Thursday, September 23, 2010

Stimulus Evaluated with Facts

On September 19, 2010, the Business Cycle Dating Committee (chaired by my colleague Robert E. Hall) of the National Bureau of Economic Research (NBER) declared that the trough in business activity occurred in June 2009. That trough marked the end of the recession that began in December 2007 and the economy began to recover in July 2009, i.e., the start of the rising phase of the business cycle. The BCDC weighs several indicators of economic activity to reach its conclusion.

The stimulus, the American Recovery and Reinvestment Act of 2009 (ARRA), was signed into law on February 17, 2009, a month after Barack Obama was sworn in as president. The law authorized $787 billion as follows: $288 billion in tax cuts and benefits, $275 billion for federal contracts, grants, and loans, and $224 billion for education, health care, and entitlements.

The web site for ARRA shows that $158 billion in funds had been awarded for federal contracts, grants, and loans, but only $36 billion had been received by applicants between February 17, 2009, and September 30, 2009. Even if all $36 billion had been spent by June 30, 2009, its effect on the economy would be almost unmeasurable.

A large chunk of the tax cuts consists of making work pay credits against social security payments. Tax withholding tables adjusted to reflect less withholding means that no more than one-seventh of the total found its way into private hands for spending by June 30, 2009. The effect of making work pay tax credits on the economy would also be almost unmeasurable.

There is broad agreement that monetary policy played an important role providing financial resources to banks through lower interest rates and purchase of treasuries and other financial assets.

Some prominent economic figures (e.g., Warren Buffet) and politicians complain that the BCDC’s formula does not reflect the ongoing economic misery. But those emotive statements reflect personal judgments, not the official declaration.

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