Grading the American Recovery and Reinvestment Act

On February 17, President Obama signed the economic stimulus package after a week of negotiations between the House of Representatives, the Senate, and the White House as to the final contents of the bill. The Wall Street Journal has an excellent resource available to any who want to sort through some of the finer points of the bill. It can be sorted by department, spending size, and initiative.

Reading through the numbers, roughly $270B of funding is allocated to a category broadly termed "aid." Almost 90% of this spending is actually locked up in seven large projects which include: federal aid to states for medicaid spending, federal aid to states to shore up education budgets, extension of unemployment benefits, subsidization of unemployed workers' healthcare plans, and increased funding for food stamps. Regardless of politics, it is clear that most of the funding is going to organizations or individuals who will spend and not save, and have a basic need (food and healthcare) which is being met by the government. The effect of the Keysnian multiplier is unclear, but one suspects that the education and healthcare sectors will continue to hold their ground and not be forced to shrink due to this spending.

The next portion of the stimulus packages deals with tax cuts. Based on the numbers, the government stands to lose almost $300B in revenue as a result of this bill. $116B of the $300B will go to households in the form of tax credits for individuals earning less than $75,000, and married couples earning less than $150,000. An additional $70B will be used to help certain families avoid paying the AMT, and $45B to fund child tax credits, college tuition credits, and transfer payments to certain retirees, disabled people, and veterans. The effect of these tax cuts on the economy is far more questionable. While none of these cuts are intended to help high net-worth households, both the child tax credit and the college tuition tax credit do not have income phaseouts. Given the current economic climate and household leverage levels, any government tax cut or distribution going to households who are not going to be engaged in non-discretionary spending will be ineffective. A large portion of this piece of the stimulus will be saved, effectively transferring household debt to the government and not stimulate the economy. Over the long-term, it may help households' outlook and create a structural improvement in the consumer, but it will do nothing to pull the country out of the recessionary spiral.

The final piece of the stimulus, the $220B allocated to government spending, is perhaps the most controversial of all. Almost $60B is allocated to core infrastructure projects: highways, public transportation, water, and the energy grid. Additionally, there is $5.5B allocated to NASA and other scientific projects, of which half takes the shape of increased funding to the National Science Foundation. Much of the remaining spending takes the shape of much smaller projects that are not easy to identify as having particularly high impact and seem to have been sitting on a wish list in a Washington office. There are some projects in particular, such as funding for special education and Title I programs (which cost about $25B together), that seem to fall in this bucket.

In totality, the stimulus bill seems far more about "American Recovery" than it does about "American Reinvestment." Most of the stimulus is geared towards helping Americans maintain their standard of living through government borrowing, rather than emphasize job creation, improving various pieces of infrastructure, or improving long-term competitiveness of American business. In terms of effectiveness as economic stimulus, the thing that matters the most is that the money actually gets spent rather than saved. The vast majority of the spending, aid, and tax cuts actually all follow this ethos. It will be hard to assess the effectiveness of the bill until the country puts some distance between itself and this current recession, but when combing through the numbers it is the opinion of this writer that even if the spending is effective in buffering the recession, it may have been a wasted opportunity to move the country forward.