Don't Mark Tenth Anniversary of Obama Stimulus By Passing Costly & Inefficient "Automatic Stimulus" Law
February marks the 10th anniversary of the 2009 American Recovery and Reinvestment Act (ARRA, also known as the “economic stimulus law”) which was designed to stimulate an American economy in freefall. The legislation for “shovel-ready” transportation projects, more generous unemployment and food stamp benefits, and various temporary tax relief for individuals and businesses, was estimated, at the time, to cost $787 billion — more than the 2009 annual Pentagon budget.
The key purpose of the stimulus law — which had been designed and enacted almost entirely on a partisan basis — was to create “jobs, jobs, jobs.” The incoming Obama administration estimated that the law would create “between three and four million jobs by the end of 2010” while keeping the unemployment rate under eight percent. None of that happened. Instead, total employment fell by another four million jobs in two years, and as unemployment soared to 10 percent, Americans asked “where are the jobs?”
Much later, stimulus supporters admitted that the official document with projections about job creation had been a big mistake. Christina Romer, who went on to chair President Obama’s Council of Economic Advisers, admitted that she should have been more politically astute about making predictions. As it turned out, the job-creation estimate was a political disaster, as it provided administration opponents fodder to attack further stimulus measures.
Today, that experience is still influencing the actions of Washington policymakers. In recent 10-year retrospectives, former Obama administration officials (including former CBO and OMB Director Peter Orszag, and Jason Furman, Chairman of President Obama’s Council of Economic Advisers) noted that Republican criticisms of the 2009 law contributed to the inability of Congress to pass subsequent stimulus laws, as it often does after recessions. Jared Bernstein, then-Vice President Biden’s Chief Economist, and one of the economists behind the stimulus law’s projected job impact, worries that current “gridlock and dysfunction” make it “extremely hard to imagine this Congress passing [an] ARRA-like stimulus” in a timely manner. Their recommendation: policymakers should craft an “automatic stimulus” protocol that kicks in when the economy slows, without the need for temporary legislation like the 2009 law.
Some in Congress are already heeding this call. Senior Democratic lawmakers in the House and Senate recently introduced the ELEVATE Act, “automatic stimulus” legislation providing billions of dollars in employment subsidies every year, supported by increasing federal funds as unemployment rates grow. And, in a piece last week, Bernstein supported these suggestions: “A forward-looking agenda would depend less on discretionary measures and more on extended unemployment insurance and SNAP benefits, job subsidies and grants to states ….”
The idea would thus be that instead of waiting for Congress to act on a temporary stimulus law, federal law should be changed permanently to ensure that increased Medicaid funding, “state aid” to retain teachers, bigger food stamp benefits, and longer unemployment checks, would flow automatically to states when unemployment rises.
If carefully crafted, such an approach might improve the timeliness of responses to recessions. But key concerns include the cost, and whether such benefits and other spending would be properly targeted and temporary. For example, the proposed employment subsidies program today is an open-ended entitlement that would not only grow automatically in recessions, but would mean permanently higher federal spending, as it would operate even when the economy is strong. Similar changes to other types of stimulus would increase spending even more, in bad times and good. In contrast, the 2009 law provided for significantly lower, capped funding for employment subsidies for only two years.
Lawmakers are under tremendous pressure to “do something” when recessions strike, as occurred ten years ago. And despite concerns about Congress being unable to enact temporary stimulus, that practice has been regularly followed since at least the 1950s when policymakers started supplementing automatic tax and spending stabilizers with short-term stimulus measures including the extension of unemployment benefits. Passing an automatic stimulus bill today will not restrain the urge to “do something,” and that could mean much more spending.
Following the last recession, the nonpartisan Congressional Budget Office found that existing automatic stabilizers (such as unemployment insurance for example) provided more support for the economy than ever before, even with the large temporary stimulus enacted in 2009. Policymakers should therefore consider the costs and other associated risks of adding automatic stimulus, especially if the driving factor is concern about political divisions in Congress. When needed, Congress has regularly crafted temporary stimulus legislation — often with bipartisan support. This bipartisan cooperation also serves as an important brake on the more extreme policy preferences of each party. “Fear” of dysfunction, or the fact that the 2009 stimulus law didn’t achieve the predicted goals of its supporters, is not a sufficient reason to abandon that longstanding practice. And doing so would involve its own significant new risks.
Matt Weidinger is a resident fellow in poverty studies at the American Enterprise Institute. He served for more than two decades on the staff of the House Ways and Means Committee, most recently as the deputy staff director.
