February 23, 2011
Under the American Recovery and Reinvestment Act of 2009 (ARRA), also known as the economic stimulus package, certain recipients of funds appropriated in ARRA (most grant and loan recipients, contractors, and subcontractors) are required to report the number of jobs funded through the law after the end of each calendar quarter. ARRA also requires CBO to comment on those reported numbers. In its latest report, issued today, CBO provides estimates of ARRA’s overall impact on employment and economic output in the fourth quarter of calendar year 2010. (CBO’s most recent previous report was issued in November 2010.)
CBO now estimates that ARRA will increase budget deficits over the 2009–2019 period by $821 billion—$7 billion more than what we estimated in our November report. By CBO’s estimate, close to half of that total impact occurred in fiscal year 2010, and about 70 percent of ARRA’s budgetary impact was realized by the close of that fiscal year. (When ARRA was being considered, CBO and the staff of the Joint Committee on Taxation estimated that it would increase budget deficits by $787 billion between fiscal years 2009 and 2019.)
Our current estimates also reflect CBO’s assumption that the Federal Reserve will begin to adjust interest rates in response to fiscal policy a little sooner than previously forecast. That change decreases the projected economic effects of ARRA by a small amount in the fourth quarter of 2011 and in 2012.
CBO’s Estimates of ARRA’s Impact on Employment and Economic Output
Looking at recorded spending to date along with estimates of the other effects of ARRA on spending and revenues, CBO has estimated the law’s impact on employment and economic output using evidence about the effects of previous similar policies and drawing on various mathematical models that represent the workings of the economy. Because those sources indicate a wide range of possible effects, CBO provides high and low estimates of the likely impact, aiming to encompass most economists’ views about the effects of different policies. On that basis, CBO estimates that ARRA’s policies had the following effects in the fourth quarter of calendar year 2010:
- They raised real (inflation-adjusted) gross domestic product by between 1.1 percent and 3.5 percent,
- Lowered the unemployment rate by between 0.7 percentage points and 1.9 percentage points,
- Increased the number of people employed by between 1.3 million and 3.5 million, and
- Increased the number of full-time-equivalent (FTE) jobs by 1.8 million to 5.0 million compared with what would have occurred otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers).
The effects of ARRA on output peaked in the first half of 2010 and are now diminishing, CBO estimates. The effects of ARRA on employment and unemployment are estimated to lag slightly behind the effects on output; they are expected to wane gradually beginning in the fourth quarter. CBO projects that the number of FTE jobs resulting from ARRA will drop sharply during 2011—from between 1.7 million and 4.7 million in the first quarter to less than half that number in the fourth quarter (between 0.8 million and 2.5 million). During 2012, CBO estimates that the impact on employment and economic output of ARRA will be small.
Limitations of Recipients’ Estimates
CBO’s estimates differ substantially from the reports filed by recipients of ARRA funding. During the fourth quarter of 2010, recipients reported, ARRA funded more than 580,000 FTE jobs. Those reports, however, do not provide a comprehensive estimate of the law’s impact on U.S. employment, which could be higher or lower than the number of FTE jobs reported, for several reasons (in addition to any issues concerning the quality of the reports’ data):
- Some of the jobs included in the reports might have existed even without the stimulus package, with employees working on the same activities or other activities.
- The reports cover employers that received ARRA funding directly and those employers’ immediate subcontractors (the so-called primary and secondary recipients of ARRA funding) but not lower-level subcontractors.
- The reports do not attempt to measure the number of jobs that were created or retained indirectly as a result of recipients’ increased income, and the increased income of their employees, which could boost demand for other products and services as they spent their paychecks.
- The recipients’ reports cover only certain ARRA appropriations, which encompass about one-fifth of the total either spent by the government or conveyed through tax reductions in ARRA; the reports do not measure the effects of other provisions of the stimulus package, such as tax cuts and transfer payments (including unemployment insurance payments) to individual people.
Consequently, estimating the law’s overall effects on employment requires a more comprehensive analysis than the recipients’ reports provide.
The report was prepared by Benjamin Page and Felix Reichling of CBO’s Macroeconomic Analysis Division.