Economic snapshot | Budget Taxes and Public Investment

Five Years Since the American Recovery and Reinvestment Act: The Downward Spiral of Public Investment

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Next Monday marks five years since the American Recovery and Reinvestment Act (ARRA) was enacted, yet the U.S. labor market remains extraordinarily weak, with too little demand, few job opportunities, and crushing levels of long-term unemployment. This demonstrates the continued importance of expansionary fiscal policy, including large-scale ongoing public investment—purchases the government makes now that are useful for years to come, such as building roads and investing in research and education. However, though increasing funding for public investment is a win-win—creating jobs today and making critical improvements to the nation’s infrastructure—policymakers have instead pursued austerity.

In 2012, the last year with data, public investment for nondefense purposes was falling precipitously relative to potential gross domestic product (GDP)—the maximum sustainable output of the economy. Within the next decade, nondefense public investment will be lower than its previous historic low point. The figure below shows that by 2023 nondefense investment will be less than two-thirds of its average share of GDP from 1962 to 2012. (Because only the small amount of defense investment that goes to basic and applied research typically contributes to private-sector output, the graph below depicts only nondefense investment, though the downward trend applies to defense investment as well.)

In addition to improving the country’s infrastructure, increasing investment in a struggling economy has recently shown positive effects: The American Recovery and Reinvestment Act created jobs for up to 3.3 million people in 2010, when ARRA spending peaked. Of all of ARRA’s components, the Congressional Budget Office found that the two with the biggest bang-to-buck ratio were federal purchases of goods and services and transfer payments to the states for infrastructure spending—when the states actually spent the money as intended.

See more work by Joshua Smith