What Was Obama's Stimulus Package?
Did Obama's Stimulus Plan Work?
The economic stimulus package ended the Great Recession by spurring consumer spending. It's goal was to save between 900,000 to 2.3 million jobs. Most important, it instilled the confidence needed to boost economic growth.
It also aimed to restore trust in the finance industry by limiting bonuses for senior executives in companies that received TARP funds. (Sources: "Letter to Senator Grassley," Congressional Budget Office, March 2, 2009. Recovery.gov)
How It Worked
ARRA had three spending categories. It cut taxes by $288 billion. It spent $224 billion in extended unemployment benefits, education and health care. It created jobs by allocating $275 billion in federal contracts, grants, and loans.
The Obama administration did better than planned. By the end of FY 2009, it spent $241.9 billion. Of that, it spent $92.8 billion in tax relief, $86.5 billion in unemployment and other benefits and $62.6 billion in job creation grants.
In the FY 2012 budget, the Congress allocated additional funding to raise the total to $840 billion. By December 31, 2013, the administration spent $816.3 billion. Of that, it spent $290.7 billion in tax relief, $264.4 billion in benefits, and $261.2 billion in contracts, grants and loans. (Source: Recovery.gov.)
Was It a Success?
Many critics pointed out that Obama's stimulus package did not succeed because the economy contracted 2.8 percent in 2009. The Congressional Budget Office projected ARRA would stimulate GDP growth by 1.4 percent to 3.8 percent that year. That meant growth in gross domestic product would be 1.4 percent to 3.8 percent better than if Congress did nothing.
In fact, the CBO projected the economy would contract 3 percent for 2009. That's because it had already contracted 5.4 percent the first quarter, and 0.5 percent in the second. The Dow had fallen to 6,594.44 on March 5, 2009. By Q4 2009, GDP was up 3.9 percent, and the Dow had risen to 10,428. By 2010, the economy expanded 2.5 percent.
The economic stimulus bill was supposed to save 900,000-2.3 million jobs. As of October 30, 2009, it saved 640,329 jobs. (This is the most recent report. The Recovery Board stopped estimating job creation after that.)
Not all of that success was thanks to the Stimulus Package. Expansive monetary policy and active emerging markets boosted global growth. But by March 2009, monetary policy had done all it could. It was evident more fiscal policy was needed. No doubt, the economic stimulus package inspired the confidence needed to turn the economy around.
Once in office, Obama realized he needed to increase the fiscal stimulus from the $190 billion plan he proposed in his campaign. Some components of his campaign plan, such as enacting a foreclosure moratorium, had already been implemented by Fannie Mae. Others, such as eliminating taxes on seniors making up to $50,000, were still part of Obama's economic agenda elsewhere.
Obama's biggest challenge was to create enough of a stimulus to soften the recession, but not big enough to raise further doubts about the ballooning U.S. debt. Unfortunately, the plan was blamed for doing both -- failing to reduce unemployment below 9 percent, and adding to the debt. Even so, the stimulus plan was not condemned as much as health care reform, Medicare, and Medicaid for the debt.
How Well Did Each of the Three Components Work?
Obama's tax rebates were supposed to encourage consumer spending, but many experts doubted it.
Why? The rebates showed up as less tax withholding. Unlike the Bush tax cuts, workers did not receive checks. As a result, most people weren't aware they got a tax rebate.
The Stimulus for Small Business helped create jobs, increased lending from the SBA and community banks and reduced capital gains taxes for small business investors. The aid helped, but many states were so underwater that their losses outweighed the federal assistance.
The public works construction was probably the most well-publicized. Signs were posted wherever stimulus money was used to construct roads or public buildings. It was estimated to retain or add 3 million jobs, many of which were sorely needed in the construction industry.
Economic Stimulus for Small Businesses
Although most of the media attention was on the $105 billion invested in large banks, the Treasury's TARP program also invested $92 billion to strengthen community banks across the country. These banks were directed to use the funds to help small businesses in their local area.
Second, the Economic Stimulus Package included $54 billion in tax writeoffs for small businesses. Here's the breakout:
- Deductions for machinery and equipment, such as computer and office equipment, signs, and vehicles was raised to $250,000 (except SUVs which were limited to $25,000). Property that didn't qualify for the tax credit could be depreciated by 50 percent.
- Investors in small, publicly-held businesses who held their stock for more than five years received a capital gains tax cut.
- Small businesses could delay paying the 3 percent withholding tax on goods and services sold to governments.
- Small businesses that hired unemployed veterans and students who looked for work for more than six months received tax credits.
- Delay taxes for businesses that reduced their debt.
- The Small Business Administration 7(a) loan guarantee was raised from 75 percent to 90 percent of the value of the loan.
- Fees were eliminated on the SBA's 504 program, which guaranteed $4 million worth of economic development loans to small businesses.
The FY 2011 budget also allocated $64 billion, broken out as follows:
- $33 billion in tax credits for small businesses that add new workers or give raises beyond a cost-of-living increase.
- Raise the limit on SBA loan guarantees from $2 million to $5 million.
- $30 billion from the TARP program for 8,000 community banks (assets under $10 billion), which do half of all small business lending.
- $700,000 to eliminate capital gains taxes for investors in small businesses.