Is The Stimulus Package Worth It?

There's a lot of opinion about whether or not the recently passed American Reinvestment and Recovery Act (ARRA) of 2009 (aka, "the stimulus package") will help America lessen the impact of the current recession. Many people wonder if it will actually do anything. Many believe it will be of great impact.

I think I may have some insight.

About a week ago, on March 2, the Congressional Budget Office released an estimate to the Finance Committee of what the ARRA is expected to do for GDP growth over the next ten years. Ostensibly, the finance committee uses the CBO's analysis to inform themselves about the policy decisions before them.

So, using the CBO's estimate to the Finance Committee, I did a calculation of what each scenario (high estimate, low estimate, and "do nothing") would cost, in terms of lost GDP, using $13 trillion as the starting GDP.

Here's the news: in the high estimate scenario, with the stimulus package helping the most to spare us from the worst of the recession, the USA loses $1.3 trillion in cumulative GDP in the years between 2009 and 2011. In the low estimate scenario, the USA loses $2.02 trillion, and in the "do nothing" scenario the USA loses $2.2 trillion.

But wait, the $787 billion stimulus costs money, doesn't it? If you factor in the stimulus package's price tag into each scenario, the story is a bit different.

In the low estimate scenario, the lost GDP plus the bill for the stimulus package amounts to $2.8 trillion. Remember the "do nothing" scenario's cost of $2.2 trillion? This means that in the low estimate scenario, the ARRA actually puts America $612 billion further back in 2011 than if we had done nothing!

In the high estimate scenario, which is the one where the most optimistic ROI multipliers are used to gauge the success of the stimulus, America is only $98 billion better off than if it had done nothing!

So this suggests that both sides of the argument are right, in a sense. Those who say the stimulus won't do much, and those who say it doesn't go far enough are right, as it buys us little relative value versus the "do nothing" scenario even in the CBO's best estimate.

In my opinion, the key is in the multipliers: the CBO doesn't believe that the stimulative effects of the ARRA are all that stimulating. If we were spending the stimulus dollars on activities that would generate better returns, those multipliers would be higher, and we would get "more bang for our (stimulus) buck", and the loss in GDP over the next few years would be smaller.