treasury's TARP program also invested $570 million in 84 institutions to strengthen community banks.
Second, the Economic Stimulus Package included tax write-offs for small businesses. Here are a few of them:
- Deductions for machinery and equipment, such as computer and office equipment, signs, and vehicles, were raised to $250,000. 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.
- The Small Business Administration 7(a) loan guarantee was raised from 75% to 90% of the loan value.
- 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
- $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