What Is the American Recovery and Reinvestment Act (ARRA)?

In 2009, during the Great Recession, President Barack Obama signed the American Recovery and Reinvestment Act (ARRA), which was a bill aimed at providing fiscal stimulus. The Act consisted of $787 billion in spending, which was later increased to $831 billion. The budget allocated funds for healthcare, infrastructure, and education across the country. In addition, it provided tax cuts, tax credits, and extended unemployment benefits to families. The ARRA sparked controversy during its implementation. Its role in ending the Great Recession is debated to the present day.

Basics

To combat the severe ramifications of the 2008 Great Recession, the U.S. Congress enacted the American Recovery and Reinvestment Act (ARRA) of 2009, commonly referred to as the Obama stimulus or the 2009 stimulus package.

This ambitious fiscal legislation encompassed an extensive array of federal spending measures strategically designed to jump-start the economy. The primary objectives were to generate fresh employment opportunities, sustain the survival of small enterprises, and lighten the tax burden on hardworking families amid the economic crisis.

The Enactment of ARRA: A Historic Anti-Recession Package

The year 2009 marked a significant turning point for the U.S. economy with the implementation of the American Recovery and Reinvestment Act. This massive injection of federal spending aimed to revitalize the job market and counter the impact of the Great Recession of 2008.

Months of diligent work preceded the bill's realization, commencing in the lead-up to President Obama's inauguration in January 2009. Collaborative efforts between the incoming president's aides and members of Congress expedited the process. Swiftly, on January 28, 2009, the House of Representatives passed the bill, followed by the U.S. Senate on February 10, 2009.

With intense conference negotiations, Democratic congressional leaders sought a compromise to gain support from a few Republicans, leading to reductions in the bill's overall spending. Ultimately, on February 17, 2009, President Barack Obama signed the historic ARRA into law, authorizing $787 billion in funds, making it the most substantial anti-recession spending package since World War II.

The ARRA: Sector-specific Investment Initiatives

The American Recovery and Reinvestment Act was devised to invigorate the economy through strategic financial injections aimed at various sectors demanding enhancement. Four key areas were the focus of this revitalization effort: infrastructure, healthcare, education, and tax relief. 

Public Infrastructure: $85 Billion 

Local projects that suffered from inadequate funding were the primary recipients. These projects ranged from the restoration of crumbling bridges to the expansion of mass transit systems. "Shovel-ready" initiatives were encouraged to promptly infuse funds into local communities, although President Obama acknowledged the challenge of truly "shovel-ready" projects.

Healthcare: $138 Billion 

Improvements in healthcare were achieved through the mandatory computerization of patient records for hospitals and doctors, incentivized by financial support. The bill also extended medical insurance to laid-off workers and provided compensation to states for additional Medicaid expenses.

Education: $108 Billion 

To support education, approximately $53.6 billion was allocated to states and local school districts, facilitating teacher salaries and educational programs. Additional funding was dedicated to the Head Start preschool initiative and special education programs. Pell Grants for lower-income college students also saw an increase, reaching $5,350 in 2009 and $5,550 in 2010.

Tax Relief and Other Benefits: $260 Billion 

To ease the burden on families, the ARRA introduced withholding reductions of up to $400 for individuals and $800 per family, alongside a substantial $70 billion extension of the alternative minimum tax. The bill also provided stimulus checks to Social Security and veterans benefit recipients and simplified access to the child tax credit for the working poor. Additionally, first-time homebuyers were incentivized with an $8,000 tax credit.

Reception of the ARRA: Differing Views on Fiscal Stimulus

Opinions on the ARRA were sharply divided along party lines and among economists, presenting a mixed bag of support and skepticism. Some proponents believed that while the massive stimulus expenditure was a step in the right direction, it fell short of entirely rescuing the national economy from the recession.

Notably, economist and columnist Paul Krugman expressed his early approval of the ARRA in a November 2009 New York Times op-ed article, stating that it had followed the principles of macroeconomics commendably. Nonetheless, he argued that the stimulus should have been more extensive to achieve a more robust revival of the U.S. economy.

Indeed, the ARRA did contribute to a resumption of economic growth, as evident from the accelerated gross domestic product (GDP) growth at the time. However, this rebound was insufficient to effectively address the persistent issue of unemployment in the years ahead.

The ARRA in the Crosshairs: Arguments Against Government Spending

Detractors of the ARRA contended that significant government expenditure inevitably encounters inefficiencies and bureaucratic hindrances. Economist Lee Ohanian, in a critical June 2009 Forbes magazine opinion piece titled "The $787 Billion Mistake," maintained that the economy was already showing signs of early recovery before the stimulus programs had even come into effect.

Labeling the economic justifications for ARRA as outdated and flawed, Ohanian emphasized the potential strength of government incentives for private spending and employment over the approach of flooding the economy with unearned funds.

The ARRA's Impact and Subsequent Stimulus Efforts

Over a decade later, evaluating the ARRA's effectiveness remains challenging due to the absence of a counterfactual scenario. Comparing alternative economic projections used to justify the ARRA to actual results provides some insight.

Harvard economist Gregory Mankiw and others examined the U.S. unemployment rate following the ARRA's passage, contrasting it with projections made by ARRA proponents at the President's Council of Economic Advisers. Actual unemployment rates significantly surpassed the "no-stimulus" baseline and lower projections that touted the anticipated federal spending benefits.

The expanded ARRA spending over subsequent budgets culminated in a total cost of $831 billion between 2009 and 2019. Despite economic improvement after the 2008 recession, the post-Great Recession recovery displayed an L-shaped trajectory. Real GDP took four years to recuperate losses, while unemployment took nearly eight years to rebound.

The onset of the pandemic in 2020 brought new challenges, leading to substantial government stimulus initiatives to address unemployment spikes, business closures, and GDP contraction. Packages like the CARES Act of 2020 and the Consolidated Appropriations Act of 2021 played a significant role in fueling economic recovery.

Conclusion

The American Recovery and Reinvestment Act was a response to the 2008 Great Recession, designed to mitigate job losses through economic stimulus measures like tax cuts, government spending, and targeted financial aid. With a total cost of $831 billion, its effectiveness remains elusive, given the lack of a comparative scenario. The true outcome of the American economy without the ARRA's implementation will always remain a mystery.