The Recovery Act: Evidence of success three years out

Today marks the three-year anniversary of the American Recovery and Reinvestment Act (ARRA). Despite overwhelming evidence of ARRA’s pivotal role in turning the economy around and boosting employment (including reports from the Congressional Budget Office, economists Alan Blinder and Mark Zandi, and the Federal Reserve Bank of San Francisco, among others), a vocal—mostly politically motivated—minority continues to misinform the debate, trying to convince the public that the stimulus failed.

That couldn’t be further from the truth.

As this recent video from the Center for American Progress nicely depicts, ARRA kept our economy from swerving over the cliff’s edge. In the video, Michael Linden of CAP uses three measures to demonstrate that the stimulus stopped the economy’s bleeding: He looks at annualized GDP growth, the monthly change in non-farm payroll employment, and monthly private-sector layoffs. As the housing collapse and financial crisis spread to the rest of the economy, these three indicators all grew dramatically worse, culminating in a dire situation in the fourth quarter of 2008—when GDP was plunging at an 8.9 percent annual rate—and the early months of 2009. After ARRA was enacted in mid-February, things started to turn around. In fact, here is what happened:

  • In the second quarter of 2009—the first full quarter after the stimulus was passed—GDP declined at a much slower pace (0.7 percent), and growth resumed in the third quarter;
  • Job losses slowed dramatically throughout 2009 and the economy started adding jobs in early 2010; and
  • Private sector layoffs, which had peaked in Feb. 2009, began a rapid decline and returned to pre-recession levels by early Feb. 2010.

Now don’t get me wrong, ARRA wasn’t a cure-all (nor was it designed to be). The $831 billion 10-year cost of ARRA was smaller than the 2009 output gap and nowhere near the $3.0 trillion cumulative output gap since the start of the recession (which would be even bigger without ARRA). Unemployment remains unacceptably high, long after the official end of the recession. The economy needs 11 million more jobs to return to its pre-recession unemployment rate and the job seekers ratio has been higher for the last three years than it was at any point during the downturn of the early 2000s. Still, the stimulus prevented the situation from arguably being much worse than it otherwise would have been. Critics of the stimulus fail to recognize just how big of a hole ARRA was up against. As my colleague Josh Bivens explains in Failure by Design:

“The unemployment rate without the Recovery Act would have reached nearly 12%, not the 9% foreseen by the Obama administration. A good metaphor for this controversy is the temperature in a log cabin on a cold winter’s night. Say that the weather forecast is for the temperature to reach 30 degrees Fahrenheit. To stay warm, you decide to burn three logs in the fireplace. You do the math (and chemistry) and calculate that burning these three logs will generate enough heat to bring the inside of the cabin to 50 degrees, or 20 degrees warmer than the ambient temperature.

But the forecast is wrong—and instead temperatures plummet to 10 degrees outside and burning the logs only results in a cabin temperature of 30 degrees. Has log burning failed as a strategy to generate heat? Of course not. Has your estimate of the effectiveness of log burning been wildly wrong? Nope—it was exactly right—it added 20 degrees to the ambient temperature. The only lesson from this one is a simple one: since the weather turned out worse than expected, you need more logs.”


  • http://twitter.com/2enchantU Edwyne Rouchelle

    Well-written and informative article. Just hope the GOP snowed-group gets it and can understand that the author is telling the truth, supported/referenced by stats & facts. Understandably, they have trouble discerning what’s true from what’s fabrication, poor people.