How Much of the Stimulus Spending Is Actually Stimulative?

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by: Sutida

The total size of the American Recovery and Reinvestment Act of 2009 (ARRA) was $787 billion. This is approximately equal to 2.6 percent of GDP over the years 2009-2010. However, not all of this money will provide a boost to the economy in calendar years 2009-2010. Approximately $70 billion of this appropriation was for a one-year patch of the Alternative Minimum Tax (AMT). While this patch provides a stimulus compared to a situation in which the AMT is not patched, Congress has always moved to adjust the AMT in this manner. There was probably no one in the country who had actually expected to pay the taxes that would have been required in the absence of an AMT fix, so this patch does not realistically provide any boost to the economy.

Furthermore, some of the spending in the bill continues beyond 2010. For example, the money appropriated for modernizing the electrical grid and computerizing medical records will be spent out over the next decade. These may be very useful expenditures, but money spent in 2015 will not boost the economy in 2009 or 2010.

If the $787 billion ARRA appropriation is adjusted by excluding the $70 billion AMT patch and the spending of $146 billion that takes place in years after the end of calendar year 2010, the two-year total stimulus in the package falls to $571 billion, approximately 1.9 percent of GDP.
In addition to the stimulus from the federal government, the actions of state and local governments will also impact the economy.

The vast majority of these governments are facing budget deficits in 2009 and 2010 due to the economic downturn. Virtually all of these governments are required by their constitutions or charters to balance their budgets. Therefore, the projected deficits will force them to either cut spending and/or raise taxes.

Will Congress consider another round of stimulus to counteract the housing crash?