Anti-“Stimatic”, Why the Recovery and Reinvestment Act Didn’t Work

by Kristin Knepper

 

In 2009 at the height of the “Great Recession”, Congress passed the American Recovery and Reinvestment Act (ARRA). This stimulus package was supposed to be a ten year plan; 787 billion dollars towards tax cuts, extended unemployment benefits, and government contracts, grants and loans. However, the stimulus was simply throwing good money after bad.

President Obama, in supporting the ARRA, also supported Keynesian economics. John Maynard Keynes believed that a nation’s economy could be improved by increasing government spending. There are many flaws to this argument, the first being that government spending isn’t nearly as effective as private spending. The stimulus funded many unemployment and welfare programs, programs that don’t boost the economy. The private sector has a stronger incentive to invest funds where they will receive a return on investment. In the United States Congress, there’s no such concern for return on investment (or they sure aren’t acting like it). 

Even an article by the Federal Reserve Bank of New York’s top employees admits, “… the distribution of ARRA funds across states shows that the expanded assistance to unemployed workers was indeed highly correlated with state unemployment rates. It turned out, however, that most other state allocations had little association—positive or negative—with state unemployment rates” (Orr and Sporn, 2013). A stimulus is a short term “boost” that does nothing for real, long term economic growth. Milton Friedman compared this stimulus to the New Deal, which “hampered recovery from the contraction, prolonged and added to unemployment and set the stage for ever more intrusive and costly government” (CATO, 2009).  

The stimulus put more money in consumers’ pockets through tax cuts, but consumers aren’t going to spend money when their neighbors’ houses are under water and they have a risk of being laid-off; and they sure aren’t going to save the money when interest rates are near zero! Less government prevention would have made the recession “seem” worse, but there would be less inflation and less government debt.


Works Cited
Brannon, Ike, and Chris Edwards. "Barack Obama's Keynesian Mistake." Cato Institute. N.p., 29 Jan. 2009. Web. 20 Mar. 2016. http://www.cato.org/publications/commentary/barack-obamas-keynesian-mistake.

Orr, James, and John Sporn. "State Unemployment and the Allocation of Federal Stimulus Spending   Liberty Street Economics." Liberty Street Economics. N.p., 27 Feb. 2013. Web. 20 Mar. 2016. http://libertystreeteconomics.newyorkfed.org/2013/02/state-unemployment-and-the-allocation-of-federal-stimulus-spending.html#.VvGVguIrLIV.

Picture source: http://conversableeconomist.blogspot.com/2011_05_15_archive.html