11.02.2009 Policy Points

Is the Recovery Package Working?

In a new analysis, economist Josh Bivens of the Economic Policy Institute looks at the newest GDP report and identifies the effects of the American Recovery and Reinvestment Act (ARRA). Concludes Bivens:

All in all, the combined evidence—the timing of ARRA in relation to subsequent economic performance; the strong influence of taxes and transfers since ARRA; and direct data from Recovery.gov on the timing and composition of ARRA expenditures and tax-cuts—suggests that the recovery package has substantially boosted economic growth and created or saved 1.1 to 1.5 million jobs since its passage.

More specifically, Bivens considers the timing of the recovery package, the impact of income transfers and tax reductions, and direct evidence of ARRA’s role in job creation. Writes Bivens:

… estimates indicate that the recovery package contributed 2.7 percentage points to annualized GDP growth in the third quarter and that it has cumulatively added a full 1.6% to GDP since it was passed. Given that hours have fallen 25% faster than employment since the recession began, if pre-recession levels of average hours worked are targeted, this should translate into a 1.3% (1.6*(1-.25)) increase in employment, or 1.5 million jobs. If one wants to be conservative and note that the last two recoveries following recessions have been accompanied by a 30% rise in the rate of productivity growth (which, all else equal means that less employment is required for a given rate of GDP growth), the 1.6% bump to GDP would translate into something closer to 1.1 million jobs (1.3*(1-.3)) created or saved by the recovery package.

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