As an economist studying government data releases, I sometimes feel like Lou Loomis waiting for Danny Noonan’s ball to drop in on the 18th hole in Caddyshack, especially when it comes to the question of the effectiveness of the stimulus package and the US economy. While I have certainly proffered on more than a few occasions my expert opinion regarding when we should experience recovery, I have only been recently asked whether I think the American Recovery and Reinvestment Act (ARRA) has been successful.

I agree that the outgoing and incoming administration had to do something, with the prospect of:

  • one in ten Americans unemployed (and twice as many underemployed),
  • one in five  American households underwater in their home value,
  • eleven trillion dollars in wealth wiped out,
  • falling economic activity,
  • and a seized financial sector.

The question is, was ARRA as it was passed the thing to do? I believe that a fundamental flaw of ARRA is that it tried to be all things to all people–a little tax relief, a little bit of R&D, a little bit of government spending–you see the pattern.  However, it has been recently suggested that we need an ARRA “part deux.”

Competing schools of thought: Tax Breaks & Government Spending

The Tax Breaks Approach: On one hand, many conservatives argued voraciously that tax breaks and tax cuts were what this country needed to get back on its feet.  It is likely that households receiving these tax cuts and tax breaks would have saved them rather than spent them.  In turn, these savings would have then served as funds that banks could lend to clients to start businesses, expand businesses or just stay in business.  The only flaw in this scheme is that banks were not lending due to the financial crisis and even if they were, many businesses were seeing precipitous declines in their revenues as consumers cut back their spending due to their fear of losing their jobs.  So this may not have presented itself as a viable solution in the face of the severe economic contraction we experienced and are still experiencing.

The Government Spending Approach: On the other hand, many liberals, for lack of a better term, were advocating government spending as the panacea to all of the economic ills that bedeviled this nation.  I will reluctantly raise my hand as a keen supporter of this approach with the caveat that not all government spending is equal.  Arguably, this crisis could have afforded the government the opportunity to invest in much needed infrastructure investments ranging from high speed rail to rebuilding bridges to bringing classrooms to 21st century standards, all investments in our collective future, which by the way is when the bill will come due.  Moreover, our nation would have had the tangible benefits of these infrastructure investments and the future generations who are paying for it would have been benefiting from it.

What does this all mean? However, the criteria for government spending under ARRA was “shovel ready” which eliminated many projects and focused the funds on projects that in some instances were little more than repaving a section of road.  We have saddled future generations with the cost of these investments, but we will have left no tangible evidence of those expenditures for them to benefit from and enjoy.  Moreover, the tax relief came in the form of hiring credits as well as actual tax cuts, but their impact has been negligible.  The fundamental flaw of the current ARRA is that it tried to appeal to a broad political spectrum but failed to focus on its primary mission of moving the economy forward.  I would argue that unless the next ARRA is tightly focused on improving the nation’s infrastructure, then we should reject it and demand better.

Check out two past blog posts on the ARRA:

“Economic Stimulus Plan + Towson University” (Bobbie O’Connell)

“The American Recovery and Reinvestment Act analyzed by TU Experts” (Thomas Rumeau)