Baker Institute Student Forum debate: America's stimulus legislation

By Neeraj Salhotra     1/13/11 6:00pm

Both conservative economists, like Martin Feldstein, and liberal economists, like Paul Krugman, believed a stimulus was necessary to save the U.S. economy from a depression. The American Recovery and Reinvestment Act was such a stimulus. The Recovery Act was enacted almost two years ago and, with the midterm elections only a few weeks away, it is fair to ask whether the Recovery Act has been successful. Although the act was constrained in size by the polarization of Congress, it was, nevertheless, a hugely successful policy initiative.The Recovery Act was designed to boost consumption which would, in turn, increase employment. But it was simply too small. As respected economist Martin Wolff notes, "The U.S. was too cautious and not bold enough." The U.S. stimulus was only 5.7 percent of its GDP, whereas China's stimulus was 14 percent of its GDP. The U.S. stimulus was not only composed of government spending, but also tax cuts and aid to state governments.

Tax cuts and aid to local governments are poor stimuli - people invariably save money as opposed to consuming, and aid to state governments only prevents further job losses rather than creating new jobs. Thus, only a fraction of the stimulus was government spending that truly created jobs. The polarization of Congress, coupled with the numerous earmarks needed to secure votes, prevented President Barack Obama from enacting a stimulus bill of the necessary size.

While the Recovery Act was too small, it was, bar none, Obama's most successful initiative. The act's unemployment insurance provisions kept 3.3 million Americans out of poverty. These were 3.3 million Americans that avoided the misery and hopelessness of destitution.

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The Recovery Act's government expenditures created between 2.8 and 3.4 million jobs. These are more than 3 million Americans who were spared the wrath of American unemployment, where there are five applicants for every job opening.

By creating all these jobs and preventing millions of Americans from falling into poverty, the Recovery Act boosted GDP by up to 4.2 percent. Put differently, without the stimulus, economic growth would have been an abysmal 0.2 percent.

So, before we vilify Obama for not doing enough for Main Street, let's be clear: He saved or created more than 3 million jobs; he helped more than 3 million Americans avoid poverty and he boosted GDP growth by more than 4 percent. As Vice President Joe Biden would say, the Recovery Act "is a big f***ing deal."

Neeraj Salhotra is a Sid Richardson College sophomore.

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