The National Bureau of Economic Research (NBER), in December 2008, declared the economy in recession since December 2007. With the worsening performance of the economy beginning in September 2008, Congress passed and President Obama signed a much larger stimulus package composed of spending and tax cuts. The American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5), a $787 billion package with $286 billion in tax cuts and the remainder in spending, was signed into law on February 17, 2009. It includes spending for infrastructure, unemployment benefits, and food stamps, revenue sharing with the states, middle class tax cuts, and business tax cuts. Also in 2008 and 2009, the government intervened in specific financial markets by providing financial assistance to troubled firms and enacting legislation granting authority to the Treasury Department to purchase $700 billion in assets. The broad intervention into the financial markets was passed to avoid the spread of financial instability; but there are disadvantages, including leaving the government holding large amounts of mortgage debt.
President Obama, in a speech on December 8, 2009, proposed an additional stimulus package that would include tax and other benefits for small business, infrastructure investments, incentives to promote energy efficiency, and an extension of relief provided in the 2009 legislation for benefits for the unemployed, state aid, and emergency assistance.
The need for additional fiscal stimulus depends on the state of the economy. Growth rates, measured by real gross domestic product (GDP), after two strong quarters, were 2.1% in the fourth quarter of 2007, slightly negative in the first quarter of 2008, positive in the second quarter, a negative 2.7% and 5.4% in the third and fourth quarters. The contraction continued with a decrease by 6.4% and 0.7% in the first and second quarters of 2009. However, after four consecutive quarters of decline, 2009 third quarter estimates indicate a GDP increase of 2.8%.
The unemployment rate declined in January and February of 2008, but began rising in March 2008 and by October 2009 stood at 10.2%. For November 2009, it fell to 10.0%. After extensions of, and modifications to, unemployment compensation in 2008 and early 2009, another extension for 14 weeks in all 50 states was enacted in the Worker, Homeownership, and Business Act (H.R. 3548, P.L. 111-92) and signed into law on November 6, 2009. The new law also offers an additional six weeks of benefits for laid-off workers in 27 states with high unemployment.
Fiscal policy temporarily stimulates the economy through an increase in the budget deficit, which leads to an increase in total spending in the economy, either through direct spending by the government or spending by the recipients of tax cuts or government transfers. There is a consensus that certain proposals--ones that result in more spending, can be implemented quickly, and leave no long-term effect on the budget deficit--would increase the benefits and reduce the costs of fiscal stimulus relative to other proposals. Economists generally agree that spending proposals are somewhat more stimulative than tax cuts because part of a tax cut may be saved by the recipients. The most important determinant of the effect on the economy is the stimulus' size. For instance, the 2008 stimulus package increased the deficit by about 1% of GDP while ARRA is estimated to increase the budget deficit by about 1.3% in 2009 and an additional 2.2% (or 3.5% overall) in 2010. The Congressional Budget Office (CBO) projects that ARRA would raise GDP by a range of 1.2% to 3.2% in 2009 compared with what it otherwise would have been.
This report, which includes research and analysis from Andrew Hanna, will be updated as legislative and economic events occur.
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