The Return of the Master

Ever since the presidency of Jimmy Carter and the stagflation of the time, Keynesian economics has always been in doubt. The Great Recession changed popular perceptions of it, bringing back Keynesianism into good light, but did Obama’s policies actually work?

In less than a month after being inaugurated, Obama led the 111th United States Congress to pass the American Recovery and Reinvestment Act of 2009, or colloquially called the ARRA Act. The ARRA Act had multiple provisions, but, in short, it ushered back in the era of fiscal stimulus. If Obama’s fiscal and monetary policies worked, we can look at the recovery from the Great Recession as a revalidation of Keynesian policies.

What is the ARRA?

There are multiple ways Obama intended to stimulate the economy through this act. The act increased company and individual tax incentives, expanded welfare programs, increased spending on education and health programs, more infrastructure spending, enlarged scientific research, more housing investment, and others. So when critics explain how the cost-per-job of the act was extremely high (even though studies have shown this to be lower than $100,000), and believe that debunks the fact that it worked, I believe they ignore all of the spending that wouldn’t happen under strictly Keynesian policies and that didn’t contribute to short term job growth. For example, spending on the census, short one-time bonuses, and education of homeless children are all not going to have a big effect on short term job growth, directly or indirectly, and they aren’t “Keynesian” countercyclical policy.

Was the ARRA effective overall?

In 2012, the Congressional Budget Office (CBO) decided to estimate the ARRA’s effect in the closing months of 2011 in a short, 14 page report. They conclude that in just one quarter, ARRA policies led to the following effects that would not have happened without the act. They raised real, and not nominal, GDP by 0.2 to 1.5%, lowered the unemployment rate by 0.2 to 1.1 percentage points, increased the number of people employed by 0.3 million to 2 million, and increased full time equivalent (FTE) jobs by 0.4 million and 2.6 million. These numbers aren’t bad, and according to the CBO the ARRA’s effect on output had peaked at 2010 (so numbers were even better just a year earlier), showing the lasting, significant effects of the ARRA. Many quarters had higher numbers, and even by low estimates it is obvious that the ARRA had a substantial effect on unemployment and GDP, especially with the low interest rates during the period and the multipliers that ensued. A similar report detailed that the ARRA not only significantly boosted those employed, but hours worked, too. As detailed in one of my previous articles, this increase in employment and hours worked is very important, as this leads to more expendable income and more consumption + demand, which leads to firms using idle resources to increase production, which they do by hiring more people, which increase expendable income and demand, and the cycle continues.

These are estimates of the ARRA’s effect on certain economic indicators, according to the aforementioned CBO report.
High and low estimates of output multipliers caused by countercyclical policies, showing that all of these policies combined led to a high output multiplier, even going by low estimates. Other reports even put fiscal policy multipliers as high as an average of 2.0.

Some criticisms of these estimates talk about the “crowding out” effect, yet the CBO believes it is marginal, and there’s evidence that it doesn’t occur if you look at some measures of private sector job growth.

“That effect, too, was probably much smaller in the past two and a half years than it might have been otherwise because of a high unemployment and a large amount of unused resources (as well as the diversity of activities funded under the ARRA).”

Estimated Impact of the American Recovery and Reinvestment Act on Employment and and Economic Output from October 2011 Through December 2011
Even though there is an inevitable dip in private sector job growth because of the recession, it quickly grows with recovery during 2010 (aforementioned peak of output multipliers), as increased demand is leading to higher production and therefore more hiring.

There have also been studies that show the ARRA’s initiatives in the Supplemental Nutrition Assistance Program led to an increase in food expenditures by a whopping 5.4% among low-income households, and led to a 2.2% decline in food insecurity. Increases in consumption and expendable income greatly helps economies, as I explained before.


Other criticisms have to do with misallocation of resources and involves the ABCT, which I criticize in another past article. I conclude that based on multiple analyses concluding credible economic impact, studies that show increases in consumption, and evidence there was no “crowding out,” that Obama’s ARRA act was a success.

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