Editorials


 * The American Recovery and Reinvestment Act of 2009 and Beyond **

In his response to the most recent State of the Union, Representative Paul Ryan of Wisconsin criticized Obama and other Democrats for using the word "stimulus" to expand the scope of the American government. While the claim that government is expanding in size is a rather dubious one considering the fact that government spending as a percentage of GDP is barely above "Morning in America" era America, it is worth understanding the "stimulus" which Representative Ryan is clearly unhappy with.

The 111th Congress passed the American Recovery and Reinvestment Act of 2009, commonly called "the Stimulus", on February 13 and the Act was signed into law four days later by President Obama. Its goal was to return the economy back to prosperity by using deficit spending to replace the consumer demand as the country plunged into a recession following the financial meltdown of 2008. This policy which is based on Keynesian economics hearkens back to the presidency of Franklin Roosevelt. John Maynard Keynes urged FDR to invest in public infrastructure as a way to stimulate the economy and end the Great Depression. The failure of the American Recovery and Reinvestment Act to produce a greater recovery is not an illustration of the ineffectiveness of deficit spending, rather it is the result of limited stimulation of the economy by the government.

Initially, when the ARRA was first passed many economists predicted that it was too small to create a strong recovery and Obama would need to call on Congress for more stimuluses. Nobel Prize winning economist Paul Krugman noted that the difference between what the economy was expected to produce and what it could produce was a hole of over $2 trillion dollars. Furthermore the $600 billion of stimulus would need to be supplemented in the future if this output gap was to be closed. In addition, Krugman bemoaned the fact that a significant amount of the money appropriated in the Act was towards tax breaks which would have smaller multiplier effects than infrastructure projects. It is an extreme contortion of the truth to suggest that economists believed that the ARRA would create a full recovery and are currently being dishonest when they continue to defend the merits of stimulus spending.

Additionally, while the individual while the total price of the American Recovery and Reinvestment Act may appear staggering, state governments have essentially worked against it. Between the fourth quarter of 2007 and the second quarter of 2010, real government consumption grew only 4.5% against a potential GDP increase of 6%. This is because state and local governments, unlike the national government are prevented from running deficits and as a result have cutback their spending. This has in effect mitigated the benefits of the Stimulus. It is also worth noting that the American Recovery and Reinvestment Act does give aid to the states but due to the strange power struggle between governors and senators the sum was reduced in the Senate.

Even the Great Depression parallel provides a warning about not fully embracing fiscal stimulus. In his New York Times op-ed following the election of Barack Obama, Krugman examines a study of FDR's fiscal policy by MIT economist E. Carey Brown. The study explains that the reason FDR's first two terms did not contain a full economic recovery is that fiscal stimulus on the national level was undercut by tax increases and state and local level budget cuts. It is for this reason that, over 2 years ago, Krugman urged Obama to be bold in the face of a crippled economy.

To come full circle, let's return to President Obama's State of the Union; in his speech he stated that this is "our sputnik moment" meaning that it is our time to reach new heights in science and technology and progress triumphantly into the new century. However, I think maybe we should search for a different analogy. We should look to the massive public works program which brought about the end of the Great Depression. We should look back to World War II and unite as a nation to fight for a better, more prosperous, and a more equal America.