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attempt to maintain stable inflation. In a severe recession, however, especially when monetary policy is constrained by the fact that interest rates cannot drop below zero (the zero lower bound), fiscal multipliers can be much larger. Taking further into account the fact that long-term unemployment can lead to transitions out of the labor force, with a resulting long-term effect of depressing output and employment (an effect referred to as “hysteresis”), multipliers can be larger yet for fiscal policies that support aggregate demand and reduce the average duration of unemployment. Numerical estimates of fiscal multipliers are typically computed using historical data on fiscal interventions and macroeconomic outcomes, and Appendix 2 also discusses the recent empirical research on this topic. This empirical work provides estimates of multipliers for different types of fiscal interventions (government spending and individual income tax cuts). Once estimated, the resulting multipliers can be used to estimate the macroeconomic effect of the Recovery Act; that is, to compare what happened under the Recovery Act with what likely would have happened in its absence. CEA’s and CBO’s Estimates of the Recovery Act. To estimate the effect of the Recovery Act on GDP, CEA applied a different fiscal multiplier to each component, and then aggregated the effects of each component to arrive at the overall GDP effect. For government spending (corresponding to public investment outlays and income and support payments) and for tax cuts, CEA used multipliers derived from the empirical estimates of the spending and tax multipliers discussed in Appendix 2. For other components of the Act, such as State and local fiscal relief, CEA used a multiplier equal to a weighted average of one or both of the tax and spending multipliers.13 The CBO used a similar approach in its quarterly reports on the effects of the Recovery Act (although their estimates include the impact of AMT relief and so are not completely comparable to CEA estimates).14 Because of the range of estimates of multipliers in the economic literature, CBO provided an upper and a lower bound for the fiscal multipliers on the various components of the Act. As shown in Table 3-5, CEA multipliers are within the range suggested by CBO (2013a). The multipliers presented here indicate that the Recovery Act had a large effect on output. As shown in Figure 3-5, the Recovery Act quickly raised the level of GDP in the first half of 2009, jump-starting the 13 For State and local fiscal relief, CEA assumed that 60 percent of the transfer is used to avoid spending reductions, and 30 percent is used to avoid tax increases. One-time tax rebates and one-time payments to seniors, veterans, and disabled are assumed to have half of the effects of conventional tax cuts. The effect of business tax incentives is very uncertain. Conservatively, the multiplier to this component is set equal to 1/12 of the spending multiplier. See CEA (2009a). 14 CBO’s methodology is described in Reichling and Whalen (2012). The Economic Impact of the American Recovery and Reinvestment Act Five Years Later | 107
Table 3–5 Estimated Output Multipliers for Different Types of Fiscal Support CEA CBO Low CBO High Public Investment Outlays a 1.5 0.5 2.5 State and Local Fiscal Relief 1.1 0.4 1.8 Income and Support Payments b 1.5 0.4 2.1 One-time Payments to Retirees 0.4 0.2 1.0 Tax Cuts to Individuals 0.8 0.3 1.5 Business Tax Incentives 0.1 0.0 0.4 Note: The CEA multipliers show the impact of a permanent change in the component of 1% of GDP after 6 quarters, or, equivalently, the cumulative impact of a one-time change of 1% of GDP over 6 quarters. The CBO multiplers show the cumulative impact of a one-time change of 1% of GDP over several quarters. a. Includes transfer payments to state and local government for infrastructure and tax incentives to businesses directly tied to certain types of spending. b. Includes such programs as unemployment compensation, COBRA, and SNAP Source: Congressional Budget Office, Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from October 2012 Through December 2012; CEA Calculations. recovery. According to these estimates, the Act raised GDP by 2 to 2.5 percent between the fourth quarter of 2009 and the second quarter of 2011, and it continued to exert a positive effect even as it was winding down in 2012. These numbers are almost entirely within the range of those implied by the CBO analysis, with the exception being a few quarters in late 2012 and early 2013, when CEA estimate is slightly higher. Using the historical relation between increases in GDP and employment, CEA and CBO also estimated the number of jobs generated by the Recovery Act. According to CEA model, the Recovery Act increased employment by more than 2.3 million in 2010 alone, and continued to have substantial effects into 2012, as demonstrated in Figure 3-6. Cumulating these gains through the end of FY 2013, the Recovery Act is estimated to have generated about 6.4 million job-years. These estimates are also within the range of CBO’s upper- and lower-range estimates of 1.6 to 8.3 million job-years. CEA Estimates of the Recovery Act and Subsequent Fiscal Measures Combined. The combined effect of the Recovery Act and the subsequent countercyclical fiscal legislation is substantially larger and longer lasting than the effect of the Recovery Act alone.15 The Recovery Act represents only about half of total fiscal support for the economy from the beginning of 2009 through the fourth quarter of 2012. Moreover, as shown in Figures 3-7 and 3-8, the bulk of the effects of the other fiscal measures occurred as 15 CEA’s estimates of the effects of the subsequent fiscal measures are based on CBO’s initial cost estimates, not actual spending. CEA assigned each of the subsequent fiscal measures to the same functional categories that were used to analyze the Recovery Act, and then applied the corresponding multipliers as discussed above. Quarterly costs were interpolated when only annual cost estimates were available. 108 | Chapter 3
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ECONOMIC REPORT OF THE PRESIDENT To
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C O N T E N T S ECONOMIC REPORT OF
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economic report of the president To
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year-old. In the meantime, I’m go
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the annual report of the council of
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C O N T E N T S CHAPTER 1. PROMOTIN
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APPENDIX 1: COMPONENTS OF THE RECOV
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THE OBAMA ADMINISTRATION’S RECORD
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2.15. Housing Starts, 1960-2013....
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3.1. Forecasted and Actual Real GDP
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C H A P T E R 1 PROMOTING OPPORTUNI
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Opportunity, Growth, and Security i
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crisis—continue to rebound and co
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Figure 1-4 Real GDP Per Working-Age
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Figure 1-6 Change in Poverty Rate F
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Figure 1-7 Domestic Crude Oil Produ
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Figure 1-8 Growth in Real Per Capit
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Figure 1-9 Unemployment Rate by Dur
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e needed to make up for a decades-l
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Annual percent change 2.50 15-year
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Figure 1-14 Share of National Incom
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Along with steps that create jobs,
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corner, with purchases increasing d
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the four quarters of 2013, or enoug
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Percent of GDP 12 10 8 6 4 2 0 -2 -
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Percent 5.0 4.0 3.0 2.0 Figure 2-3
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In the euro area, the unemployment
Page 61 and 62: Figure 2-6 Cumulative Flows into Mu
Page 63 and 64: Figure 2-7 Household Deleveraging,
Page 65 and 66: Box 2-1: The 2013 Comprehensive Rev
Page 67 and 68: Percent 25 20 15 10 5 0 -5 Figure 2
Page 69 and 70: Figure 2-11 State and Local Pension
Page 71 and 72: Percent of GDP 2 1 0 Figure 2-14 Cu
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Page 79 and 80: Figure 2-18 Petroleum Net Imports,
Page 81 and 82: Figure 2-21 U.S. Per Capita Consump
Page 83 and 84: Percent 11 Figure 2-22 Unemployment
Page 85 and 86: Figure 2-25 Predicted vs. Actual Ma
Page 87 and 88: Box 2-4: Unemployment Duration and
Page 89 and 90: The Long-Term Outlook The 11-Year F
Page 91 and 92: Growth in GDP over the Long Term As
Page 93 and 94: Box 2-5: Immigration Reform and Pot
Page 95 and 96: Even with this growth, however, the
Page 97 and 98: families. The other half was for in
Page 99 and 100: ecause of rapidly declining stock a
Page 101 and 102: Obama Administration and the 111th
Page 103 and 104: Figure 3-1 Recovery Act Programs by
Page 105 and 106: other cases, new measures expanded
Page 107 and 108: Figure 3-2 Recovery Act and Subsequ
Page 109 and 110: Box 3-1: Other Administration Polic
Page 111: challenges, and how economists have
Page 115 and 116: Figure 3-7 Quarterly Effect of the
Page 117 and 118: Table 3-6 Estimates of the Effects
Page 119 and 120: International Comparison The 2008 c
Page 121 and 122: Box 3-2: The U.S. Recovery in Compa
Page 123 and 124: Table 3-7 Tax Relief and Income Sup
Page 125 and 126: traditionally been jointly financed
Page 127 and 128: downturn in the economy. Even thoug
Page 129 and 130: Figure 3-11 Recovery Act Cumulative
Page 131 and 132: The Recovery Act also invested in r
Page 133 and 134: helped individuals who chose to ret
Page 135 and 136: the period, even though total power
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Page 139 and 140: Alternative Minimum Tax relief, bus
Page 141 and 142: Through the end of a Individual Tax
Page 143 and 144: y Poterba (1994), states and locali
Page 145 and 146: Table 3-11 Fiscal Support for the E
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Page 151 and 152: Table 3-12 Summary of Cross-Section
Page 153 and 154: the CMS projections show real per-c
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Page 157 and 158: Box 4-1: Two Measures of Growth in
Page 159 and 160: Figure 4-1 Growth in Real Per Capit
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find that even those seniors who di
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the slowdown in real (that is, infl
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health care costs for an individual
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estimate for the ACA found that its
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Figure 4-4 Medicare 30-Day, All-Con
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agreements among the providers them
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payment for physician services, the
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Box 4-3: The Cost Slowdown and ACA
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2010a; 2011; 2012c; 2013a; 2014), w
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Figure 4-6 Recent CBO Projections o
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Conclusion The evidence is clear th
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facilitated this private-sector tec
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esulting gap between the actual gro
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Table 5-1 Sources of Productivity I
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Table 5-2 Nonfarm Private Business
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of the productivity improvement res
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Figure 5-3 Growth in Productivity a
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improving and college completion ra
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Box 5-2: Does Inequality Affect Pro
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Percent 3.5 Figure 5-5 Composition
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• Just two of the largest U.S. te
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Box 5-3: Just-in-Time Manufacturing
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Figure 5-7 Exclusive and Shared All
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Box 5-4: Spectrum Investment Polici
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To stimulate investment in more adv
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Because current uses of technology
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Box 5-5: Electronic Health Records
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about the array of services and sup
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and, in such cases, provides partie
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Box 5-6: The Leahy-Smith America In
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Box 5-7: Pay-For-Delay Settlements
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C H A P T E R 6 THE WAR ON POVERTY
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Measuring Poverty: Who is Poor in A
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thresholds ever since. These dollar
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of necessary items, including food,
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Table 6-1 Poverty Rates by Selected
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Box 6-3: Women and Poverty While wo
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However, this reflects smaller decl
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Percent 25 Figure 6-1 Trends in the
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Box 6-4: Social Programs Serve All
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of low- and middle-income workers a
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particularly valuable since they es
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Figure 6-4 Official vs Anchored Sup
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deep market poverty driven by the b
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work: in 2010, for example, unemplo
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out of poverty through job training
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e noted that researchers have found
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2012). Among the children of low-ea
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Education appears to be one of the
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Friedman, and Rockoff (2011) find t
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including an additional $25 a week
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Figure 6-11 Recovery Act and Subseq
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Empowering Every Child with a Quali
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modernize America’s high schools
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low-income Americans and their chil
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C H A P T E R 7 EVALUATION AS A TOO
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program evaluation efforts. For exa
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went to preschool would have had if
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y adopting successful interventions
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Box 7-2: Using Behavioral Economics
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Box 7-3: “Rapid Cycle” Evaluati
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Figure 7-1 Outlays for Grants to St
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performance data, fewer than half o
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Investment Act programs. The PROMIS
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Figure 7-2 Inventory of Beds for Ho
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example, included a nondiscretionar
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Other benefits of considering evalu
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with the treatment effect and thus
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unemployment insurance wage and ben
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hard for researchers to access for
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REFERENCES Chapter 1 Almunia, Migue
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____. 2014. “Press Release: Janua
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and the TPP at the Peterson Institu
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Increase Employment Evidence from t
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___. 2010b. “The Economic Impact
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___. 2012. World Economic Outlook A
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Polak Annual Research Conference. W
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Baicker, Katherine and Amitabh Chan
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Daly, Mary, Bart Hobijn, and Brian
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Nominal Wages,” International Jou
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Learning: A Meta-Analysis and Revie
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Chien, Colleen V. 2012. “Reformin
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GAO (Government Accountability Offi
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Jorgenson, Dale. 2001. “Informati
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Integration in Economic Development
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_____. 2007. “Improving the Safet
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Dahl, Gordon B. and Lance Lochner.
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Heckman, James J. and Dimitriy V. M
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Ludwig, Jens and Douglas Miller. 20
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Sharkey, Patrick. 2009. “Neighbor
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_____. 2013. “Practical Evaluatio
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www.nij.gov/topics/corrections/comm
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Stock, James H., and Mark Watson. 2
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letter of transmittal Council of Ec
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Council Members and Their Dates of
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The Members of the Council Betsey S
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Act has had on reducing health care
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Statistical Office The Statistical
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A P P E N D I X B STATISTICAL TABLE
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INTEREST RATES, MONEY STOCK, AND GO
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2013-to-2014 TABLE NUMBER MATCH 201
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Year or quarter Table B-1. Percent
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Table B-2. Gross domestic product,
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Table B-3. Quantity and price index
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Table B-5. Real exports and imports
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Year Total 2 Table B-7. Real farm i
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Table B-9. Median money income (in
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Year or month Civilian noninstituti
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Year or month All civilian workers
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Table B-14. Employees on nonagricul
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Table B-15. Hours and earnings in p
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Year and month Interest Rates, Mone
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Year and month Table B-18. Money st
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Table B-20. Federal receipts, outla
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Table B-22. Federal receipts, outla
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Table B-24. State and local governm
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End of month Table B-26. Estimated
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B-7. Chain-type price indexes for g
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B-28. National income by type of in
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B-48. Employment cost index, privat
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B-65. Producer price indexes by sta
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B-81. Federal receipts, outlays, su
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B-99. Farm output and productivity
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B-111. International reserves Inter
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