Estimated Economic Effects of the Recently Enacted Stimulus Legislation
At the request of Senator Grassley and Congressman Camp, today CBO released a year-by-year estimate of the economic effects of the American Recovery and Reinvestment Act of 2009 (ARRA) as enacted on February 17, 2009. This is our first such analysis of the ARRA legislation as enacted. (In CBO’s letter to Senator Gregg, Senator Grassley, and Congressman Camp on February 11, 2009, we estimated an average of the effects of the House- and Senate-passed versions of H.R. 1 because the final language had yet been agreed upon; those numbers differ only very slightly from the estimates provided in today’s document).
We estimate that the legislation will raise gross domestic product (GDP) and increase employment in the short run—by adding to aggregate demand and boosting the utilization of labor and capital. In contrast, we expect that the legislation will reduce output slightly in the long run because the resulting increase in government debt will tend to “crowd out” private investment and thereby reduce the stock of productive private capital. That crowding-out effect will be diminished to the extent that some of the funding in the legislation will go for activities that could add to the nation’s long-term output.
Today’s letter provides finer detail on how CBO estimated the short-run effects of the legislation. Different provisions in the law differ in both the magnitude and timing of their effects on aggregate demand. To simplify its analysis of the overall effects, CBO grouped the various provisions into a number of more general categories, and each category was assumed to have a range of effects on the economy that could by summarized by “multipliers”—the cumulative effect on output of a one-time increase in spending, or reduction in taxes, of one dollar. For example, a one-time increase in federal purchases of goods and services of $1.00 in the second quarter of this year would raise GDP by $1.00 to $2.50 in total over several quarters, with most of that effect in the first two quarters and little effect beyond a year. The multipliers are applied to outlays when they occur and to changes in taxes or transfer payments when they affect disposable income. Table 1 in today’s letter shows the categories to which CBO assigned the major provisions of ARRA. (In some cases, when different elements of a single provision were estimated to have different multipliers, the total cost of a provision was divided among more than one category. In those cases, the provision is shown in the table in the category to which most of its budgetary cost applied.)
Thanks to Ben Page and Robert Arnold of CBO’s Macroeconomic Analysis Division for their fine work on this analysis.