American Recovery and Reinvestment Act Research Paper

Introduction

The American Recovery and Reinvestment Act (ARRA), also referred to as the Recovery Act or the Stimulus, is a public law that was adopted by the United States Congress in 2009 as a response to the economic decline in the world market known as the Great Recession. The recession affected the United States economy, primarily jeopardizing large numbers of jobs. The subtitle of the Act describes its purposes as “making supplemental appropriations for job preservation and creation, infrastructure investment, energy efficiency and science, assistance to the unemployed, and State and local fiscal stabilization” (United States, 2009). Analysis of the ARRA requires describing its history, explaining its provisions, examining its implementation, and discussing its impact on business and society, which will allow evaluating the Act’s results and proposing recommendations for future policy makers.

History of the Act

For large federal laws that involve extensive spending and are capable of affecting many spheres and groups of people, understanding the history of their adoption is important because it reveals the background and the incentives behind the law. Also, the way a law is treated in the Congress shows whether it is controversial; it shows who in the American society is likely to support it and who is against it; who will benefit from the law and who will experience losses or disadvantages. Analysis of a policy starts with discussing the reasons for its adoption and the procedural stages of its enactment.

The ARRA was proposed by the representatives of the Democratic Party as a Democratic Party candidate Barack Obama was elected President. The background of the Act was the Great Recession of the late 2000s. The challenging economic situation of 2008-2009 was the environment where the actions under the ARRA were to be taken, and the Act was the response to the situation.

The main difficulty of the Great Recession was that it occurred in the modern, rapidly transforming market, the principles of which were not sufficiently studied. In other words, recessions had happened before, but a new recession is always a challenge because the market is constantly changing, and what worked the last time might not work this time. One of the influential views on the ways to combat recessions and reduce its negative effects is the Keynesian theory (Young & Sobel, 2013). It argues that government should focus on public spending during recessions and demonstrates how such a strategy helps prevent further economic deterioration and protect many people from losing their jobs.

The ARRA initiative was controversial from the very beginning of its legislative history. It was introduced to the House on January 26, 2009, by a United States Representative Dave Obey, a member of the Democratic Party and the Chairman of the House Committee on Appropriations. Almost immediately, over 200 amendments were proposed, but they were combined into 11 amendments to speed up the process of adoption. The Act passed the House of Representatives two days later, on January 28, with almost all the Democrats voting for it and all but one Republicans voting against (H.R.1, 2009). It demonstrated the strong consolidation of the members of both major parties. The voting was the evidence of serious disagreements between the two parties on the economic situation and possible ways to deal with the recession.

In the Senate, the ARRA faced a much more fueled discussion. Democrats and Republicans proposed various amendments, mostly regarding taxation provisions. This stage of the law enactment featured the broad collaboration among people of different economic views, and the Democrats had to compromise. For example, the Republicans’ suggestion to significantly increase the house tax credit was ultimately agreed to by the policy initiators. The ARRA passed the Senate on February 10, 2009, with all the Democrats voting for the adoption and all but three Republicans voting against (H.R.1, 2009). The document was significantly different in terms of certain provisions from the version that had passed the House.

The Conference Report was presented to the House on February 12, 2009. Its consideration was accelerated as less time was given to review the bill than it had been expected. Democrats were speeding the process up as much as they could. The next day the Conference Report passed the House. All the Yes votes were given by Democrats. In the Senate, all the Democrats and three Republicans voted for the bill. The ARRA was presented to the United States President on February 16, 2009. The next day, it was signed by the President on a formal occasion in Colorado, thus becoming a federal public law.

An important aspect of examining a public policy that affects the business sphere is analyzing whether the government’s decision to adopt the policy was based on some kind of underperforming or failure of the market. The public-interest theory is a framework, within which government decisions, attempts, and actions to impose new regulations on the market and businesses are a response to the public inquiry based on market failures (Baird, Raghu, & Tulledge-Scheitel, 2012). Examples of such failures are monopoly and inaccuracy of information. However, it is emphasized by researchers that the consequences of such regulations often do not correspond to their declared purposes, which stresses the importance of the critical approach to analyzing regulations. In case market-failure rationale is weak, it may be argued that intervention is a government failure. For the ARRA, it had been estimated by experts and officials that the adoption of a law providing for extensive market regulations was needed in the United States during the Great Recession. Therefore, the Act is at least partially justified by market failure. However, its measures, the way the market was affected, and the actual outcomes are subject to debate.

Provisions

The ARRA consists of 23 Titles in two Divisions that encompass a wide range of government spending and various other issues (see Appendix 1). It is a whole package of financial policies aimed at stimulating the national economy under the conditions of a recession. The five major purposes of the Act are described in Section 3 (United States, 2009). First, the policies pursue boosting the economic recovery from recession by preserving existing jobs and creating new ones. Second, it is declared that help should be provided to those who were affected by the recession. Third, the provisions are aimed at promoting economic efficiency by providing investments in the technological development in the areas of health and science.

Fourth, Section 3 states that long-term economic benefits should be pursued by investing in infrastructure that includes transport and sustainability. Fifth, the Act strives for preventing counterproductive tax increases, both on the federal and local levels, which will stabilize the budget and help minimize any restrictions of essential services. Also, Section 3 specifies that “The President and the heads of Federal departments and agencies shall manage and expend the funds made available in this Act…including commencing expenditures and activities as quickly as possible consistent with prudent management” (United States, 2009, p. 2). The overall purpose of stimulating the American economy is reflected in one of the major ways to refer to the law: “The Stimulus.”

The ARRA provides for spending public funds on certain areas. The areas include education, healthcare, aid to the unemployed, infrastructure, energy efficiency, science, and housing. For education, a total of 100 billion USD was to be spent, including 53.6 billion USD to local school districts, 15.6 billion USD to increase the need-based subsidies for students, 13 billion USD to underprivileged students of public schools, 12.2 billion USD to provide free public education to students with disabilities under the Individuals with Disabilities Education Act (IDEA), and 2 billion USD for childcare programs. Under the ARRA, it was also planned to spend more money on increasing teachers’ salaries, educating homeless minors, and developing educational technologies.

For healthcare, a total of 155.1 billion USD was to be spent for Medicaid, information technology programs, health insurance for the unemployed, research, building hospitals, preventive healthcare, and training healthcare providers. The ARRA provided for helping the unemployed as well as low-income workers and retirees through social security programs. A total of 82.2 billion USD was allocated to unemployment benefits, pensions, job training, employment services, food-purchasing assistance, food banks, and meals programs. Concerning infrastructure investments, a total of 105.3 USD was to be spent on transport, water management, sewage systems, public lands, government facilities, energy infrastructure, and technologies for communications and information. Research in the area of renewable energy sources and energy efficiency received 27.2 billion USD. Several scientific agencies, institutes, and foundations received extensive funding from the United States government under the ARRA. Certain uncategorized government funds were allocated to support farmers, small businesses, rural businesses, and artists.

A prominent and widely discussed part of the ARRA was dedicated to tax incentives. A total of 288 billion USD was allocated to tax incentives for individuals and companies, and the largest portion (237 billion USD) was dedicated to individuals. This included tax credits, alternative minimum tax, expansion of child tax credits, tax credits for families and college tuition, homebuyer credits, excluding certain individuals from taxation, home energy credits for those who adopt energy efficiency, and deduction of certain kinds of sales tax. Concerning companies, they were given expanded tax refund opportunities, more tax credits for producing renewable energy, bonus depreciation, and changes in taxation regulations for government contractors. The taxation provisions of the ARRA were the most amended ones throughout the legislative history of the Act, which may indicate that their expected effects were the most significant.

Implementation

The implementation of the ARRA was associated with the extensive interaction between the United States government and various sectors of the economy. It has been noticed by many researchers and officials that the Stimulus was the most large-scale package of the authorities’ intervention in the economy since the Great Depression (Implement the American Recovery and Reinvestment Act, 2013). Therefore, the implementation involved a wide range of actions. According to Barnow et al. (2012), federal and local workforce officials claimed the following to be among the major accomplishments under the ARRA:

• States and local workforce investment areas (SWIAs and LWIAs) rapidly shifted to implementing the ARRA.
• The number of individuals who were provided service in such SWIAs and LWIAs increased significantly, even doubled within a short period in certain areas.
• The number of programs and their volume rose, i.e. more training was given.
• Better cooperation was established between workforce programs and unemployment insurance programs, which positively affected the quality of workforce services.
• After receiving additional funding, training programs were advanced and prolonged.
• Youth workforce programs that had been canceled were recreated within a short period.
• Previously unavailable (due to the lack of funding) initiatives to reduce the use of resources were introduced to SWIAs and LWIAs, offering long-term benefits and ensuring the creation of new services.

Overall, it was stressed by the workforce officials that the funds provided by the ARRA needed to be spent fast in order to achieve the expected stimulus result, i.e. to boost the processes facilitating the protection of jobs, as well as providing training to people looking for a new job. SWIAs and LWIAs responded quickly, promoting a large number of initiatives and changes. Also, the funds under the ARRA made serious innovations possible. However, workforce officials also reported challenges in the implementation of the ARRA. The main challenges were associated with staffing and turnover.

Reasons for the challenges were claimed to be civil service requirements and hiring restrictions strengthened by the Act. Also, some areas reported difficulties about spending the funds within required short periods of time. Another challenge was the lack of detailed guidance from the government on how the implementation should have been carried out. Also, the ARRA required workforce officials to follow certain reporting procedures that some SWIAs and LWIAs found difficult, time-consuming, and inefficient. Naturally, many officials reported that it had been difficult to find jobs for all the customers under the circumstances of a recession. More importantly, it was a challenge for WIAs to deal with the same high level of demand from job seekers after the ARRA funds had been spent.

Impact on Business and Society

The impact of the ARRA is a controversial issue as many experts disagree on the outcomes of the Act for the spheres of business and society. A widespread framework for the debate on the Act’s impact is comparing the predicted dynamics of the recession’s consequences in case the Act had not been adopted to the actual dynamics observed after the Act’s enactment. After several years that the ARRA had been effective, a survey among economics experts was conducted on two main issues: employment and the Act’s benefits compared to its costs (The economic impact, 2013).

The survey reveals that 80 percent of experts think that unemployment would have been higher in 2010 if the Act had not been adopted. Concerning overall impact, more disagreement was detected. Only 46 percent of respondents thought that the benefits outweighed the costs; 12 percent thought that the benefits did not outweigh the costs, and more than a quarter of experts reported to be uncertain. In two more years, 56 percent thought that benefits outweighed the costs; 5 percent thought that the benefits did not outweigh the costs, and 23 percent were uncertain. Concerning the unemployment prognosis, in the second survey, 82 percent of experts believed that the unemployment would have been higher in 2010 if it had not been for the Stimulus. Judging from this sample, most economics experts agree on the positive impact of the ARRA.

A study conducted by the Council of Economic Advisers at the Executive Office of the President showed that, within ten months after the ARRA was enacted, about one-third of its total funds (236.3 billion USD) had gone to households and companies in the form of tax reductions, and 149.7 billion USD had been “obligated for projects and activities, which means that the money is available to recipients once they make expenditures” (The economic impact, 2013, p. 3). It was stressed that the trajectory of the American economy was changed by the ARRA toward monitoring, controlling, and mitigating job loss, which is a major consequence of the recession. It is argued that the ARRA is responsible for the growth of real GDP in the second half of 2009.

Particularly, the Act is reported to have added between two and three percentage point to the real GDP of the country right after its enactment and between three and four percentage points in the second half of the year. The study suggests that the level of unemployment in the United States would have been 50 percent higher if the economy had not been stimulated by the ARRA funding. After analyzing the labor market, the study identifies almost 650,000 jobs that could not have existed without the ARRA funding. The Act was found to substantially support small businesses during the Great Recession (Amadeo, 2016). Another important aspect of the Act’s impact is the issue of energy efficiency and renewable energy. More than 50,000 jobs in the area of clean energy were found to be created by the ARRA funds. Also, investing in the industry is estimated to bring significant benefits for the economy in the long run as it promotes sustainable development.

Therefore, the Stimulus was found by researchers more positive than negative in terms of its effects on business and society. However, negative outcomes were also discussed. For example, several renewable energy manufacturers who had received funds under the Act were found to be bankrupts shortly after that. Another example is that the American international business cooperation could have been seriously damaged by the so-called “buy American” provisions. According to the ARRA, construction projects for building any public facilities were required to employ construction materials produced in the United States. This provision was criticized by the representatives of the Canadian business community. Even high-rank officials of Canada expressed their disagreement with the policy because it undermined the wide business cooperation between the two countries. The United States government had to reconsider some provisions to protect the business connections with the northern neighbor.

Policy Analysis

Policy analysis primarily pursues answering the question, “Did the policy work?” which is a particularly challenging question for policies aimed at serious economic modifications. Economies are extremely complicated systems with large numbers of factors and influences, where any development is hard to calculate, which is why predictions often fail. When dealing with direct government funding, analysts need to determine whether positive and negative phenomena observed after such funding in the area where it had been applied to were caused by the funding or would have occurred anyway due to different reasons. The ARRA is an example of this problem. Until today, experts disagree whether the dynamics in the United States labor market and business was affected by the Act because no-one can be certain how the recession would have unfolded if the Act had not been adopted.

The United States were built upon the principle of free market. The businesses and the society are sensitive to any government’s initiatives to impose additional regulations on the economy or otherwise intervene with it. Extensive provisions of the ARRA were justified by extreme circumstances of the Great Recession, which explains the quick adoption of the law. As the implementation analysis showed, funds were rapidly allocated and needed to be spent by targets (e.g. WIAs) on federal, state, and local levels within short periods. All this was aimed at active stimulation of the economy so that short-term results were observed as soon as possible. The results were hundreds of thousands of protected and created jobs, the growth of real GDP, and the promotion of economic efficiency. Most experts thus agreed that the intervention was well-founded and turned out effective. The main strength of the policies was that it followed the academically examined and approved principles of Keynesianism (Young & Sobel, 2013). The strategy to stimulate the economy be investing in the public sector was strictly followed throughout the provisions of the Act.

The critics of the ARRA claimed that there was an initial fallacy in the policy design, which was its major weakness. The fallacy, according to some economists, was that government funding could not help improve the economic situation, i.e. the capability of the ARRA to fulfill its fundamental purpose was doubted. For example, 200 United States economists, including three winners of the Nobel Prize in Economics, wrote a letter to President Obama stating, “We the undersigned do not believe that more government spending is a way to improve economic performance” (Cato Stimulus, 2009). The economists added that “to improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production.

Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth” (Cato Stimulus, 2009). Some proponents of the ARRA criticized it, too, but, on the contrary, for the insufficiency of government spending (Perlman, 2009). Some economics experts claimed that the ARRA could have protected and created much more jobs, if more money had been spent on measures to support employment. Another aspect of the Act criticized by economists was the lack of direct measures. Some argued that consumer spending and unemployment needed to be stimulated more directly to balance the downturn. However, by the end of 2009, a large number of United States economists, including six Nobel Prize laureates, stated that the economy would have been worse without the ARRA.

The ARRA is rather a positive example for future policymakers. Recommendations that can be drawn from the Act’s design, implementation, and impact, include, first of all, having a strong theoretical basis. The Stimulus was proposed by prominent economics experts as a well-founded response to the recession. Also, it was aimed at both short-term and long-term results, which legislators should always pursue. Its provisions were mostly approved of by liberal politicians, which signifies strong political consolidation, which always reinforces laws. Adopting the Act required significant courage from policymakers because it was the largest intervention in the United States economy since the Great Depression. Yet, some criticized the Act for not being extensive enough. Also, less time was dedicated to reviewing the Act in the Congress than it had been expected. A lack of consideration is always a risk of poor decision-making. The haste, with which the law was adopted, is one of the weaknesses of the ARRA that should be considered by future policymakers.

Appendix I

H. R. 1

One Hundred Eleventh Congress of the United States of America

AT THE FIRST SESSION

Begun and held at the City of Washington on Tuesday, the sixth day of January, two thousand and nine

An Act

Making supplemental appropriations for job preservation and creation, infrastructure investment, energy efficiency and science, assistance to the unemployed, and State and local fiscal stabilization, for the fiscal year ending September 30, 2009, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the ‘‘American Recovery and Reinvestment Act of 2009’’.

SEC. 2. TABLE OF CONTENTS.

The table of contents for this Act is as follows:

DIVISION A—APPROPRIATIONS PROVISIONS

TITLE I—AGRICULTURE, RURAL DEVELOPMENT, FOOD AND DRUG ADMINISTRATION, AND RELATED AGENCIES

TITLE II—COMMERCE, JUSTICE, SCIENCE, AND RELATED AGENCIES

TITLE III—DEPARTMENT OF DEFENSE

TITLE IV—ENERGY AND WATER DEVELOPMENT

TITLE V—FINANCIAL SERVICES AND GENERAL GOVERNMENT

TITLE VI—DEPARTMENT OF HOMELAND SECURITY

TITLE VII—INTERIOR, ENVIRONMENT, AND RELATED AGENCIES

TITLE VIII—DEPARTMENTS OF LABOR, HEALTH AND HUMAN SERVICES, AND EDUCATION, AND RELATED AGENCIES

TITLE IX—LEGISLATIVE BRANCH

TITLE X—MILITARY CONSTRUCTION AND VETERANS AFFAIRS AND RELATED AGENCIES

TITLE XI—STATE, FOREIGN OPERATIONS, AND RELATED PROGRAMS

TITLE XII—TRANSPORTATION, HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES

TITLE XIII—HEALTH INFORMATION TECHNOLOGY

TITLE XIV—STATE FISCAL STABILIZATION FUND

TITLE XV—ACCOUNTABILITY AND TRANSPARENCY

TITLE XVI—GENERAL PROVISIONS—THIS ACT

DIVISION B—TAX, UNEMPLOYMENT, HEALTH, STATE FISCAL RELIEF, AND OTHER PROVISIONS

TITLE I—TAX PROVISIONS

TITLE II—ASSISTANCE FOR UNEMPLOYED WORKERS AND STRUGGLING FAMILIES

TITLE III—PREMIUM ASSISTANCE FOR COBRA BENEFITS

TITLE IV—MEDICARE AND MEDICAID HEALTH INFORMATION TECHNOLOGY; MISCELLANEOUS MEDICARE PROVISIONS

TITLE V—STATE FISCAL RELIEF

TITLE VI—BROADBAND TECHNOLOGY OPPORTUNITIES PROGRAM

TITLE VII—LIMITS ON EXECUTIVE COMPENSATION

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