Josh Bivens: Issue 9

Topics: Macroeconomics, Economics, Unemployment Pages: 7 (2485 words) Published: November 18, 2013
Josh Bivens argues that the American Recovery and Reinvestment Act (ARRA) did work to create more jobs. He says that a combination of tax cuts, transfer payments and direct government grants to stop the great recession were needed to boost economic growth, which was the goal of the stimulus package. According to Bivens, automatic stabilizers (i.e.: Lowering of interest rates and progressive tax collections) were introduced after private spending slowed down, resulting in ineffective methods to halt the economy’s rapid decline. However, he disagreed with the component of the ARRA to fix Alternative Minimum Tax (AMT), as he felt it was not suitable for a short-term plan, and did not provide the economic boost needed within the allotted timeframe. Although Bivens says AMT compromised the ARRA, he still argued the stimulus package was needed and effective in meeting the estimated 2-4 million new jobs and a 5% increase in GDP in 2 years.

According to the private sector macroeconomic forecasters, the estimate for new jobs and increased GDP were accurate. Their research confirmed that the ARRA added 3% to GDP and created/saved roughly 2.5 million jobs. Further evidence from the Congressional Budget Office (CBO) showed that the ARRA was effective, and estimated 5.3 million full-time saved jobs, which kept the unemployment rate up to 2 points lower than it would have without the recovery plan. Bivens says these estimates were “spot-on” to the actual impact because of a liquidity trap, which occurs when an economy with high unemployment combined with very low interest-rates experiences deficit-backed tax cuts and spending. As a result of the trap, unemployment rates lower. Additionally, Bevin says the timing of the ARRA coincided perfectly with the downward spiral of spending and unemployment, while two-thirds of the Act’s provisions go directly to boosting household disposable income, which would stop a fall in consumer spending. Bevin provides further support that the ARRA worked when discussing facts about the economy if the stimulus package was never imposed. For example, Bivens notes that GDP would be $600 billion lower, there would be 3 million fewer jobs, and unemployment rate would be 2% higher.

Another argument Bivens makes suggests the Act caused minimal cost to the economy because it was temporary. Further he says there was no effect on long-term budget challenges. Rather, he says the economy’s long-term deficits are due to rising health care costs and low revenue as a share of GDP. Bivens also compares the $787 billion cost for the ARRA to against the actual net impact on the budget deficit. For example, because the Act saved jobs and generated tax revenue it kept them out of public safety net programs (i.e.: extensions unemployment insurance). Additionally, the CBO suggests that the economic activity spurred by the ARRA recouped more than half ($330 billion) of the initial price tag. Bevin’s argues that other provisions in the Act offset the total cost, as well as the impact of low interest rates contributing to the overall lower cost. Bevin explains that the failure to increase interest rates is prime evidence that no crowding out of private investing was occurring; essentially, making the Act free in terms of economic opportunity cost. His testimony mentions several papers that confirm large multiplier effects of fiscal support when the economy is a liquid trap, thus it was very likely that the Act was “crowded-in” private investments, and making it absent in the Act’s effects.

Bivens says more support is needed to generate enough economic growth and while the ARRA saved the US economy from the great recession, the economic fate remains poor. He compares the 9.5% unemployment rate to the CBO 2013 estimate of 6.3%, reiterating that this is higher than the peak rate during the early 2000’s recession. Bivens also suggested that with the grim outlook on unemployment, the private sector has decreased hiring and...

Cited: Websites:
1. Official U.S. unemployment rate, from www.bls.gov.
2. 2010 Economics Report of the President, from www.whitehouse.gov.
3. ARRA debt spending, from www.cbo.gov.
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