2008 Economic Stimulus Act & 2009 ARRA

Abstract

The recession that began in 2008 was largely born of the policies and programs that helped bring the 2001–2004 recession to a close. In a way, it was caused in part by consumers, many of whom were convinced by unscrupulous lenders that they would be able to make tremendous investments in the real estate market. The overwhelming number of homeowners whose debt eventually overcame them sent shockwaves through the financial system and eventually helped slow down the economy to a degree not seen since the Great Depression of the 1930s. At the earliest stages of the recession, an economic stimulus package was offered by Congress to prevent a worsening of the country's fiscal condition. At the tail end of the recession, another recovery package was offered to prevent a return to fiscal instability. This paper will review these two actions—the Economic Stimulus Act of 2008 and the American Reinvestment and Recovery Act of 2009—and their effectiveness in addressing the recession of 2008–2010.

Overview

One of the most maligned figures of the Great Depression was President Herbert Hoover. He is blamed for both not acting during the crisis and managing a government intervention that was terribly misguided. However the public may have felt about Hoover either during his administration or in the years that followed, his perspective on the critical importance of industry and the consumer was well-founded. "Economic depression cannot be cured by legislative action or executive pronouncement," he once said, "Economic wounds must be healed by the action of the cells of the economic body—the producers and the consumers themselves."

Indeed, efforts to revitalize the economy during the Great Depression and during subsequent recessions have focused on reinvigorating the supply side and encouraging consumers to return to active spending and investing. This trend continued through the beginning of the twenty-first century, in which the United States experienced two recessions in its first decade. For example, the government's response to the 2001–2004 period, which was punctuated by the horrific terrorist attacks on September 11, 2001, was slowed by the lowering of key interest rates and providing tax credits for business.

The recession that began in 2008 stemmed in part from the policies and programs that helped bring the 2001–2004 recession to a close. The overwhelming number of homeowners whose debt eventually overcame them through subprime and even fraudulent lending sent shockwaves through the financial system and eventually helped slow the economy to levels nearly like the Great Depression. This paper will review the two actions employed by the government to end the crisis: the Economic Stimulus Act of 2008 and the American Reinvestment and Recovery Act of 2009.

The Causes of the 2008 Recession. On the tail end of the 2001–2004 recession and a period of economic stagnation, the Federal Reserve (also known as "the Fed") recommended that interest rates stay as low as possible. The rationale was simple: lower interest rates attract investment in housing, business loans, and other areas of economic growth. The move worked, as more and more potential homeowners entered the market, spurred by the perception that they could indeed afford to pay monthly mortgage rates. However, starting in 2004, the price of oil started to rise, and the Fed responded by gradually increasing interest rates (Beese, 2008).

The change in interest rates came as a shock to the growing number of homeowners. They had already emerged from the 2001 recession mired in debt—a significant number of homeowners took out home equity loans or otherwise used the equity built into their properties to bolster their income during that crisis. In the six years between 2001 and 2007, about $5 trillion was taken out of homes to compensate for the sluggish economy, accounting for about 30 percent of the total growth in American consumption during that period (Henwood, 2008). A large percentage of these homeowners were committed to subprime loans—loans that were offered to people with poor credit—which were growing in popularity due to aggressive marketing by lenders and endorsements by the federal government (Holt, 2008).

Adding to the "housing bubble" (an uncorrelated increase in the price of residential real estate) that was expanding by 2007 was the fact that financial institutions did little to curb subprime lending. In fact, this practice became one of the most prolific of lending practices, with major institutions purchasing or developing subprime lending companies to tap into this increasingly popular type of mortgage. Major financial institutions such as Citigroup, Merrill Lynch, and AIG, as well as their subprime subsidiaries, were concerned with loan quantity rather than quality (Burry, 2010). In fact, many saw little reason for concern about the risks of lending to people with low credit, since the innumerable quantity of subprime mortgages could be securitized on the market and backed by the federal government.

By 2007, the housing bubble began to collapse upon itself, creating a devastating confluence of issues. As home prices began to retract, homeowners found themselves with less equity in their homes than they were paying in mortgages. A great many simply could not afford to make their monthly payments, sending their mortgages into foreclosure. The sudden toxicity of subprime mortgages meant that banks would lose millions—many institutions that had placed such loans on the market in speculative trades were now faced with a widespread volume of losses, and they did not set aside enough money to cover those losses (Appelbaum & Cho, 2010). These factors helped create one of the longest recessions in U.S. history since the Great Depression, as homeowners lost their homes in great numbers and once-powerful financial institutions teetered on the brink of collapse.

The housing bubble and the near-collapse of the financial industry created an environment of poor economic health. Lenders were unable to provide credit to businesses, which in turn were forced to lay off workers. The high volume of personal debt and lack of jobs created sizable shortfalls in tax revenues for state governments, causing them to slash budgets. Meanwhile, international markets were impacted by the financial industry's woes; the U.S. recession had become a global recession. The recession was so widespread and impactful that few political leaders, media outlets or casual observers could resist comparing the 2007-2008 recession (and the period of sluggishness that followed) to the Great Depression.

As the recession took hold, the administration of President George W. Bush sought to reverse the malaise by infusing consumers with tax rebates and lower interest rates. After the recession came to an official end, however, growth continued at a minimal pace into the term of President Barack Obama, who offered another set of federal intervention policies.

Applications

The Economic Stimulus Act of 2008

Consumer Rebates. President George W. Bush's first response to the economic crisis focused on infusing money into the consumer base. Nearly 80 percent ($120 billion) of the $152 billion package would be spent on tax rebates for consumers. Most individual taxpayers would receive $600, while married couples filing jointly would receive $1,200. Individuals with incomes of $75,000 and jointly filing couples earning $150,000 would not qualify for these rebates ("Bush signs," 2008). Rather, the stimulus rate reduces by five percent of the amount of income that exceeded the $75,000/$150,000 mark. Additionally, parents with children under 17 years of age and who qualified for the federal Child Tax Credit would receive an additional $300 per child under that credit.

The Economic Stimulus Act moved through Congress in a mere four weeks. The speed of the bill's passage was indicative of the bipartisan desire for the government to quickly halt a recession before it took full root. The Senate took two weeks deliberating the bill before adopting it on February 7, 2008, by an overwhelming vote of 81 to 16. Later that day, the House took the matter up and, by another impressive vote differential of 380 to 34, passed the legislation ("President signs," 2008). Six days later, the bill arrived on President Bush's desk. President Bush signed the measure without delay, and the Treasury Department and the IRS immediately began issuing rebate checks.

The Economic Stimulus Act was designed to provide an immediate infusion of investment in the marketplace by consumers. The extra cash, political leaders hoped, would be used to purchase goods and services so that the economy would get a boost. According to studies conducted after the Act became law, the rebates were not used exactly as hoped. In one survey of over 2,500 people, about 1,100 (just over 48 percent) of respondents said that they used the rebate to pay off debt rather than purchase new items. Nearly 32 percent simply put the money into savings. Only about 20 percent actually spent the rebate on goods and services (Shapiro & Slemrod, 2009).

Depreciation Allowances. Although the bulk of the Stimulus Act was focused on the consumer, it also contained some provisions that were designed to help businesses weather the storm. One such incentive was a 50 percent depreciation allowance. Depreciation is an income tax deduction to help commercial property owners recover the cost of annual wear and tear on their property. Under this "bonus depreciation" incentive, businesses were able to see a reduction in their annual liabilities for real estate as well as business vehicles (Internal Revenue Service, 2008). Furthermore, property owners would be able to expense up to $250,000 the cost of maintaining the business, rather than depreciating it over several years. Finally, the bill looked to bolster the real estate industry by increasing the maximum mortgage amounts the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal Housing Administration (FHA) may give to potential homebuyers. This provision would help homeowners refinance to stay afloat.

It would be nearly ten months after the Act's passage when the National Bureau of Economic Research would formally announce that the economy was already in a recession (Isidore, 2008). The breadth of the crisis, including its impacts on the financial sector, would gradually be revealed over the course of 2008, demonstrating that the Economic Stimulus Act would fall short of halting the recession and the overall crisis that would continue through 2009 and beyond.

American Recovery & Reinvestment Act of 2009. By early 2009, efforts by the Bush administration and Congress to prevent a recession from settling in had fallen short. The economy shrank by an annualized rate of 5.4 percent, nearly 780,000 jobs were lost in a one-month period and the deficit had ballooned to $1.3 trillion (Spratt, 2010). President Bush requested funds totaling $350 billion shortly before he left office; monies which would be used to "bail out" the financial institutions in the most danger, an appropriation known as the Troubled Assets Relief Program (TARP). However, the health of those institutions was far worse than previously thought, and before he departed office, President Bush (and President-elect Obama) worked to infuse another $350 billion into the financial sector in January of 2009.

The need for additional TARP funds underscored the continued woes of the housing market. Senator Christopher Dodd (D–CT), chairman of the Banking Committee, warned that a new wave of as many as eight million foreclosures could take place (Mooney, 2009). President-elect Obama was still putting together his administration while attempting to address the issue of mass foreclosures and anemic growth. In February of 2009, the Obama administration's new stimulus plan, the American Recovery and Reinvestment Act (ARRA), was passed.

ARRA was an extensive and complex set of policy changes, spanning a number of fields. In one arena, the bill offered a subsidy of up to 65 percent for the temporary health insurance program known as COBRA (established as part of the Consolidated Budget Reconciliation Act of 1985), which offers a temporary extension of an individual's workplace health insurance coverage in the event that he or she is laid off from work. The subsidy, for qualified individuals, would be allowed for nine months, allowing for the worker to still receive coverage while looking for a new job in a difficult economy. Also, federal medical assistance percentages (FMAP), Medicaid payments to states, would increase by $87 billion to help the poor ("American Recovery," 2009).

ARRA also contained a large number of tax incentives and credits. For example, homebuyers who purchased their homes by April of 2010 would be eligible for a tax credit of up to $8,000. Several low-income tax credits like the Earned Income Tax Credit (EITC) were enlarged, along with tax rebates for Social Security recipients, veterans and railroad retirees. Those who invested in energy-efficient windows, fuels and other "green" activities would also be eligible for tax credits (IRS, 2010). Businesses would also be eligible for tax rebates and credits, such as those for hiring lower-income employees and using energy efficient technologies and construction materials. Furthermore, businesses purchasing new equipment or who experienced losses in one year in an otherwise profitable decade were also eligible for tax credits ("Stimulus-Tax Incentives," 2009).

On the science and technology front, the $787 billion stimulus plan invested $570 million in climate science research, $42 billion in energy-related investments and $21 billion in transportation and vehicle programs such as transit assistance and energy-efficient commercial fleets. The measure also spent $21 billion in energy-related incentives, such as renewable energy production and $1.6 billion in bonds for clean energy (Pew Center, 2010). Additionally, the ARRA infused $7.2 billion for the development of broadband services, particularly in rural and underdeveloped regions. This figure included $2.5 billion for broadband grants and loans (Kruger, 2010).

Arguably, one of the most noticeable aspects of ARRA is its investment in grants and loans for infrastructural improvements. As of 2013, $260 billion was made available for federal grants, loans, and contracts, $290 billion in tax benefits, and $261 billion in entitlements (Recovery.gov, 2013). The recipients included construction and/or rehabilitation of public buildings, roadways and other project of public interest (National Conference of State Legislatures, 2010). Across the country, supporters stated, 640,000 jobs would be created to perform these projects (Congressional Budget Office, 2009). In 2013, it was estimated that, through 2012, the act had created 6 million “employment years” (one payroll job per year), which corresponds to the Council of Economic Advisers 2009 estimate of 6.8 million employment years (Council of Economic Advisers, 2013).

The ARRA did not pass with as much bipartisanship as the Economic Stimulus Act. Criticisms of the law, therefore, are common. Some assert that not enough long-term jobs were created. Others (including Canadian officials) complained that a provision in the law called the "Buy American" mandate, (which requires that steel, iron, and manufactured goods be made in the United States) is protectionism and could damage US-Canadian relations (ARRA 'Buy American', 2009).

Perhaps the most pointed criticism of ARRA was its $787 billion price tag (later revised upward to $831 billion), which would weigh heavily on an already staggering federal deficit, and did little to spur long-term growth or foster employment. Although the Obama administration claimed that the ARRA would create 750,000 jobs in the first few months of its first year, federal Commissioner of the Bureau of Labor Statistics shortly thereafter testified to Congress that such claims would be difficult to substantiate. Critics pointed out that unemployment increased by two points in the first half of 2009 in spite of the ARRA's spending programs. Meanwhile, they argued, 60 percent of Americans felt that the ARRA would do little for the economy in the long run, and 57 percent believed that the stimulus was either making the economy worse or having no impact at all ("Happy 6-month," 2009).

Conclusions. Science fiction author Isaac Asimov once commented that no one could have lived through the Great Depression without being scarred by it. "No amount of experience since the depression can convince someone who has lived through it that the world is safe economically" (www.ThinkExist.com). Indeed, the Depression inspired modern political leaders to work diligently to safeguard the economy from a return to depression conditions. Still, recessions have occurred since the 1930s, although few were as severe as the one that began in 2008.

The hallmark of the 2008–2010 recession is that it caught many key leaders by surprise. The 2008 Economic Stimulus Act and the 2009 ARRA were largely reactionary, designed to spur growth rather than address the core issues that created that recession. Both were well received to a degree when adopted, as they at least demonstrated a government desire to intervene and restart the economy. However, the long-term effectiveness of either law continues to be the subject of great debate.

Terms & Concepts

Earned Income Tax Credit (EITC): Tax credit designed to help low-income taxpayers retain more of their income.

Housing Bubble: An uncorrelated increase in the price of residential real estate which becomes unsustainable and can even result in negative equity for the homeowner.

Recession: An economic downturn period in which growth declines over a sustained period of time (often two or more quarters).

Subprime Lending: The practice of offering mortgages to individuals who are determined to be able to afford monthly payments despite poor credit histories or low incomes.

Troubled Assets Relief Program (TARP): A 2008 law that offered financial assistance to U.S. financial institutions on the brink of collapse.

Bibliography

ARRA 'Buy American' mandate draws flak. (2009, June 22). ENR: Engineering News- Record, 262, 7. Retrieved July 22, 2010 from EBSCO online database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=44029184&site=ehost-live.

American Recovery and Reinvestment Act of 2009 (ARRA). (2009, February 17). Advocacy. Retrieved July 22, 2010 from American Medical Association. http://www.ama-assn.org/ama/pub/advocacy/current-topics-advocacy/hr1-stimulus-summary.shtml.

Applebaum, B., & Cho, D. (2009, December 21). Fed's approach to regulation left banks exposed to crisis. The Washington Post. Retrieved July 20, 2010 from EBSCO online database Newspaper Source Plus.

Burry, M. (2010, April 4). I saw the crisis coming. Why didn't the Fed? New York Times. 10. Retrieved July 20, 2010 from EBSCO online database Newspaper Source Plus. http://search.ebscohost.com/login.aspx?direct=true&db=n5h&AN=48928339&site=ehost-live.

Bush signs stimulus bill; rebate checks expected in May. (2008, February 13). Retrieved July 19, 2010 from CNN.com http://www.cnn.com/2008/POLITICS/02/13/bush.stimulus/.

Congressional Budget Office. (2009, November). Estimated impact of the American Recovery and Reinvestment Act on employment and economic output as of September 2009. Retrieved July 22, 2010 from http://www.cbo.gov/ftpdocs/106xx/doc10682/11-30-ARRA.pdf.

Council of Economic Advisers. (2013, February 1). Economic impact of the American recovery and reinvestment act of 2009: Ninth quarterly report. Whitehouse.gov. Retrieved November 26, 2013 from http://www.whitehouse.gov/sites/default/files/docs/cea9tharrareportfinal.pdf

Happy 6-month birthday ARRA, lawmakers offer differing perspectives. (2009, August 21). Children & Youth Funding Report. Retrieved July 25, 2010 from EBSCO online database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=44042185&site=ehost-live.

Henwood, D. (2008). Crisis of a gilded age. Nation, 287, 3-4. Retrieved July 20, 2010 from EBSCO online database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=34463987&site=ehost-live.

Holt, J. (2009). A summary of the primary causes of the housing bubble and the resulting credit crisis: A non-technical paper. Journal of Business Inquiry, 8, 120-129. Retrieved July 20, 2010 from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=48359702&site=ehost-live.

Howsen, R. M., & Lile, S. E. (2011). The role of politics and economics in the allocation of federal stimulus spending. Applied Economics Letters, 18, 263–266, Retrieved November 26, 2013 from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=57583418&site=ehost-live

Internal Revenue Service. (2008, February 21). 2008 Economic Stimulus Act provides tax benefits to businesses. Retrieved July 21, 2010 from irs.gov http://www.irs.gov/newsroom/article/0,,id=179227,00.html.

Internal Revenue Service. (2010, July 6). The American Recovery and Reinvestment Act of 2009; information center. Retrieved July 22, 2010 from irs.gov http://www.irs.gov/newsroom/article/0,,id=204335,00.html.

Isidore, C. (2008, December 1). It's official: Recession since December 2007. Special Report Issue #1: America's Money Crisis. Retrieved July 21, 2010 from CNNMoney.com http://money.cnn.com/2008/12/01/news/economy/recession/index.htm.

Klein, B., & Staal, K. (2017). Was the American Recovery and Reinvestment Act an economic stimulus? International Advances In Economic Research, 23(4), 395–404. doi:10.1007/s11294-017-9655-7. Retrieved January 25, 2018, from EBSCO online database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=126688043&site=bsi-live

Kruger, L. (2010, May 6). Broadband infrastructure programs in the American Recovery and Reinvestment Act. CRS Report for Congress. Retrieved July 24, 2010 from EBSCO online database GalleryWatch CRS Reports.

Mooney, M. (2009, January 12). Bush to ask for TARP; Obama to 'rebrand' it. Retrieved July 22, 2010 from ABCnews.com http://abcnews.go.com/GMA/Economy/story?id=6626721&page=1.

National Conference of State Legislatures. (2010). General government provisions—H.R.1.—The American Recovery and Reinvestment Act. Retrieved July 22, 2010 from http://www.ncsl.org/documents/statefed/HR1%5fGoverningProvisions.pdf.

Pew Center on Global Climate Change. (2010). Summary of the American Recovery and Reinvestment Act (ARRA). Retrieved July 24, 2010 from http://www.pewclimate.org/analysis/ARRA.

President signs Economic Stimulus Act of 2008 with rebates and business incentives. (2008, February 13). CCH Tax Briefing: Economic Stimulus Package. Retrieved July 21, 2010 from CCH Group http://tax.cchgroup.com/legislation/2008-stimulus-package.pdf. The Recovery Act. (n.d.). Retrieved July 24, 2010 from Recovery.gov http://www.recovery.gov/About/Pages/The%5fAct.aspx

Shapiro, M., & Slemrod, J. (2009). Did the 2008 tax rebates stimulate spending? American Economic Review, 99, 374-379. Retrieved July 21, 2010 from EBSCO online database Business Source Complete http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=39782076&site=ehost-live.

Spratt, Jr., J. (2010, July 14). Rep. John M. Spratt Jr. holds a hearing on the Recovery Act update. FDCH Political Transcripts. Retrieved July 22, 2010 from EBSCO online database Newspaper Source Plus.

Stimulus—tax incentives. (2009). Retrieved July 21, 2010 from EBSCO online database Sustainability Watch. http://search.ebscohost.com/login.aspx?direct=true&db=suw&AN=44457659&site=ehost-live.

US government. (2013). Breakdown of funding by category 2013. Retrieved November 26, 2013 from http://www.recovery.gov/Transparency/fundingoverview/Pages/fundingbreakdown.aspx#ContractsGrantsLoans

Suggested Reading

Downing, N. (2009, January 10). Whitehouse seeking Social Security boost as part of Obama's stimulus plan. The Providence Journal. Retrieved July 25, 2010 from EBSCO online database Newspaper Source Plus.

Economic policy. (2009, January). Country Report: United States, Issue 1, 10-12. Retrieved July 25, 2010 from EBSCO online database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=35904100&site=ehost-live.

Federal stimulus has worked as designed [Editorial]. (2010, February 18). The Decatur Daily. Retrieved July 25, 2010 from EBSCO online database Newspaper Source Plus.

Gores, P. (2008, May 4). Will it work? Stimulus package's fate may rest on skittish consumers spending. Milwaukee Journal Sentinel. Retrieved July 25, 2010 from EBSCO online database Newspaper Source Plus.

Robeznieks, A. (2012). Stimulus money at work. Modern Healthcare, 42, 32–33. Retrieved November 26, 2013 from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=70454108&site=ehost-live

Sharp, J. (2009, February 3). Better use of tax credit would aid homebuyers, be real stimulus [Editorial]. The Ottawa Herald. Retrieved July 25, 2010 from EBSCO online database Newspaper Source Plus.

Taylor, E. (2014). American Recovery and Reinvestment Act: Economic impact five years later. New York: Nova Science Publishers.

Young, A., & Sobel, R. (2013). Recovery and Reinvestment Act spending at the state level: Keynesian stimulus or distributive politics? Public Choice, 155(3/4), 449–468. Retrieved November 26, 2013 from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=87391277&site=ehost-live