Policy Paper: American Recovery and Reinvestment Act

Policy Paper

American Recovery and Reinvestment Act of 2009

BUS 102: Ethics and Law in Business and Society

December 12, 2015

Professor Dr. Sean Jasso

Section 21, TA: Felix Cunanan

Table of Contents

Introduction3

History of the act4

Current Situation5

Rationale for the Public Policy5

Main Purpose of the Act6

Implementation7

Department of Education7

Department of Energy8

Department of Agriculture8

Department of the Treasury9

Department of Commerce9

Department of Defense10

U.S. Code10

Title 6 § 453b. Requirement to buy certain items related to national security interests from American sources; exceptions 10

Title 15 § 631: Declaration of policy 12

Title 26 § 45: Electricity produced from certain renewable resources, etc.12

Impact on Businesses and Society12

Response to Government Failure13

Preventing Future Market Failure 13

        Negative Externality14

        Public Goods14

        Information Asymmetry15

Policy’s Efficacy15

Arguments Against the Policy.16

Recommendations16

Appendix18

References23

Introduction

The American Recovery and Reinvestment Act (ARRA) is a $787 billion bill that was signed into law during the Democratic administration of President Barack Obama. The law was created in response to the great recession that began in 2007. Signed on February 17th, 2009, the ARRA was passed with the intention of providing a temporary bump to the nation’s economy.  The government hoped to stabilize and stimulate the American economy by creating jobs and keeping existing ones, investing in long-term economic growth and fostering unprecedented levels of accountability and transparency in government spending (Overview of the American Recovery and Reinvestment Act). Investing billions of dollars to help the United States (U.S.) recover from deep recession was an unprecedented effort;  it includes provisions on how to “modernize the nation’s infrastructure, enhance energy independence and expand educational opportunities, preserve and improve affordable health care, provide tax relief, and protect those in need”(National Telecommunications and Information). The capital funds used to implement the law went into various federal departments, a few of which will each be discussed in further detail.

Before the ARRA was signed into law, gross domestic product (GDP) and employment rates were very low; moreover, private sector layoffs were ever increasing. However, after the bill was signed into law, these factors turned around. Employment grew steadily, saving or creating around two million jobs. By 2013, the real gross GDP was raised by between 0.1 percent and 0.4 percent (Reichling, 2014). Since the ARRA succeeded in providing a temporary bump to the economy, many believe that the policy was incredibly necessary given the state of the economy. However, there are still those who argue that the policy has involved excessive government spending, which they believe will put the U.S. further into debt. Both proponents and opponents of the ARRA have valid claims, but in comparing the current economy to what it was before, the law was an extraordinary effort by the government to prevent the economy from further deterioration.

History of the Act

The U.S. economy began to contract in December in 2007 and by the next year, the economy faced the biggest recession since the Great Depression when the stock market crashed in 1929. Up until the introduction of what is also known as the stimulus act, about 4.6 million jobs were lost. Over the fourth quarter of 2008 and the first quarter of 2009, GDP experienced a greater percentage decline than any six-month period since the late 1940s (Aldy, 2012, p. 1). There were also expectations of default on nearly forty percent of investment grade corporate bonds (Aldy, 2012, p. 1). This was due in part to banks giving loans to those with bad credit and the banks subsequently lost significant amounts of money when the housing bubble burst. As a result from the economy’s contraction, consumer spending severely declined. Therefore, in response to government failure, the bill was almost immediately signed into law.

Implementing the ARRA required the government to spend billions of dollars, which raises the question of how this can actually help the economy out of recession and why the government must extend a helping hand. When consumers feel pessimistic about the state of the economy, as in this case, it makes sense for them to spend less because their disposable income will likely decline. However, this decrease in consumer spending can further undermine prospects for recovery, for consumption is a fundamental determinant of business cycles (Petev & Pistaferri, 2012). Stimulating the economy by means of job opportunities can get more money flowing through the markets, which would increase consumer spending. The government should extend a helping hand because as Keynes (1936) asserted, “government is obligated to actively manage and manipulate the level of aggregate demand and intervene in private markets” (Carter & Tippins, 2012). Thus, it is necessary for the government to fund these efforts because it can give an effectual boost to the economy that would not happen without its help.

Current Situation

In order to fulfill a main objective of the ARRA to foster unprecedented levels of accountability and transparency in government spending, the Council of Economic Advisors was assigned with providing quarterly reports on the effects of the Recovery Act on overall economic activity, particularly on employment (Council of Economic Advisers, 2014, p. i). Within the first few years of the ARRA, GDP per capita reached its pre-crisis level and millions of private-sector jobs were created, bringing the overall unemployment rate down (Council of Economic Advisers, 2014, p. 2). According to the final report, the stimulus act had a “substantial positive impact on the economy, helped to avert a second Great Depression, and made targeted investments that will pay dividends long after the Act has fully phased out” (Furman, 2014). Over the years, Obama signed into law numerous fiscal measures that cover the scope of the ARRA; some measures include expanded business tax incentives and a temporary payroll tax cut. The final report also indicates that the U.S economy is much stronger than it was before; it has grown for eleven straight quarters and 8.5 million jobs have been created since early 2010. The economy still might need much more improvement, but Obama’s strenuous efforts to stimulate the economy have laid the foundation for stronger economic growth.