The American Recovery and Reinvestment Act of 2009

Matthew Gerak

Kim Christensen

Economics

3/12/14

The reasons for the 2008 financial crisis are varied and there exist many differing

viewpoints and opinions. It is generally agreed upon that risky government policies, loose

banking regulations and the failure of various financial institutions are the main causes of the

Great Recession. In presenting this explanation, several specific topics will be covered that

many academics agree are important in explaining the crisis. These topics include: the

macroeconomic policies that relate to the subprime crisis, the subprime crisis itself, the failure

of large banks to mitigate risk, the failure of financial ratings agencies, the fall of real GDP in the

American economy, and the credit and debt crisis.

The stage for the 2007-2008 Financial Crisis was set much earlier on in the late 1990s

and early 2000s. The government made many important policy decisions at this point that

allowed for chances of increased risk in the financial system. Peter J. Wallison, a former general

counsel of the U.S. Treasury and now a fellow at the American Enterprise Institute (AEI) notes

that, “Starting in the late 1990s, the government, as a social policy to boost homeownership,

required Fannie Mae and Freddie Mac to acquire increasing numbers of “affordable” housing

loans.”1An affordable housing loan is made to people who would normally not be in good

enough financial standing to secure a regular mortgage. Another key policy decision of congress

under the guidance of economists and policy advisors such as former Fed Chairman Alan

Greenspan, former Treasury Secretary Robert Rubin, and former Assistant Treasury Lawrence

Summers to allow the massive derivatives market to continue unregulated. There was a highly

publicized battle between the head of the Commodity Futures Trading Commission Brooksley

Born, who pushed for regulation of the derivatives market, and the policy advisors who

1 Rahn, Richard W. "What Caused the Financial Crisis." Cato Institute. N.p., n.d. Web. 12 Mar. 2014.

eventually quieted Brooksley Born’s opinion and convinced congress to let derivatives continue

unregulated. 2Key derivative products in the housing bubble, as will later be expanded on, were

collateralized debt obligations, which include mortgage-backed securities, and credit default

swaps. CDOs are futures product that investors buy from, for the most part, investment banks

where the value of the security is derived from the future cash flows of a fixed income stream

such as that of a mortgage (MBS) for example, or a car loan. These fixed income products are

packaged together and sold to investors. These two policy decisions by the government

brought in a period of an extraordinary rise in housing prices and excessive leverage by financial

institutions. 3The fact that so many houses were being purchased drove the prices of houses up

132 percent starting from the first quarter of 1997 to the top of the housing bubble in the

second quarter of 2006. 4

The policy of subprime lending coupled with other factors such as low mortgage interest

rates, low short term interest rates, and irrational exuberance led to the record high housing

prices in the bubble. Low mortgage interest rates were caused by foreign investors investing in

mortgage-backed securities through the government-sponsored enterprises Fannie Mae and

Freddie Mac. At the time, mortgage-backed securities were thought to be very low risk. This

was a general sentiment that was propagated by the historical low risk of mortgage default,

ratings agencies such as Moody’s, Standard & Poor and Fitch, and the understanding that these

GSEs were government-backed and U.S. banks were regarded as “Too Big to Fail”. Many

2 Carney, John. "The Warning: Brooksley Born's Battle With Alan Greenspan, Robert Rubin And Larry Summers." Business Insider. Business Insider, Inc, 21 Oct. 2009. Web. 12 Mar. 2014.3 "The Leverage Ratio." World Bank. N.p., n.d. Web. 11 Mar. 2014.4 Holt, Jeff. "A Summary of the Primary Causes of the Housing Bubble." The Journal of Buisness Inquiry. N.p., n.d. Web. 11 Mar. 2014.

investors thought their investments were safe. This influx of foreign savings caused mortgage

interest rates in the U.S. to trend lower than 6 percent, which was lower than anyone had seen

in years. Investors desired these low rates and understandably purchased houses. The short-

term interest rates were completely caused by the Fed. The U.S. had been in a recession after

the bursting of the dot-com bubble in 2001. The Fed pushed the federal funds rate lower in

order to stimulate growth and bring the U.S. out of recession. The low rates increased the use

of adjustable-rate mortgages which allowed homes to be available for more buyers and also

encouraged investors to increase leverage by borrowing at lower short-term rates to increase

future returns. A third reason for the housing bubble is based on the theory of irrational

exuberance. This was first proposed by Richard Schiller, an academic economist who serves at

Yale’s School of Economics and the National Bureau of Economic Research. In his words,

irrational exuberance is “a heightened state of speculative fervor. 5This is present in most

bubbles. Investor sentiment and investor psychology gets involved and can cause people to

make assumptions and take on risk that they normally would not. This affected all facets of the

housing market during the bubble. Regular people that would not normally be able to afford a

house became convinced that they could invest by subprime lenders and the government

encouraging them. Subprime lenders, as the regulation of the mortgage market by the

government was decreased, started to push bad mortgages on unsuspecting buyers because of

the insane profits they were making. These Subprime lenders were not focused on the large

scale effects that their actions were going to cause in the economy. Some of this was predatory

lending as in the case of Countrywide, but most of it was probably due to the culture of the

5 Shiller, Robert J. Irrational Exuberance. Princeton, NJ: Princeton UP, 2000. Print.

housing bubble.6 Investment bankers then realized that they could make profits off of the

housing bubble by packaging the mortgages into mortgage-backed securities and collateralized

debt obligations that were traded on the open market. The last extension under irrational

exuberance was the insurance companies, such as AIG, who were profiting by insuring these

debt obligations through credit default swaps. A credit default swap is “a swap designed to

transfer the credit exposure of fixed income products between parties.” 6 In this case, the

investment banks insulated their risk of the MBSs and CDOs by swapping the liability of a

defaulted loan to the insurance companies. This chain of activities that transferred risk from the

housing market to the financial institutions and insurance companies was creating record

profits in the financial industry. It is no wonder that investors, lenders, bankers, credit rating

agencies, and insurance companies were all participating in these risky endeavors. The

government was affected by irrational exuberance in their many policy decisions that lessened

the bank deposit ratios and deregulated to some extent the housing and financial industry. Jeff

Holt explains this phenomenon and its relation the housing bubble perfectly:

This almost universal assumption of rising home prices led the participants who contributed to the housing bubble to make the decisions that caused the bubble. Government regulators felt no need to try to control rising home prices, which they did not recognize as a bubble. Mortgage lenders continued to make increasing numbers of subprime mortgages and adjustable rate mortgages. These mortgages would continue to have low default rates if home prices kept rising. Investment Bankers continued to issue highly leveraged mortgage-backed securities. These securities would continue to perform well if home prices kept rising. Credit rating agencies continued to give AAA ratings to securities backed by subprime, adjustable rate mortgages. These ratings, again, would prove to be accurate if home prices kept rising. Foreign investors continued to pour billions of dollars into highly rated mortgage-backed securities. These securities also would prove to be deserving of their high ratings if home prices kept rising. Insurance companies continued to sell credit default swaps (a type of insurance

6 "Attorney General Brown Announces Landmark $8.68 Billion Settlement with Countrywide." Home. N.p., n.d. Web. 12 Mar. 2014.

contract) to investors in mortgage-back securities. The insurance companies would face little liability on these contracts if home prices kept rising. Home buyers continued to purchase homes (often for speculative purposes) even though the monthly payments would eventually prove unmanageable. They assumed that they would be able to “flip” the home for a profit or refinance the loan when the adjustable rate increased. This too would work if home prices kept rising. 1

Basically, the economy was efficient and all the people responsible for the housing bubble were

gaining large profits under the assumption that home prices would keep rising. This was a

reasonable assumption considering that home prices had not fallen in one year since the Great

Depression.1 Everybody in the process was happy, that is, until the housing market crashed.

Home prices peaked in the second quarter of 2006. After that, it became a downward spiral

that put homeowners on the street and mortgage lenders out of business. The housing market

became saturated. Due to foreclosures and the amount of new homes built, the supply of

homes available was greater than the quantity of homes demanded and this caused prices to

fall. In a normal situation, this would probably hurt the economy due to the halt of

construction, which is an economic indicator that affects GDP and the loss of wealth by

homeowners. 4 The bursting of this bubble, however, had many unpredicted, yet important

effects within the economy. The relation between the previously mentioned stakeholders in the

housing bubble created a doomed situation that kept gaining increasing negative momentum as

the effects of the housing market crash continued to effect investment. For the most part, this

was due to leverage. By the time the subprime crisis hit the investment banks around the time

of the sale of Bear Stearns and bankruptcy of Lehman Brothers near the middle of 2008, the

banks were helpless. Their heavy investments into mortgaged back securities were worthless

after the massive amounts of foreclosures became massive losses for banks. The fact that some

companies were leveraged 30 or 40 to 1 increased the losses to the point where many banks,

insurance companies, and lenders could not recover and had to either be bailed out, bought up,

or declare bankruptcy. 3 They spent money that they did not have and when asset values

dropped even a small amount, the institutions were declared to be in a lot of trouble. This

network of banks and other financial institutions discussed has come to be known as the

shadow banking system. It is referring to many investments that were financed alternatively

with short term loans called repurchase agreements that primarily used mortgage-backed

securities as collateral instead of a traditional bank loan. This system was financed by the

network of institutions mentioned above, but mostly by the highly leveraged investment banks.

When the mortgage-backed securities went bad, they could not be used to finance investment

and banks raced to dump these toxic assets off their balance sheet in fire sales in exchange for

liquidity. Fire sales usually cause an extreme decrease in asset prices and this further weakened

firm balance sheets due to the losses they incurred. This is a big reason for the stock market

crash in 2008. Investor uncertainty and irrational exuberance also played a role. Stock prices

declined by over 50 percent from October 2007 to March 2009. Banks become unwilling to lend

to each other, fearful of looming bank failure and insolvency, especially around the time of the

Lehman Brothers failure on September 15, 2008. The days following was the culmination of an

extremely uncertain period in the market starting from around the time Bear Stearns had been

sold to J.P. Morgan in March 2008 for $2 per share, a mere 5 percent of its value a year earlier.

Merrill Lynch, Fannie Mae, Freddie Mac, and AIG were big names among others that either

were either sold off or received government relief around this time period. These were some of

the world’s largest financial institutions and they were failing. Liquidity was desired in this time

period, but it was hard to acquire. Credit froze up as banks rushed to deleverage. The ascending

interest rates and tightened credit standards manifested itself in lowered consumption and

investment in the economy. Late 2008 is the time period when GDP took a big hit as there was

very little investment happening in the wake of the Lehman bankruptcy. Real GDP in the U.S.

fell by -1.3% in the third quarter of 2008, -5.4% percent in the fourth quarter of 2008, and -6.4%

in the first quarter of 2009. The government was alarmed and it decided to take major steps to

relieve the credit crisis so the economy did not completely stop. At one point General Electric, a

financially healthy company that was not involved with the housing crisis, was having trouble

financing its day-to-day operations because it could not get credit. This gives one an idea of the

scope of this credit crisis.

The government had never experienced a recession of this magnitude before. They knew that

if action was not taken, the American economy could collapse. Key decision makers at this time

period were President George W. Bush, Treasury Secretary Henry Paulson, Fed Chairman Ben

Bernanke, and President of the New York Fed Timothy Geithner. Paulson took action after the

fall of Lehman Brothers, pushing the Troubled Asset Relief Program or TARP through congress.

TARP was implemented in October of 2008 as part of the larger Economic Recovery Act and

forced $700 billion into troubled financial institution, either as capital injections or as a way to

buy subprime mortgage assets. The government also used billions of dollars to bail out the

major financial institutions AIG, Bear Stearns, Fannie Mae, and Freddie Mac. These actions were

highly criticized, but they did successfully stop imminent economic collapse. These were

immediate measures. Afterwards, there were greater and more permanent steps taken to bring

the economy out of recession, such as the Economic Recovery Act, FDIC measures, and fiscal

stimulus.

After the worst effects of the crisis hit, everyone wanted to know what had happened.

Many blamed greedy investment bankers or predatory lenders. One factor that many

academics believe played a big role is the more general macroeconomic concept of moral

hazard. Moral hazard encompasses the use of leverage to finance risky investments in the belief

that the creditors will be bailed out by the government. Starting in the Reagan Administration

in the 1980s, financial markets have become increasingly deregulated in one way or another.

The monetary policy leaders at the Fed from back then continuing through to more recent Fed

Chairmen Alan Greenspan and Ben Bernanke tend to influence regulatory and monetary policy

in a way that increases profitability and causes asset bubbles.7 An article, “Gambling with Other

People’s Money” exposes an example of risk taking that was not commonly seen throughout

previous history:

If you think that Uncle Sam will cover your friend’s debts . . . You will worry less and pay less attention to the risk-taking behavior of your gambler friend. You will not take steps to restrain reckless risk taking. You will keep making loans even as his bets get riskier. You will require a relatively low rate of interest for your loans. You will continue to lend even as your gambler friend becomes more leveraged. 8

The government has had a reputation for directly bailing out or orchestrating a free market

solution for failing banks such as Continental Illinois, countries such as Mexico, and other

7 Mishkin, Frederic S. The Economics of Money, Banking, and Financial Markets. Reading, MA: Addison-Wesley, 1998. Print.8 Roberts, Russell. "Mercatus Center." Gambling with Other People's Money. N.p., n.d. Web. 12 Mar. 2014.

financial institutions such as Long Term Capital Management. 8 This has obviously become a

much bigger problem now. Creditors have smartened up and realized, like in the above quote,

that “Uncle Sam” will make sure they receive 100 cents on the dollar for basically every loss

they could have possibly incurred. A staggering statistic; “Between 1979 and 1989, 1,100

commercial banks failed. Out of all of their deposits, 99.7 percent, insured or uninsured, were

reimbursed by policy decisions.” 8That means that there is no risk when larger organizations

invest large sums of money. Taking the risk out of markets will systemically cause investors to

make bad investments, while they receive the low fed funds rate instead of receiving a higher

interest rate that should be given on a riskier investment. It essentially causes institutions to

“gamble with other people’s money” as they become careless with their investments. The

current system is one that preaches a privatization of gains and socialization of losses. This

statement means that when companies, or more specifically investment banks, make a good

investment, the profit is all theirs; but when these same banks completely destroy themselves

financially, the government and taxpayers must pay. This can be plainly seen through the

historical examples stated above or the more recent 2008 examples of the nationalization of

the government-sponsored enterprises – Fannie Mae and Freddie Mac or the bailout of Bear

Stearns, AIG, and many other financial institutions. The problem of moral hazard is mostly

government created. It does not make sense to say that people and bankers have become

greedier over time. It seems that they were allowed and even encouraged by the government

and others around them to leverage themselves up and continue to make increasingly risky

investments. This was a process that took years.

The Stimulus Package

In a direct effort to counter the Great Recession, President Barack Obama signed the

American Recovery and Reinvestment Act of 2009 into law on February 17, 2009. The bill called

for a stimulus package of 787 billion dollars to instigate activity within our economy. The goals

were to create jobs and save existing ones, jumpstart current economic activity and long-term

growth, and provide accountability and reports for where all the money was going.9 The money

was going to be used for direct tax cuts for millions of working families and businesses, funding

for entitlement programs to directly benefit the public, and funding for legal contracts, grants,

and loans. 2

An important aspect of the stimulus package was the evident focus on keeping

transparency in the use of the allocations. This would then decrease corruption and keep the

public informed and aware concerning exactly how the government was using the money. The

government set up a board, The Recovery Board, with one trustee and eleven general

inspectors to enforce the accountability of the money. Their job was to make sure the money

was being distributed in a fair manner, being used for authorized purposes to prevent fraud,

and that it was used in the most efficient manner to cut out waste of allocations and time. The

board needed to make sure that the money was being used with respect to legal laws and

administrative constraints. The board was open to receiving public opinions on the use of the

stimulus package:

9 "Recovery.gov." The Recovery Website. N.p., n.d. Web. 11 Mar. 2014.

From February 2009 to August 31, 2013, the Inspectors General have reported 4,388 complaints of wrongdoing associated with ARRA funds to the Recovery Board.

· 1,625 have triggered open investigations

· 1,097 cases were closed without action

In that time, the Inspectors General have also completed 2,975 reviews of activity involving ARRA funds, many of which have resulted in recommendations to the agencies for improving the management of these funds. 9

The board accepted public opinions and viewpoints about how the money was being used. The

fact that the government was making sure that they were open to public opinion demonstrates

transparency in the whole act. Reports were released to the public to inform them of the

specific details of where the money was being used:

Entities receiving ARRA awards (”recipients”) are required to report quarterly on the awards. The reports include data on award amounts, funds received and spent, descriptions of the projects, jobs funded in the quarter, and the completion status of the projects. All the recipient funding data is cumulative; however, the job numbers are the one quarter only. Recipient data is updated on the 30th of January, April, July, and October. 9

These reports directly supported the idea of transparency in the allocations. Every last dollar

was reported and nothing was held back from the public. Our ability to see where the money

was going gives us direct knowledge of the Act and increases the value of the public opinion. A

lot of legislation doesn’t have a board backing it with a main goal of providing the public with

the specificities and details of that piece of legislation. This may cause uncertainty in public

opinion and lead to a lack of trust in the government.

Fiscal Policy

Fiscal policy was used via the American Recovery Act, along with monetary policy

carried out by the Fed. Fiscal policy mainly focuses around altering taxation and government

spending to either raise or decrease economic activity depending on the state of the economy

at the time. If the economy was in a recession, like it was in 2009, the government would give

tax cuts and increase spending to stimulate the economy. If the economy is typically stable or

booming, the government could keep taxes the same or raise them and decrease their

expenditure and use it to pay off national debts. The economy would not be in need of a

“jumpstart”. There are multiple effects in the economy caused by altering taxes and

government expenditure:

· A change in aggregate demand

· An ability to alter output depending on AD

· Allocations in the private and public sectors

· Distribution of income 10

Automatic stabilizers are a form of fiscal policy that take effect depending on the stability of the

economy. For example, unemployment benefits provide struggling citizens with extra money to

use to help stimulate our economy. Also, taxes (income, sales, corporate) generally fall during a

recession due to the progressive nature of our economy’s income tax system. Basically, there is

a positive correlation between incomes and tax rates for households and businesses. As

incomes rise, tax rates also rise and as incomes fall, tax rates tend to fall. Automatic stabilizers

10 Fiscal Policy." : The Concise Encyclopedia of Economics. N.p., n.d. Web. 12 Mar. 2014.

kick in on a cyclical schedule. These programs and changes in tax rates come into effect

depending on the state of the economy. They do not need to be directly implemented through

legislation at that specific time. This is a type of fiscal policy that naturally exists due to the

varying stability in the economy at any given time.

Monetary policy deals with the amount of money being supplied and the rate at which it

is being supplied. The Federal Reserve is our central banking system and it was created in 1913

due to instability caused by the banking system at that time, specifically the banking panic of

1907.2 The Federal Reserve is the medium in which monetary policy is prescribed. The Federal

Reserve’s three main goals are to:

· Maximize employment

· Stabilize prices

· Induce moderate long-term interest rates 11

The Fed is able to reach the previous three goals using three tools, the discount rate, open-

market operations, and reserve requirements:

The Fed cannot directly control inflation, output, or employment, nor can it set long-term interest rates. It affects these vital economic variables indirectly, mainly through its control over the federal funds rate. All depository institutions, including banks, credit unions, and thrifts, are required to hold minimum reserve balances in accounts at Federal Reserve Banks. The federal funds rate is the interest these institutions charge one another for overnight loans of reserves, balances that are sometimes needed to meet minimum requirements. Fed monetary policy actions alter the supply of reserves in the banking system. When more reserves are available in the banking system, the federal funds rate goes lower, reflecting an excess of supply over demand. In this way,

11 "Federal Reserve Education." Federal Reserve Education. N.p., n.d. Web. 11 Mar. 2014.

the Fed is able to keep the federal funds rate close to its target. Changes in the federal funds rate are intended to cause changes in other short-term interest rates. Indirectly, the federal funds rate also affects long-term interest rates, the total amount of money and credit in the economy, and ultimately, employment, output, and inflation.11

“Tight” or “contractionary” monetary policy is used to raise the federal funds rate in order to

keep inflation stabilized. “Expansionary” or “accommodative” monetary policy is used to lower

the federal funds rate in order to combat a recession.

The Cato Institute’s Viewpoint

The Cato Institute is a public policy research organization that was founded in

1977.12The name originated from a series of letters called Cato’s letters:

A series of essays published in 18th- century England that presented a vision of society free from excessive government power. Those essays inspired the architects of the American Revolution. And the simple, timeless principles of that revolution — individual liberty, limited government, and free markets – turn out to be even more powerful in today’s world of global markets and unprecedented access to information than Jefferson or Madison could have imagined. Social and economic freedom is not just the best policy for a free people; it is the indispensable framework for the future.12

The principles of that revolution -individual liberty, limited government, and free markets- are

central to the themes of Cato Institute’s research. Cato’s researchers do a wide range of studies

surrounding policy issues. “The mission of the Cato Institute is to originate, disseminate, and

increase understanding of public policies based on the principles of individual liberty, limited

government, free markets, and peace. Our vision is to create free, open, and civil societies

founded on libertarian principles.”12 They try to focus on exposing the fact that they are an

independent think-tank that does not take influence from any specific political parties,

12 "About Cato." Cato Institute. N.p., n.d. Web. 12 Mar. 2014.

originations, or outside influences. They want to convey information to the public with a clear

conscience and do not let anything sway the truth of this information. The Cato Institute is

entirely privately funded. It receives eighty percent of its funding through tax deductible

contributions from individuals and the other twenty percent from foundations, corporations,

and profits from sales of its own books and publications. (Cato Organization footnote)

The Cato Institute was openly critical of the American Recovery and Reinvestment Act of

2009. Their stance towards the stimulus package was consistently evident throughout their

publications in the years following the ARRA. Throughout multiple articles, the Cato Institute

has criticized the ARRA and has showed that they are against the idea of increasing government

spending. The Obama administration turned to a lot of different economists to figure out the

specific details of the ARRA. The administration needed to take a wide range of opinions into

consideration and figure out the best possible prescription they could take to try and aid the

struggling economy. The Cato Institute published an article in The New York Times saying that

government spending was not going to work and this article was signed by over 200

economists, including three Nobel Prize winners.13 According to the Cato Institute, this letter

should have given the Obama administration a sense of the unanimity among credible

academic economists. Instead, they looked past the message this article tried to send and went

with a large stimulus package. This stimulus package was based on a “multiequation

macroeconomic forecasting model, one in-consistent with the best practice of modern

macroeconomics.”5The Obama administration completely disregarded the works of Robert

Lucas, who is a Noble Prize winner in Economic Sciences and an economics professor at the

13 Young, Andrew T. "Why in the World Are We All Keynesian Again?" Cato Insitute. N.p., n.d. Web. 11 Mar. 2014.

University of Chicago. 14 Robert Lucas’s work devalued the use of macroeconomic models for

policy prescription.

In, “Why in the World Are We All Keynesians Again? The Flimsy Case for Stimulus

Spending” Andrew Young states that there is no consensus that fiscal spending is at all

effective.5 This article focuses on the fiscal multiplier. The fiscal multiplier reveals how much

private spending will result from a specific economic stimulus. If the multiplier is above one,

then one dollar in government stimulus will result in more than one dollar in private spending.

If the multiplier is below one, then one dollar in government stimulus will result in less than one

dollar in private spending. The marginal propensity to expend is the amount of money that will

be spent instead of saved from one more dollar of income. This can be plugged into the

following equation to figure out how much resulting stimulus will come from government aid

(the fiscal multiplier): 

The Marginal Propensity to Expend is typically high: “Most U.S. citizens spend more than

80 percent of the income that they receive. U.S. personal savings rates are actually quite low,

so the marginal propensity to expend is likely to be quite high.” 13 In reality, if the Marginal

propensity to expend is .8, then the resulting fiscal multiplier should be five. Typically in the

U.S., the fiscal multiplier doesn’t exceed two. 13 This would in turn mean that the Marginal

Propensity to Expend would be .5 and that would mean that there were large faults in the

spending stream. In conclusion, there must be other factors that create decreases in levels of 14 "University of Chicago: Department of Economics." University of Chicago Department of Economics. N.p., n.d. Web. 12 Mar. 2014.

investments and personal expenditures, and the Keynesian Model for the fiscal multiplier has

other variables that need to be added to this simple equation.13

The Ricardian Equivalence can possibly be used as one explanation for why the fiscal

multiplier is so low. It was put forth by Robert Barro in the 1970’s. 13 It revolves around the

thought that people realize that we are going to eventually have to pay out of our own pockets

in tax dollars for any kind of raise in government spending. This government spending is

originally used to increase the aggregate demand through the multiplier. The only problem,

according to the Ricardian Equivalence, is that rational tax payers take this growing government

debt into consideration. These tax payers start saving the money from their increased income

and in the end, the “responsibility” for this government stimulus ends up canceling out the

original intended effects of it. Robert Barro didn’t think the fiscal multiplier was actually at zero

following the ARRA, but his most appropriate idea had placed it at around .4 to .6.13This means

that for every dollar the government was spending, the result was only a forty to sixty cent

raise in aggregate demand. Basically, this means that the stimulus package was completely

counteractive. The government was spending money that was resulting with an even worse

outcome.

“Crowding out” is a term that can also be used to define another problem with

government stimulus. This term goes hand in hand with the Ricardian Equivalence but deals

with interest rates instead of taxation:

When the federal government pursues spending in excess of its current tax revenues, it has to turn to financial markets and compete with private borrowers for funds. The increased demand for funds will, all else equal, put upward pressure on interest rates,

making borrowing more costly. By raising the cost to private borrowers—both individuals and businesses—government deficit spending tends to crowd out private investment expenditures and consumption expenditures that are sensitive to interest rates.13

The government is raising the interest rate by borrowing money and this leads to a direct

decrease in private investment. Private saving carries an inverse relationship to private

investment. The return on savings will be much higher, so people tend to put their money in

the bank. This also leads to a decrease in private expenditure. 13

The next problem that I am going to focus on revolves around specific “slack” within

different regions of the country. The “Great Recession” was an evident time of economic

struggling throughout the country yet some areas were slacking worse than others. The

standard textbook model of the Keynesian function relays that fiscal stimulation is perceived as

a shift of aggregate demand along the short-run aggregate supply (SRAS)

(Curve:http://www.harpercollege.edu/mhealy/eco212i/lectures/ch12-18.htm) Site

The short-run aggregate supply curve relays a firm’s willingness to produce goods and services

at a specific price. 13As the economy reaches full employment, the slope of the curve increases

and approaches vertical. 13 This means that when the economy is operating at full employment,

an increase in aggregate demand will result in inflation instead of higher production. When the

slope of the curve is much flatter, this means that there is slack in terms of production and

labor. The following assumption is that an increase in aggregate demand will work efficiently in

the sense that it will raise the levels of production. If we take the previous Keynesian model

into consideration, it should have given considerable reasoning as to where the allocations of

the ARRA should have gone. The recession didn’t affect all the regions of our country equally.

Some areas were struggling worse than others. The allocations should have gone to areas with

the lowest levels of production based of the principle of “slack”. The allocations also failed to

go out to areas with high levels of MPS. This means that the money was not being put into

places where it had the highest chance of being spent. One of the major indicators of which

states landed higher allocations depended on their previous grants from the government.13This

means that areas that typically received large amounts of federal funds before the ARRA

tended to receive large allocations from the ARRA. The conclusion that the Cato Institute draws

from the three previous facets of reasoning for funding is that the money did not go out to the

correct areas. The truth of the matter is that the allocations from the ARRA may have been

dispersed based a little too heavily on political reasons when they should have been based off

of the concrete laws or reasoning that I focused on previously.

One of the main arguments in favor of the ARRA is that the stimulus helped the economy

from going farther down into a worse recession and possibly heading into a depression. Young’s

article states, “Fiscal stimulus may get us a period of weak growth and employment in exchange

for one where we plunge into a deep depression.”13 Basically, the ARRA kept the economy at a

standstill during a period of such blunt downfall. The main problem with this argument may

simply be put as one of timing, statistics, and fluctuating opinions. The stimulus package

resulted directly from the need to fix the economy; it came as a result of certain

macroeconomic variables and this would be considered as an exogenous event. 13 The fact that

it came as a result of these variables makes it hard to distinguish its resulting effects on these

variables. The combination of time and statistics also makes it very difficult to tell what the

effects of the ARRA are. Specifically, these macroeconomic variables change course over time

for multiple ambiguous reasons and collecting a specific set of data cannot surely pinpoint

these reasons. Yes, there are major economic indicators that can give us very valuable

information about the ups and downs throughout the economy, but these are a given.

Economists often need to look deep into highly precise cause and effects, and this can be

extremely difficult when adding the factors of time and statistics. Different economic opinions,

outlooks, and political backgrounds often add to the difficulty of pinpointing concrete reasoning

for certain permutations in macroeconomic variables. As I stated in the previous paragraph,

political power may have had a heavy effect on the way government officials interpreted the

economy before the ARRA and even after it. For example, economist A can look at a fall in GDP

and give certain reasoning while the economist sitting across the table will look at this same fall

in GDP and give a completely different reason for it.

One major problem with statistical information is what economists like to call shocks.

“Economists refer to such changes as shocks since they arise from outside of the specific system

of variables that one wants to analyze. Tracing out the effects of such shocks to government

spending is the ideal way to estimate the government spending multiplier. But identifying such

shocks is easier said than done.” 13 Countercyclical policy is put into effect when economic

stimulus is used to stimulate an economy that is heading in the opposite direction.

Countercyclical policy has an inverse relationship the natural tendency of the current economic

cycle. Countercyclical policy and shocks both have an exogenous relationship to the business

cycle. This previous statement sums up why it is so hard to efficiently study the economy and

find “clean” macroeconomic variables that unmistakably allow us to prescribe the “problem” in

our economy.

The Economic Policy Institute’s Viewpoint

The Economic Policy Institute is a non-partisan, non-profit think tank that was created in

1986 to extend economic policy to include the needs of low and middle income workers. 15

“EPI believes every working person deserves a good job with fair pay, affordable health care, and retirement security.  To achieve this goal, EPI conducts research and analysis on the economic status of working America. EPI proposes public policies that protect and improve the economic conditions of low- and middle-income workers and assesses policies with respect to how they affect those workers.”

The EPI is an economic think-tank with a specific focus on the lower and middle working

class. The Economic Policy is generally regarded as the first institute to specifically conduct

research pertaining to those classes. They have done a lot of research surrounding the great

recession and the vast effects it has had on these classes. The EPI is highly approved of and

credited by a large number of economic policy makers and academic economists. Their works

are published in prestigious academic journals and used throughout national media and state

research organizations. Their works reflect original academic thoughts, ideas, and arguments

that have been directly supported through research done by their renowned staff.

“Our team includes the best minds in economics and other disciplines. Our broad network of researchers and scholars has made EPI the authoritative source on the economic well-being of working Americans. EPI’s staff includes nine Ph.D.-level

15 Bivens, Josh. "Public Investment: The Next New Thing for Growth." Economic Policy Institute. N.p., n.d. Web. 11 Mar. 2014.

economists, and a number of other experts with advanced degrees in Sociology, Public Policy, and Law. Our staff also includes ten policy analysts and research assistants, and a full communications and outreach staff.” 15

This staff is given immediate credit due specifically to their scholarly backgrounds. The EPI

focuses on giving generally liberal economic insight into various different sectors ranging

throughout microeconomic and macroeconomic variables. They look into education, taxes,

healthcare, international trade, globalization, immigration, jobs, wages, regulation, retirement,

to name a few. They start off by analyzing the lower and middle classes and then work on

formulating policy prescriptions based on this research.15

The EPI has had mixed reviews about the ARRA but they stand in support of the major

theme behind it: public investment. The ARRA was interpreted to have positive effects, as

opposed to the Cato Institute’s viewpoints, yet the major issue they have with ARRA is that it

was too small in size and it was spanned too short of a period of time. The EPI does feel as if the

ARRA had done good things when it was being carried out. They support the thought that

public spending is going to needed to be used continuously to fully carry the economy out of

the recession and back to a fully level state.

The EPI examines capital to be a nation’s greatest representation of wealth: “America’s

stock of human and physical capital, public and private, can be thought of as the most tangible

representation of the nation’s wealth.”715They then draw the following assumption that public

investment carries immense importance in the sense that it enhances specific sectors in our

economy such as education and infrastructure that eventually lead to a higher expectations,

productivity, and living standards. The conclusion is that public investment has a positive

correlation with the ongoing state of our nation’s economy. Private investment is also

important in these sectors yet the major difference is that public investment contributes to a

wider range of beneficiaries than private investment usually does. 7The EPI strongly reinforces

the thought that public investment has a strong correlation to the jobs markets and that it also

contributes to long-term productivity growth. They feel that this tradition of thought has faded

in the past couple decades due to a large increase in productivity growth that was attributed to

an increase in the private sector spending on information and communications technology (ICT)

equipment. 15 Basically, public knowledge has lost the vision that the EPI feels should be so

central to the focus of our policy prescription.

“As of March 2012 the unemployment rate stood at 8.2 percent and had been at or

above this level since February 2009. Further, the pace of economic growth dropped to just

above 1.7 percent for 2011, a rate far below the 3.0 percent GDP growth of 2010 and a pace

that is unlikely to put sustained downward pressure on unemployment rates.”15 The EPI views

this economic contraction to root from the same major problem that arose throughout the

Great Recession; the nation was simply not spending enough to keep employment up.

Automatic stabilizers and falling interest rates were not able to effect spending in the way they

were supposed to due to the resulting contraction in spending from the eight trillion dollar

housing bubble burst.15This goes to show that when the ARRA came into the picture, it gave a

somewhat appropriate long needed boost for spending: “The Recovery Act added roughly 3

million jobs at its peak and kept the unemployment rate about 1.5 percentage points below

where it otherwise would have peaked.”15 The only problem is that this had immediate positive

effects directly after it was enacted but what was going to happen after these effects winded

down. The result would be a “fiscal drag” in growth. This fiscal drag has come in and out of play

in the years following the ARRA due in result to fluctuating stimulations of the economy. For

example, “New stimulative measures passed by Congress at the end of 2010—a payroll tax cut,

extension of unemployment benefits, and more generous provisions for businesses to expense

investments for tax purposes—somewhat compensated for the drop off.”15 Spending would

result in macroeconomic stimulation to our economy without largely affecting other economic

activity. If this debt-financed spending could continue without large increases in the interest

rate, then private sector investment might actually be crowed out because studies show that a

large motivator for private investment is the current state of the economy. 15 Most

macroeconomic models and forecasts show that public investment in infrastructure is also

extremely crucial in the sense that it positively affects other public investment sectors due

simply to the fact that businesses and investors always look for areas with attractive

infrastructure.

Public Investment strongly affects the jobs market, yet it also has major effects on long-

term productivity growth. The EPI supports this claim through statistical information on our

economy over specific fluctuating periods in the past sixty years:

“Between 1947 and 1973—when growth in the real (inflation-adjusted) stock of public capital averaged 4.5 percent—productivity growth averaged more than 2.6 percent. But between 1973 and 1995, when growth in the real public capital stock fell nearly in half, to 2.3 percent, productivity growth slowed to just 1.6 percent.” 15

These statistics strongly support the connection between public capital and productivity

growth. As I stated before, in the second half of the 1990’s, the productivity growth rose back

to a similar rate that was occurring in the 1947-1973 period. 15 This was not related to public

investing but rather the information and communications technology equipment sectors. After

this increase in these sectors started to slow down, during the years leading up to the

recession, throughout the 2003-2007, productivity growth fell. The reaction from the EPI is that

the country needs to try to make the correct adjustments to try and keep the productivity

growth up. The economy could hope for a boost from new private investment sectors, like the

ones in the late 1990’s, yet this is highly unlikely. 15 The most reliable way, looking at strong

statistical representations, is to increase public investments.

It is looking as if the nation is going to heading into a period of complete opposition to

the whole purpose of the ARRA and this does not seem to sit well in the EPI’s eyes:

“Policy debates today are dominated by claims that the U.S. budget deficit needs to be substantially reduced. For example, the deal resolving the debate over raising the debt limit in August 2011 will result in substantial reductions in government spending beginning in 2013—a time when the unemployment rate still is forecast to be above 8 percent. Given that the U.S. economy is operating far below potential, and is likely to do so for years to come absent aggressive policy measures to boost it, such rapid fiscal contraction is extremely unwise.”15

These reductions in government spending will likely result in reductions in public investment.

The common viewpoint and economic justification for cutting the debt spending is seen as

illogical according to the EPI. The common viewpoint is that if an economy is stabilized, cutting

budget deficits should cause the interest rate to fall because the public and private sector are

no longer in competition for loanable funds.15This drop in the interest rate will then allow for an

increase in private investment and this is where the increase in productivity comes from. The

main problem with this outlook is that our country is not operating at full employment and

private investment is not being crowded out because the excess resources in our economy also

eliminate the competition between the public and private sector for loans. 15 The EPI defends

this argument against the common viewpoint by stating that the process of crowding out has

been absent due to the fact that interest rates have actually dropped while budget deficits have

increased since the beginning of the recession. 15 The conclusion is that budget deficits caused

by public investment are not bad for the economy specifically during a time of recession and

that public investment needs to be focused on more than private investment. The EPI feels as if

the economy is being misinterpreted in the sense that economists largely correlate economic

boosts with private sector decisions when the focus should really be on the public sector. This

thesis is largely supported by work done by Federal Reserve economist David Aschauer and

nationally renowned economist Alicia Munnel, who later became Undersecretary of Treasury.

Their work showed that the rate of return on public capital was much higher than that of

private capital. 15

Another smaller benefit of putting focus on the public sector is greater wealth equality.

There have been very credible papers, such as, “The Effects of Infrastructure Development on

Growth and Income Distribution”, by Cesar Calderon and Luis Serven, that show that countries

with higher public capital tend to have greater levels of income equality.15 This makes sense due

to the fact that public capital is generally spread among a wider range of people. Private capital

is mostly embedded in the wealthiest people in the country. Common economic statistics show

that the wealthiest people in our country compose most of the private investment sector. The

evident conclusion is that higher rates of income equality are always good for the economy.

One last focus of public investment is that its effects cannot always be easily converted

into measurable mathematical representation. For example, investments in cleaner air and

water may have positive effects on the economy but they these benefits for our economy do

not show up in cash incomes.15

The EPI strongly supports the idea that the ARRA was simply too small to fully pull our

economy out of the Great Recession and back into level economic standing. They feel that this

may be the result of the fact that the argument against fiscal stimulus was just starting to come

into play at the wrong time:

Ironically, as regards timing, the case against discretionary fiscal stabilizations seems to have won greatest agreement among policymakers and economists just as the argument was losing much of its force. Between 1947 and 1990, recessions were indeed quite short and recoveries tended to follow rapidly after business cycle troughs. However, beginning in 1981, it has taken progressively longer for recoveries to generate anything close to full resource utilization. Thus, the last three recessions – even those with a relatively mild depth (like in 2001) – only saw full recovery of employment years after the official recession ended.16

This quote shows that is has been taking longer and longer to carry our country out of

recession. The argument that is being proposed by the EPI points to the reasoning behind these

statistics. Something must be going on to cause this process to linger. The EPI would argue that

the reason behind this is the dwindling support in favor of increasing fiscal stimulus. These

recessions were usually fixed on average with greater expaniasory fiscal policy. The Great

recession had “sharply contractionary” fiscal policy compared to historical averages, with a

particular focus on state and local expenditures. 16 The comparison that stands out the most is

with the recession of the early 1980’s: “The output gap at the trough of the early 1980s 16 Bivens, Josh. "The Great Debate: How Academic Economists and Policymakers Wrongly Abandoned Fiscal Policy." Economic Policy Institute. N.p., n.d. Web. 11 Mar. 2014.

recession was actually larger than that at the trough of the Great Recession, yet two years

following that trough 80 percent of the output gap had been erased. In contrast, four years

after the trough of the Great Recession less than 20 percent of the output gap has been

erased.”16 Basically, put in a common analogy, the hole was deeper in the 1980’s, yet the

country climbed much farther out in much less time. Also, adding to the disturbing nature of

this comparison, monetary policy was much more influential on the economy at the time,

considering the federal funds rate could be lowered by up to ten percentage points.16 In the

past decade, the federal funds rate has not moved more than five percentage points down at

any time. 16In turn, if monetary policy was even more influential on our economy in that time

period than it is now, this can only mean that fiscal policy is needed now more than ever. This

is not the case: “Real government spending four years into recovery is approximately 15

percent below what it would be had it just it matched average government spending patterns in

prior recoveries” 16Fiscal stimulus should not be something new to our country. There have

been a lot of claims amongst economists that the spending in the ARRA was absurd and

unnecessary. The truth of the matter is that perception may have truly gotten the best of our

policy prescribers. This veil of thought, against fiscal policy, has formed and the EPI argues that

there is not significant statistical reasoning to support it. Instead, the country should try to

escape this problem the same way it has in the past. There is no point in straying away from the

solution that has proved successful multiple times in recent history.

Throughout this essay, I have proposed two different, yet very credible economic

viewpoints on the ARRA. The Economic Policy institute supports the purpose of ARRA and

thinks that it needed larger allocations that should spanned over a longer period of time. On

the other hand, the Cato Institute completely disagrees with the ARRA and feels as if its effects

on the economy were not nearly reflective of the eight hundred billion dollars used within the

package. I have given an overview on the central themes behind each viewpoint. I am now

going to use a couple different reports to expose the opposing viewpoint and then follow with

different reports to support my viewpoint. I agree with the EPI and feel that the ARRA gave the

economy a sufficient boost but it could have been larger to give our economy the full boost

needed to properly take us out of the Great Recession.

The first two sources are going to be used to directly pinpoint how the Obama

Administration predicts effects of the ARRA for a short period of time after it was enacted. The

shorter time periods allow for more precise correlations between causes and effects.

Throughout the whole span of the allocations of the ARRA, one could look at numerous changes

in variables and come up with multiple reasons for these changes. If this time period is cut

down in the length, the credibility of the reasoning may increase.

The Congressional Budget Office is a nonpartisan economic reporting center for our

government:

Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process. The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. All CBO employees are appointed solely on the basis of professional competence, without regard to political affiliation. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. All of CBO’s products apart from informal cost estimates for legislation being developed privately by Members

of Congress or their staffs are available to the Congress and the public on CBO’s website.”17

The CBO is similar to the economic think tanks I have talked about previously, yet there are

some outlining differences. The CBO does not provide policy prescriptions. The institutes I

talked about previously have specific viewpoints about how the government should react to our

economy. The CBO strictly gives mostly statistical and numerical reports on economic

indicators, variables, and policy prescriptions. They do not take any stances but they do focus

on explaining how they got their results.

The report, “Estimated Impact of the American Recovery and Reinvestment Act on

Employment and Economic Output from January 2010 Through March 2010”, specifically

focuses on this first quarter of 2010 but smaller reports like this one reveal larger, consistent

on-going trends within the effects of the ARRA. The CBO report relays the fact that changes in

employment and economic multipliers on outputs of expenditure and tax breaks cannot

properly be estimated using solely reports from the government’s recovery website so they

need to add in certain aspects that I will expand on shortly. The report focuses on two specific

ways to estimate the effects of the ARRA: using reported recipient reports (often faulty) and

economic models and historical data. The second way gives a more accurate and logical

depiction of the first way. In reality, one can go to the Recovery website and find the specific

statistics reported for the ARRA. The only problem is that these statistics have external factors

that also affect them. The ARRA is not the only working form of policy prescription within our

economy throughout this time period so one needs to add multiple factors into the picture to

try and correctly portray the situation. This is what the CBO has done. The first quarter funded 17 "Congressional Budget Office." (CBO). N.p., n.d. Web. 12 Mar. 2014.

approximately 700,000 jobs, according to the Recovery Website. 1 The only problem is that this

report may not have accurately depicted the true effects of the ARRA on employment for four

different reasons:

· some of the reported jobs might have existed in the absence of the stimulus package, with employees working on the same activities or other activities

· the reports filed by recipients measure only the jobs created by employers who received ARRA funding directly or by their immediate subcontractors (so-called primary and secondary recipients), not by lower-level subcontractors

· the reports do not attempt to measure the number of jobs that may have been created or retained indirectly, as greater income for recipients and their employees boosted demand for products and services

· the recipients’ reports cover only certain appropriations made in ARRA, which encompass about one-sixth of the total amount spent by the government or conveyed through tax reductions in ARRA during the first 18

The CBO's main source for economic effects relevant to the ARRA is based off of specific

economic models and historical data:

"CBO’s assessment is that different elements of ARRA (such as particular types of tax cuts, transfer payments, and government purchases) have different effects on economic output per dollar of higher spending or lower tax receipts. Multiplying estimates of those per-dollar effects by the dollar amounts of each element of the ARRA yields an estimate of the law's total impact on output."10

To correctly depict the effects on employment, the CBO looks at the unemployment

rate and the participation in the labor force. 18 The multiplier effect is a key term used to figure

out the output that comes from certain aspects of the stimulus package. The way to correctly

estimate these multipliers is mainly based on economic modeling and data that revolves around

a direct relation between the stimulus and its effects. The CBO tries to correctly find

18 "Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from January 2010 Through March 2010." CBO. N.p., n.d. Web. 11 Mar. 2014.

these multipliers by looking at first-round effects within our economy. 18 Basically, they are

trying to separately look at each tax cut or allocation package and its immediate effect on

someone's expenditure habits. For example, if most tax cuts in a certain town cause

these beneficiaries to put this extra tax money in the bank, the following assumption is that this

tax cut did not lead to a rise in consumption. Obviously this is a simple example but the goal is

for them to get as precise as possible and extract direct cause and effect multipliers. This sort of

aligns with the thought that I presented previously about such a short spanning report carrying

greater meanings about the overall effect of the whole stimulus plan. The economic sector is

very large but if one were to look at extremely small samples and do this over and over again,

they can eventually get an accurate summary.

The three main forms used to extract results from the ARRA came from macroeconomic

forecasting models, general-equilibrium models, and direct extrapolations of past data. 18

Macroeconomic forecasting models largely depend on specific assumptions made between the

connections of certain variables in the economy. The CBO report used models from two firms,

Macroeconomic Advisers and Global Insight, as well as using the FRB-US model from the

Federal Reserve. 10These models revolve around effects of aggregate demand on actual output

in the short run. In result to the previous statement, Macroeconomic forecasting models tend

to usually show positive effects from prescription policies that are directly focused on raising

aggregate demand. In opposition, General equilibrium models tend to lead to smaller outcomes

from government stimulus packages like the ARRA. 18General assumptions behind these models

tend lean towards complete rationality behind working class people. For example, these models

predict that one can efficiently predict their wages now and for the rest of their life and how

much they will spend and save at these times throughout their life. The other major

assumption, one that was expanded on previously in this essay, deals with the fact that people

will tend to start saving money from tax cuts now to pay off the higher government budget

debts that result from these tax cuts. The General Equilibrium Models’ uses are considered to

be less valuable in the eyes of the CBO: “CBO has incorporated the results of that research into

its view of the effects of government policies. However, the research results appear to be too

dependent on particular assumptions for CBO to rely on them heavily.”10Direct extrapolations

of the past data are models based off of results from similar policy prescriptions of the

government in the past. One of the major problems underlying this format is that results will

change largely based off the time period looked at and the specific estimation strategies used.10

This theme has been expanded on previously and aligns with one of the major problems with

predicting effects of the ARRA. The following charts depict ARRA’s effects on the economy:

18

The Council of Economic Advisers is an agency within the government’s executive office

used to estimate effects of policy prescriptions and provide economic advice to the government

on the formulation of domestic and international policy. 19This agency is very similar to the

research organizations presented previously yet the major underlying difference is that it is

19 "Council of Economic Advisers." The White House. The White House, n.d. Web. 12 Mar. 2014.

central to the government instead of private. The government elects the officials to represent

this council.

The report, “The Economic Impact of the American Recovery and Reinvestment Act of

2009: Fourth Quarterly Report” 19, is based off of the quarter following the previous CBO report.

This report directly correlates the change from declination in our national economy to overall

acceleration towards recovery with the ARRA’s effects:

Following implementation of the ARRA, the trajectory of the economy changed dramatically. Real GDP began to grow steadily starting in the third quarter of2009 and private payroll employment has increased by nearly 600,000 since its low point in December 2009.

The two CEA methods of estimating the impact of the fiscal stimulus suggest that the ARRA has raised the level of GDP as of the second quarter of 2010, relative to what it otherwise would have been, by between 2.7and 3.2 percent. These estimates are very similar to those of a wide range of other analysts, including the Congressional Budget Office.

The CEA estimates that as of the second quarter of 2010, the ARRA has raised employment relative to what it otherwise would have been by between 2.5 and 3.6million.These estimates are broadly consistent with the direct recipient reporting data available for 2010:Q 19

The previous statements are based off of two approaches: the first revolves around the

behavior of real GDP and employment; while the latter revolves around economic modeling

that is very consistent to the CBO report’s models. The following charts came directly from this

fourth quarterly report and they reveal the evident effects that the ARRA had on our eonomy:

19

The overall conclusion that is made is mainly based off of the economic reports from the

government. I feel as if the government has highly credited information and they have logically

explained how they came to their results. Their work can be understood by the common

population, with little to no economic background. The opposing viewpoints may argue that

these results could possibly stem with political themes in mind. Economists that argued against

the ARRA, for example, any of the 200 hundred people that signed the Cato Institute’s Petition

against the 2009 Obama Stimulus Plan, would probably say that these government reports are

carefully formed in an effort to depict that the Obama Administration made the correct choice

in policy prescription. I truly feel as if every article or presentation of results can be interpreted

to have a political background to it, whether the argument is specifically trying to defend this

political theme or it just naturally defends it through the formation of the results. Mostly every

report on the results of the ARRA can be argued through an opposing viewpoint. It is a vast

topic that ranges through different sections of economic thought. As I have repeatedly

mentioned, correctly estimating the ever lasting effects of the ARRA is basically impossible. We

simply do not know the direction of the economy without the ARRA and we cannot surely

relate every cause of it with its effect. I want to try and present my final argument focusing on

the most credible economic statistics that I could find. I feel that credible statistics are the base

for a strong argument.

In this closing argument, I stand by the theme that the American Recovery and

Reinvestment Act of 2009, that was signed into law on February 17, 2009 by Barack Obama,

was too fiscally too small, which also means that it spanned too short of a time period. I have

defended this argument by looking at main macroeconomic variables such as, gross domestic

product and the unemployment rate. I agree with the underlining themes presented

throughout the Economic Policy Institute’s argument, such as the effects of public sector

investment on higher expectations, productivity, and living standards. The ARRA has been

critically dissected to the most precise degree by economists of every possible political

background. I feel that I have strongly dissuaded these opposing viewpoints using the most

credible economic reports that I could possibly find.

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