Economic stimulus package overview

The United States government has a number of tools available to influence the American economy and secure the well-being of its citizens. Fiscal policy allows the government to utilize spending and tax revenue on projects the government chooses to support. Actions taken by the government to achieve economic goals are enacted through legislation. When the economy is slow, the government can take action through economic stimulus legislation. These bills specify the allocation of funds to specific areas of need. These areas can be general in scope and their recovery beneficial to the majority of the population. They can also be targeted and specific, as in natural disaster relief.

Some applaud the use of economic stimulus legislation to assist the small business sector, the poor, and those affected by disasters. Government investments can make a big difference to geographic areas where infrastructure has been neglected or where industry and jobs have dried up. Investment can also have an impact on socially and economically disadvantaged individuals. Critics claim that stimulus packages are a free ride for politicians. They believe that in order to pass any bill and to get majority agreement from elected officials, the packages must include what is called “pork” or spending on special interest projects, usually within their constituency. Critics contend that many politicians do not act in the best interest of all citizens but influence the contents of legislation for their own financial benefit or for the benefit of powerful special interests. Further, other elected officials with the interests of citizens in mind may be forced to agree or make deals to get legislation passed.

The US government used economic stimulus legislation to support those affected by the terrorist attacks of September 11, 2001, and to support the American financial sector and automotive industry during the global financial crisis that began in 2007. Economic stimulus packages can also benefit elected officials. Officials who obtain stimulus money are seen as working for the benefit of citizens by infusing cash into the economy.

Understanding the Discussion

American Recovery and Reinvestment Act of 2009 (ARRA): A government bailout program designed to stimulate the economy by investing in US infrastructure, job creation, and preservation, energy efficiency, science, and social programs.

Economic Stimulus Act of 2008: A government act to stimulate the economy through tax rebates, business incentives, and loans.

Emergency Economic Stabilization Act of 2008 (EESA): An act authorizing the US Treasury Department to take action to restore liquidity and stability to the US financial system. The program not only bailed out the financial industry by purchasing so called toxic assets, but also provided tax relief and incentives for energy conservation.

Fiscal Policy: A tool used by government to influence the economy through spending or the collection of revenue such as taxes.

Troubled Assets Relief Program (TARP): A provision under EESA, authorizing the Secretary of the Treasury to make funds available to purchase troubled assets from financial institutions.

History

The history of government implementation of economic stimulus to revive the economy goes back to the mid-1930s, following the Great Depression, when President Franklin D. Roosevelt attempted to alleviate unemployment and national financial and business failures. During this time, many banks failed and consumer confidence was low.

Generally, opponents of economic stimulus intervention feel that the economy should correct itself. These opponents cite the 150-year history of the United States without economic stimulus programs, during which time the economy eventually recovered without widespread government intervention in the form of stimulus packages and bailouts (Higgs 2009). However, supporters of stimulus efforts contend that government involvement can reduce the unnecessary suffering of citizens and prevent the unnecessary failure of businesses and the collapse of industries.

The New Deal was a term used during the time of President Roosevelt to describe his efforts to restore American hope and trust in the aftermath of the worldwide economic downturn that was known as the Great Depression. His efforts began after his election in 1933. Roosevelt believed the government would have to take action to move the country to an economically viable position. These actions included reform of banking and relief to workers and farmers. A second new deal launched the Social Security Act and provided protection for unions and migrant workers (Library of Congress 2004).

Other economic stimulus packages throughout history have resulted in varying degrees of success. Journalist Richard Wolf of USA Today noted that economic stimulus packages were “enacted during five of the past seven recessions—in 1964, 1971, 1975, 1981 and 2001,” (2009). These bills found little success in the 1960s and 1970s, and were more effective in 1981 and 2001 because the government and administration realized that faster action led to better results.

A popular way to create economic stimulus is to get money into the hands of people who will likely spend it. A direct rebate is one method, and a reduction on tax burden is another. Individuals received a reduction in the individual income tax rate in 1964, 1975, 1981, 2001, and 2003, and it is likely that reduction of taxes will be popular in the future (Wolf 2009). Other methods relax the tax burden by increasing the amount of deductions individuals can take and the amount allowed for dependent exemptions.

Similarly, economic stimulus packages must support businesses that employ individuals. Businesses, like individuals, are likely to spend any additional money they have at their disposal. Some of the money spent could be used to employ workers and make purchases from other businesses. Popular stimulus cuts for businesses include reducing the corporate tax rate, which was done in 1964 and 1981. Governments have to balance the tax burden on individuals and businesses, and sometimes these two groups are at odds with each other because each feels that it pays more than the other. Businesses may feel they are paying enough, while individuals may feel that businesses have the wherewithal to pay more. Other economic incentives for business have allowed for “modification of depreciation schedules” in 1962, 1971, 1981, 1992, 2002, and 2003 (Wolf 2009). Like individuals, businesses can also benefit from incentives that include increasing business deductions.

As in President Roosevelt’s day, any return to taxpayers—business or individual—has a healthy psychological effect on Americans. Economic stimulus can increase confidence in government and business, as well as reduce crime and social problems caused and exacerbated by unemployment and the lack of funds for social concerns.

Economic stimulus in 2001 was needed for several reasons. The technology bubble burst, creating a recessionary climate due to the massive increase and subsequent failure of Internet-based and other technology companies in the late 1990s through the early 2000s. In addition, the September 11, 2001, terrorist attacks negatively impacted America’s transportation and tourism industry. Businesses affected by the attacks (US airline companies, for example), faced extreme financial hardship. Similarly, tax and other benefits were extended to victims of Hurricane Katrina in 2005, to residents and businesses throughout the Gulf Coast.

An example of a government benefit extended during times of economic hardship is the 50 percent special depreciation deduction for businesses from the Internal Revenue Service (IRS) that was enacted from September 11, 2001, through December 31, 2004. After 2004, this 50 percent deduction was only for what was called the “Liberty Zone” in New York and the hurricane affected “Gulf Opportunity Zone.” However, the Economic Stimulus Act of 2008 later reinstated this deduction (Internal Revenue Service 2008).

In 2008, US President George W. Bush signed approximately $152 billion in tax relief into law. Known as the Economic Stimulus Act of 2008, it targeted “low- and middle-income taxpayers and incentives for business investment.” The Bush administration later signed the Emergency Economic Stabilization Act of 2008 into law to address problems within America’s financial industry. Just how successful these stimulus measures were remains a topic of debate. Critics of economic stimulus packages claim that mismanagement and abuse of such large sums represent large risks to their effectiveness.

Economic Stimulus Packages Today

In 2009, the administration of US President Barack Obama passed an additional economic stimulus with the stated goal of helping the American economy recover from the global financial crisis. In February 2009, Democrats used their congressional majority to pass an historic $787 billion economic stimulus package called the American Recovery and Reinvestment Act of 2009 (ARRA). The package allowed for the government to use “spending and tax cuts” to stimulate the US economy. The bill included the following spending:

• $288 billion in tax relief
• $144 billion in state and local fiscal relief
• $111 billion in infrastructure and science
• $81 billion in protecting the vulnerable
• $59 billion in health care
• $53 billion in education and training
• $43 billion in energy
• $8 billion in other areas

Controversy surrounded the American Recovery and Reinvestment Act of 2009 because of perceived lack of oversight, single-party domination in the act’s design, and the fact that it would substantially increase the national debt. Others believed that there was no way the government could have moved quickly enough to resolve the nation’s economic issues. Further compounding criticism of the ARRA is that in the three-month aftermath of its implementation, only 6 percent of the funds were paid out (Cooper 2009). In addition, a January 2011 report stated that new building activity in the United States had reached a ten-year low the previous year, despite the influx of stimulus money. However, by the summer of 2009, the US economy had begun growing again after months of decline. The US economy began adding jobs in the spring of 2010. The unemployment rate in the United States remained at approximately 7.6 percent in January 2011; however, by July 2015, the US unemployment rate had reached 5.3 percent, nearing full employment. A 2014 report released by the Obama administration claimed that the ARRA had increased the gross domestic product of the United States by 2 to 2.5 percentage points between late 2009 and mid-2011 and had added approximately six million job years through 2012.

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Bibliography

Books

Auerbach, Alan J. Fiscal Policy: Lessons from Economic Research. Cambridge: MIT P, 1997. Print.

Krugman, Paul R. The Return of Depression Economics and the Crisis of 2008. New York: Norton, 2008. Print.

Periodicals

“Broadband Expansion Programs in the Recovery Act: Economic Stimulus Funding for Federal Broadband Infrastructure.” Congressional Digest 92.4 (2013): 6–32. Print.

Congressional Budget Office. Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output in 2014. Washington, DC: CBO, 2015. PDF file.

Cooper, Michael. “Stimulus Aid Trickles Out, but States Seek Quicker Relief.” New York Times. New York Times, 12 May 2009. Web. 27 May 2009.

Freeman, James. “Obama’s Stimulus, Five Years Later.” Wall Street Journal. Dow Jones, 17 Feb. 2014. Web. 19 Oct. 2015.

Grunwald, Michael. “5 Years after Stimulus, Obama Says It Worked.” Time. Time, 17 Feb. 2014. Web. 19 Oct. 2015.

Marglin, Stephen A., and Peter Spiegler. “Unpacking the Multiplier: Making Sense of Recent Assessments of Fiscal Stimulus Policy.” Social Research 80.3 (2013): 819–54.

Samuelson, Robert J. “The Verdict on the Economic Stimulus.” Washington Post. Washington Post, 16 Mar. 2014. Web. 22 Dec. 2014.

“Stimulus v. Austerity: Sovereign Doubts.” Economist. Economist Newspaper, 28 Sept. 2013. Web. 22 Dec. 2014.

Wolfers, Justin. “What Debate? Economists Agree the Stimulus Lifted the Economy.” New York Times. New York Times, 29 July 2014. Web. 22 Dec. 2014.