The American Recovery and Reinvestment Act of 2009 Dissected

1 Nov

The American Recovery and Reinvestment Act of 2009 was designed to address the faltering economy by filling a liquidity void left by the struggling private economy, using government funds.  As a result of the economic crash credit markets were frozen, consumer purchasing power was in decline and the country was losing millions of jobs.  Large corporations were feeling the same pain that millions of people were feeling.  Corporations couldn’t borrow money to cover their day-to-day expenditures and with a lack of demand in the economy, no one was buying products, which forced these corporations to either borrow money or lay off workers.  Due to the frozen credit market, companies had no choice but to lay off workers in order to keep doors open.  Simply put, there was not enough money to go around.  Similar to the key issue faced during the great depression, only this time instead of bank runs, the lending of credit came to an abrupt halt.  Because of these factors, there was no way that the private market could step in to assist with the broad challenges many companies and people were facing.  By the time The American Recovery and Reinvestment Act was introduced in the House, the economy had already lost 2 million jobs in 4 months.  The government had no choice but to step in and inject capital into the economy in hopes that they could plug the hole of a economy spiraling out of control.  This economic principle is one based on the Keynesian macroeconomic theory, which maintains that during recessions the government should offset losses in the private sector by increasing public investment in the economy.  This theory makes the basic point that government can serve as a counter balance to a struggling economy in need of rescue.

Prior to taking office, then President-Elect Barack Obama released a report detailing the impact of the financial crisis on the U.S. Economy.  Additionally, the administration outlined numerous potential proposals that might strengthen the struggling economy.  One of which was a model used to draft The American Recovery and Reinvestment Act.  The basic purpose of The American Recovery and Reinvestment Act is listed in Section 3 and reads as follows: “1. To preserve and create jobs and promote economic recovery.  2. To assist those most impacted by the recession.  3. To provide investments needed to increase economic efficiency by spurring technological advances in science and health.  4. To invest in transportation, environmental protection, and other infrastructure that will provide long-term economic benefits.  5. To stabilize State and local government budgets in order to minimize and avoid reductions in essential services and counterproductive state and local tax increases.”  The act goes on to say that 37% of the package is devoted to tax incentives ($288 billion) and 18% is to be disbursed to the state and local governments for relief ($144 billion), with nearly 90% of that total targeted towards Medicaid and education.  The remaining 45% is targeted towards federal spending projects in the areas of communication, energy efficiency upgrades, extension of federal unemployment benefits, private/federal building upgrades, sewer infrastructure, scientific research, transportation and waste water ($357 billion).

No other bills were introduced in the house as alternatives to The American Recovery and Reinvestment Act.  Dave Obey (D-WI), the House Appropriations Committee Chairmen sponsored a bill in cooperation with 9 other Democrats (Barney Frank-MA, Barton Gordon-TN, George Miller-CA, James Oberstar-MN, Charles Rangel-NY, John Spratt-SC, Edolphus Towns-NY, Nydia Velazquez-NY, & Henry Waxman-CA).  On January 26, 2009 that bill (H.R. 1), was introduced to the U.S. House of Representatives by Obey.  H.R. 1 would come to be known as the American Recovery and Reinvestment Act of 2009.  Speaker Nancy Pelosi referred H.R. 1 to the House Appropriations Committee, where it passed and was sent to the House floor for vote.  On January 28, 2009, H.R. 1 passed the House 244-188.  The bill was highly controversial, due to its lack of bi-partisan support.  In fact, not a single Republican voted in favor of the bill, joined by 10 Democrats, with 1 Republican abstaining from voting.  Prior to the bill’s passage in the House, 4 Amendments to the bill were introduced.  None of the 4 amendments came close to passing (all 4 were supported by Republicans).

On January 6, 2009, a Senate version of the bill (S. 1) was introduced.  This version would later be substituted in the form of an amendment to the House bill (S. Amendment 570).  S. 1 was sponsored by Harry Reid (D-NV), Senate Majority Leader and cosponsored by 16 Democrats (Mark Begich-AK, Jeff Bingaman-NM, Barbara Boxer-CA, Sherrod Brown-OH, Robert Casey-PA, Hillary Rodham Clinton-NY, Richard Durbin-IL, Edward Kennedy-MA, John Kerry-MA, Amy Klobuchar-MN, Frank Lauterberg-NJ, Carl Levin-MI, Clair McCaskill-MO, Robert Menendez-NJ, Charles Schumer-NY and Debbie Stabenow-MI) and 1 Independent (Joeseph Lieberman-CT).  S. 1 included a $70 billion extension of the alternative minimum tax, which was not included in the H.R. 1.  Republicans in the Senate proposed several amendments, including: spending cuts, tax cuts and trimming of the overall amount of the stimulus.  Additional amendments were also considered including: an increase in housing tax credits for all home buyers, tax incentives for electric vehicles and even removing language from the bill preventing funds from being used by religious institutions.  In a rare occurrence, the Senate began a debate of the bill on a Saturday.  This debate occurred as a result of great encouragement on the part of President Obama.  The following Monday (February 9, 2009) voted to end the debate and put the bill to a vote in the Senate.  On February 10, 2009, the bill passed the Senate with all Democrats voting in favor along with 3 Republicans.

Due to changes to the bill in the Senate, the original House bill was reduced in its amount by about $150 billion.  These changes would have an impact on areas that needed it most.  These areas included: reduced and restricted assistance for states, and much smaller tax credits for low-income workers.  The primary beneficiaries of the amendments were seniors and high-income workers.  The original price tag on the bill was $838 billion, but was reduced down to $827 billion by the time it was introduced by Senate Democrats.  As a result of the amendments, the bill was further reduced to $820 billion.  After the bill passed the Senate and was sent to the House in the form of an amendment, it was then sent to a conference committee where the final version could be pieced together.  The final version had a price tag of $787 billion.  The funds allocated for this bill were in addition to funds already provided for the fiscal year budget and therefor were not reallocated from another area.  All funding was newly allocated funding not previously factored into the budget, was provided by government loan and tacked on to the already finalized budget.  The bill includes a section that amends the budget for that fiscal year and for the following 2 years while it is in effect.

The American Recovery and Reinvestment Act was meant to stimulate growth and inject capital across a broad range of areas struggling as a result of the flailing economy.  This was achieved by providing funds in several different ways.  The spending of funds can be broken down into 23 target groups.  Those groups are as follows: aid to low-income workers, alternative minimum tax, auto sales, bonds, bonus depreciation, direct cash payments, education, energy, energy production, expanded child credit, expanded college credit, expanded earned income tax credit, government contractors, health care, home energy credit, homebuyer credit, homeland security, infrastructure, law enforcement, money losing companies, new tax credit, repeal bank credit, and unemployment.  Various sectors received benefits as a result of The American Recovery and Reinvestment Act.  Most prominent recipients of assistance are the banking sector and auto industry.  By investing in a wide range of sectors within the economy, the bill proposed a strengthened economic base across a wide range of sectors which had either suffered as a result of the economic collapse or provided an opportunity for much needed upgrades that the government could provide through the funding of projects.

Debates about the bill did not actually surround the need for the investment.  Due to a failing economy, both Republicans and Democrats saw a need to provide a boost to the economy.  Rather, the key debates revolved around the size and scope of the economic stimulus and what areas should be targeted.  Democrats targeted their proposal at various industries, low-income workers/families, unemployment insurance and state/local government relief.  Republicans wanted funding for further tax cuts and decreased government spending.  Democrats compromised on a few issues, but for the most part pushed their agenda.  This was due in part to the fact that Democrats held a majority in the House and a super-majority in the Senate, which prevented Republicans from blocking any agenda they decided to push through, provided that they could garner enough support from within the Democratic Party.  The few compromises that were made were a decrease in the price tag on the size of the stimulus and some tax breaks given (as pointed out before).

The American Recovery and Reinvestment Act did not create new laws or regulations and was intended to be a temporary program to boost GDP growth in the economy.  The policy of economic stimulus seeks to invest in public and private projects in order to bring the economy out of negative GDP growth.  As identified before, this is achieved by investing government funds in a wide variety of sectors and government programs.  This type of stimulus is similar to that of the one put in place during The Great Depression (The New Deal), but also different.  It is also different than the stimulus program passed in 2008 (TARP).  TARP sought to inject money directly into the financial sector in order to prevent a collapse of the financial sector as a result of loose credit, unqualified applicants, an overpriced housing sector, and investment firms who were selling bundled mortgage backed securities as investments that were unstable due to home owners who could not realistically afford the houses that banks had given them loans for.  This was put in place, because the financial sector posed a risk to the rest of the economy due to de-regulation (repeal of The Glass-Steagall Act), which separated financial institutions from investment institutions.  Due to this de-regulation, if the investment firms failed, so too did the financial institutions who provided credit to individuals and businesses.  With this failure, money supply would be in short supply and the entire economy would fall into a depressed state.  TARP was somewhat successful, but not large enough to prevent the cascading effects mentioned above.  The New Deal was an economic stimulus which not only injected capital into the economy via industry and government services, but also created programs such as: The Civilian Conservation Corps, The Civil Works Administration, The Federal Housing Administration, The Federal Security Administration, The Homeowners Loan Association, The National Recovery Act, The Public Works Administration, The Social Security Act, The Tennessee Valley Authority, and The Works Progress Administration.  All of these programs were created either to protect people from further economic risk or to create jobs.  The difference between The American Recovery and Reinvestment Act and TARP is simple.  TARP provided funds to a single industry, but did not provide economic investment elsewhere, which in turn did not prevent a depressed economy.  The differences in The New Deal and The American Recovery and Reinvestment Act are also simple.  While both provided economic stimulus in a wide variety of industries in order to provide a stable base from which the economy could level off, The American Recovery and Reinvestment Act did not create new job programs.  It did, however, limit economic risks for people by providing things like extended unemployment benefits.

The American Recovery and Reinvestment Act sought to beef up short-term funding for various federal agencies that fall into the 23 categories it targeted.  Those federal agencies had set guidelines from which they were required to follow in order to receive funding for the projects or improvements they undertook.  Additionally, some federal agencies were tied to projects set forth in the bill and could not use funds for any other purpose.  Other funds were given less restriction, such as those dealing with federal contracts.  As long as the agencies were abiding by the general purpose of the projects for which they were to use the funds, they were free to seek their own agenda.  One rule that was stipulated in The American Recovery and Reinvestment Act, however, was a general requirement that public works projects or public buildings funded under this act must use manufactured goods, steel, and iron that was made in the United States.  This rule is known as the “Buy American Provision”.  In addition to federal projects and funds given to federal agencies, funds were also invested into the private sector in areas such as healthcare, scientific research, the energy sector and green energy research.  These areas benefited tremendously, which is a clear sign of lobbyist for these groups influencing the areas funding

Hearings were also held about The American Recovery and Reinvestment Act, although none of the hearings took place prior to the bill being passed and signed.  The bill was swept through Congress quickly, due to the immediate need of the economy.  Subsequent hearings that have been held have related to the disbursement of funding by the various federal agencies, ensuring accountability.  Additionally, the government created an method of accountability for the funds via a website.  The purpose was to allow the public to track where the funds were being distributed across the country, what programs they were being allocated to and what factors determined the amount of distributed funds to the various areas.

By the third quarter of 2009, the effects could be seen in the economy.  During the first quarter of 2009, GDP was -4.9%, and by the third quarter of the same year, the GDP had reversed course to 1.6%.  By no means a healthy number, 1.6% GDP was proof positive that the investment had in fact paid off.  By the following quarter, GDP rose to 5.0%.  Since then, the economy has seen strong growth, showing that the policy was indeed effective.  One point that should be mentioned though is that eventually the effects of the stimulus will wear off and if the private sector is not healthy enough to take over, GDP could suffer.  A stimulus, such as The American Recovery and Reinvestment Act, is meant to be a temporary stopgap measure until economic health returns.  When stimulus is used effective, as is the case with The American Recovery and Reinvestment Act, it can be good policy that benefits the public good.

Few economists debate the fact that the stimulus did in fact achieve its purpose in stabilizing the economy and stopping the economic free-fall, however, numerous economists have insisted that the American Recovery and Reinvestment Act was in fact too small in size to achieve a quick return to full economic health.  There is no doubt that a correlation can be made between the implementation of the American Recovery and Reinvestment Act and economic improvement.  As for whether a larger stimulus would have returned the economy to full strength is a bit harder to prove, although judging by the gains as a result of The American Recovery and Reinvestment Act or examining the effects of The New Deal during The Great Depression, it is likely that a larger investment would have achieved this kind of economic improvement.

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