A Convenient ARRAngement?

  • SumoMe

“The American Recovery and Reinvestment Act of 2009” is currently a hot topic of debate not only in the 111th United States Congress but also across macroeconomists of various schools, policy makers and others. In layman’s language, this is a big budget sequel to the Bush Administrations “Economic Stimulus Act of 2008” which was mainly about providing tax rebates to the middle and lower income group as well as tax incentives to stimulate business investment. The cost to the government was projected around $152 billion.


Now the ARRA is at a whole new level. Budgeted at a whopping $819 billion composed government action is nearly every sector possible. The following pie-chart shows the sector-wise distribution of the ARRA bankroll:-


Let’s do an analysis of the entire plan, going through the pros and cons as we do so rather than elaborate on pros and cons separately in a high school text-bookish manner. The cost of the plan reflects its comprehensiveness but on the other hand if it does not go as intended the collateral is quite high. Furthermore, in the present day of financial crisis, tax revenue is not a feasible procedure to bankroll this stimulus (Indeed, it is promoting tax cut.) and thus funds need to be raised through debt-financing. The wisdom of burdening the population with such huge debt in the face of an already adverse economic situation is highly questionable.


Tax cuts are dealt with comprehensively and it seems that it will most likely help out the poor in improving their conditions. But it also seems that tax cut is dealt with too comprehensively, whereas incentives are given to higher income bracket people and corporations who don’t really need it. The idea behind tax cut is helping the people to stimulate the economy through higher consumption, but the higher income bracket already has maxed out consumption and the extra money they have is more likely to heading for their bank account.


Infrastructure spending has been heavily hyped as well. It is important to note that any returns from such spending cannot be considered a stimulus as the returns are mainly long-term. Also, huge amount of spending has a possibility of a larger number of regulatory failures.


Infrastructure spending has also links with the question of aggregate job creation- probably the most hyped aspect of the stimulus package. Now in long term, better technical and human capital certainly helps in the rate of job creation through higher aggregate output of the economy. This is basic theory of economic growth. However, this can be hardly considered stimulus. For one, the effect is long-term. But the most serious effect is that of short term job loss. The economics behind this is as follows, any investment adds to the capital stock which aids in productivity per capita. Now in the short run, immediate growth in output is not visible. So what happens when you have more efficient labour with the same output to produce? Job loss. Although, it might be said that this analysis is not exactly foolproof (as most economic models aren’t) – but the huge rate of job creation which has been promised is not going to have a short term realization by any means.


The next line of argument is based on the government putting too much trust on homeowners by providing “those who did not lie about their income” funding to avoid foreclosure. Naysayers point out that this may encourage the homeowners to become unnecessary risk takers, knowing that the government safety net is there to catch them. I am kind of on two minds on this issue, risk taking maybe good, after all nothing ventured nothing gained, but relying too much on a backup plan is not that good as well.


Transfer payment in terms of tax rebates and unemployment benefits is a point of controversy. There is no right or wrong answer to this and I am going with an ambivalent mindset on this one. Yes, transfer payment is good for alleviating the hardships of the poor but then again too much transfer payment will give rise to the “Malibu Surfer” problem. You won’t be inclined to go out and exercise your work effort if you are paid for sitting around and doing nothing!


A good thing coming out of this is rescue package for states having financial trouble. That will help to save some precious government jobs and get those states back to their feet.


We end on a somber note here considering a few things. Firstly, history hasn’t exactly favoured these “fiscal policies”, case in point being Great Depression in 1930s and East Asian Financial Crisis in 1990’s. Secondly, some expenditure like $200m to fix up The National Mall, $21m for sod and $200m for contraceptives sound wasteful from the word go. And Lastly, although the stimulus looks to have some promising long term effects, those not mentioned being in the energy sector and establishing more gender equity and perhaps improving standard of living, the stimulus for NOW is too small- and in case the plan backfires, then as I stated in the beginning of the analysis – there is a huge price to pay.


Arijit Sen

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