Commentary | Economic Growth

An investment that worked: The Recovery Act two years later

The Recovery Act, signed into law Feb. 17, 2009, passed as a response to what is now known as the Great Recession. It was designed to cushion the economy’s free-fall, create jobs, and return the country to economic growth. Given that the Great Recession officially ended 20 months ago, it is reasonable to step back upon the act’s second anniversary and assess its impact.

The Recovery Act clearly has been effective at providing the economic support for spurring output and employment that was promised by its architects:

  • The Recovery Act was enacted at a time when the private economy was contracting by more than a 6% annual rate and losing more than 750,000 jobs a month.  In the first full quarter after its enactment, the Recovery Act had cut average monthly private job losses by more than a third and slowed the economic contraction to a -0.7% annual rate.  Private job loss fell again, by over half, in the following quarter and then fell by nearly half in the quarter after that, at which point the economy was growing at a 5% annual rate. Clearly, the economy and private job market began to recover right when the Recovery Act began to take effect.
  • EPI analysis shows that by the end of 2010 the Recovery Act had created or saved 3-4 million jobs, and up to 5 million full-time equivalent jobs.  It had also boosted gross domestic product by up to $560 billion and reduced the unemployment rate up to 1.8 percentage points. (This finding is consistent with analyses by the Congressional Budget Office, the Council of Economic Advisors, and private-sector forecasters.)

The process by which the Recovery Act produced positive economic activity is straightforward. The bursting of the housing bubble inflicted a huge negative shock on spending in the U.S. economy. As household wealth evaporated due to plummeting real estate prices, both households and businesses radically cut back their demand for goods and services and demand for new construction dried up.. The Recovery Act helped offset this decline in private-sector demand by boosting public sector purchasing. Many kinds of spending outlays (or tax cuts) could have fulfilled this shock-absorbing function in the very short-run. And indeed, the Recovery Act was a portfolio of various spending increases and tax cuts (a portfolio much more heavily weighted toward tax cuts than most observers realized).

The spending increases in the Recovery Act were extraordinarily well-targeted to boost economic growth and create jobs.  The package included aid to state governments to prevent layoffs and cuts in service, both of which exacerbate recessions. The act provided support for low-income households and individual tax cuts and refundable credits, putting money in the hands of those most likely to spend it and helping those suffering the most from the recession. Finally, the act provided for investment in our nation’s transportation and energy infrastructure, which creates jobs and promotes the sustainability and global competitiveness of the economy.

As of the end of 2010, about three-fourths of Recovery Act spending had already affected the economy. Over the next year, the Recovery Act will continue to boost the economy, create jobs, and make the nation stronger for decades to come.

See related work on Recession/stimulus | Economic Growth

See more work by Ethan Pollack and Josh Bivens