With unemployment persistently high, we will be hearing more next month about much needed additional stimulus.
So it is worth trying to clear up persistent myths regarding the last stimulus.
A variety of critics of the stimulus bill passed by Congress and signed by the President early this year charge that, because unemployment remains persistently high, the stimulus did not work and that the states are squandering stimulus money to close budget deficits rather than spending it on infrastructure.
The Center on Budget and Policy Priorities has an excellent article debunking these myths. Here are some excerpts:
Here are key points to keep in mind about the recovery law:
1: Recent increases in unemployment do not mean the law is not working.
No mainstream economist believed the law would immediately revive the economy and cause unemployment to begin falling. […] The Congressional Budget Office (CBO) concluded last month that “fiscal stimulus under the American Recovery and Reinvestment Act will significantly boost economic activity above what it would have been.” [1] Specifically, CBO “estimates that real GDP will be 1.4 percent to 3.8 percent higher in the fourth quarter of 2009 than it would have been without the stimulus” and “1.1 percent to 3.4 percent higher in the fourth quarter of 2010.” [2]
2. The Administration and Congress expected the stimulus money to be spent gradually over the next two to three years, and what’s been spent to date is stimulating the economy and helping millions of Americans.
The Council of Economic Advisers estimates, based on ARRA spending through the end of August, that “between one-fifth and one-quarter of the total $787 billion included in the Act will have been spent by the end of the 2009 fiscal year. This is approximately what was projected by the Congressional Budget Office (CBO) when the Act was passed.” [..]
3. The nation faces a very serious long-term budget problem, but the recovery law will exacerbate that problem only a very small amount.
Although the recovery law significantly increases short-run deficits, the fiscal effects of the bill over the long run are tiny. In January, the Center on Budget and Policy Priorities calculated that the recovery law would add just 3 percent to the budget shortfall through 2050. [13] That’s because the tax cuts and new spending in the law are temporary. The main driver of the nation’s long-term budget shortfall is ongoing factors, the most notable of which is steadily rising health care costs.
As noted above, CBO has projected that, by the end of next year, 2.5 million more people will have jobs than would have been the case if the recovery law had not been enacted. In addition, millions of others will benefit from the higher incomes produced in an economy that is less weak than it otherwise would have been. The economy clearly needed the boost in demand that the new spending and tax cuts generate. Failing to provide this boost due to fear of very slightly increasing the long-term budget problem would have been foolish.
4: The law was specifically designed to help states close their budget shortfalls.
State revenues have fallen sharply due to the recession. As a result, states face a combined $350 billion in projected budget gaps over the next two years. Because states also face legal requirements to balance their budgets, they must enact program cuts and tax increases to close their budget gaps. Such measures, however, reduce demand for goods and services, making a weak economy even weaker. Without federal funds, states would have to take even more dramatic measures that, by reducing demand, would cost jobs and make the recession even more severe. […]
5: States are properly using stimulus funds for short-term projects.
In the recovery law, Congress required that states put their additional federal funds to work as quickly as possible, which in many cases means investing in existing projects and programs rather than mounting major new initiatives. That helps to achieve the goals of both stimulating demand for goods and services and saving or creating as many jobs as possible, as quickly as possible. […]
The criticisms of the stimulus are driven by politics not facts.
