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The Recovery Act Is Working

SOURCE: AP /Gerald Herbert

President Obama meets with his chief of staff and members of the Council of Economic Advisers.

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Conservative lawmakers are already declaring the American Recovery and Reinvestment Act a failure just five months after its passage. “The unemployment rate is skyrocketing. The stimulus has not succeeded,” Rep. Eric Cantor (R-VA) said recently as part of a concerted attack.

This sniping will only intensify as the first wave of performance data is released. In August, the White House Council of Economic Advisers will release its first quarterly report estimating jobs created or saved by the Recovery Act. And in October, the Recovery Accountability and Transparency Board will release jobs data collected from contractors, grantees, and state governments.

These numbers are not expected to approach the 3.5 million jobs promised by President Obama. The economy shrank at an annual rate of 1 percent from April through June this year. This performance exceeded expectations—especially after a whopping 6.4 percent annual rate of decline in the year’s first quarter—but there is no doubt that the economy remains in distress. Unemployment is now over 9 percent, wages are down, and consumer spending fell 1.2 percent in the second quarter.

This doesn’t mean the Recovery Act is failing, however. The total recovery package is worth $787 billion—$288 billion in tax cuts and $499 billion in investments in public needs such as infrastructure, health care, and education. Federal agencies have paid out just $70.2 billion as of July 24. Declaring failure as funds are still going out the door is comically premature, reflecting an eagerness to pin the economy’s troubles on President Barack Obama, and not an honest evaluation of the facts.

The Recovery Act was not signed into law until February 17. The economic crisis deepened around this time, as the unemployment rate climbed to its highest level in a quarter century. It will take some time to rebound from this collapse. But recovery funds have helped stop the bleeding and stabilize unemployment. The economy’s stronger-than-expected performance over the second quarter provides evidence of this boost, giving hope that the recession may soon be ending.

During the Great Depression, federal lawmakers cut spending to address the deficit (as conservatives are urging now) when expansionary policies were needed. Unemployment consequently never stopped rising, eventually reaching a catastrophic 25 percent, until President Franklin Roosevelt’s New Deal spending began to turn things around. The unemployment rate might be high now, but as this history suggests, it would be even higher without recovery funds. These funds are saving jobs that would have otherwise been lost and creating jobs at the same time jobs are being lost elsewhere in the economy. The Council of Economic Advisers estimates that employment will rise as funds are spent, ultimately reaching 3.5 million jobs created or saved by the end of 2010.

The situation would also be far bleaker for millions of Americans struggling to find work and pay their bills. The Recovery Act:

  • Extended unemployment benefits
  • Cut payroll and other taxes, including expanded child, college, and earned income tax credits
  • Boosted funding for Medicaid and Food Stamps
  • Provided $250 in payments to Social Security recipients and veterans receiving disability and pensions

People receiving this money are sure to spend it out of necessity, providing additional juice for the economy.

Cash-strapped states are benefiting, too. Most state governments are legally required to balance their budgets. Yet the faltering economy resulted in fewer tax revenues and greater demand for public services, leaving states with budget shortfalls totaling $163 billion in fiscal year 2010.

Recovery funds cannot plug all the holes—there is enough to close, on average, about 30 to 40 percent of state shortfalls. But states would face even more severe cuts without this infusion. Michigan, for example, is using recovery programs to avoid teacher layoffs. Utah is rehiring or retaining probation and parole agents and other law enforcement officers. And Colorado is using funds to avoid closing institutions in its higher education system and to hold off tuition increases.

“Overall, states reported using Recovery Act funds to stabilize state budgets and to cope with fiscal stresses,” according to the Government Accountability Office’s most recent status report. “The funds helped them maintain staffing for existing programs and minimize or avoid tax increases as well as reductions in services.”

Even greater benefits are expected in 2010 as infrastructure projects kick into high gear. These projects include road and bridge repairs, school renovation, investments in high-speed rail and other public transit, renewable energy production, and adoption of health care information technology. Updating and modernizing our infrastructure will not only create jobs; it will also put the country in much stronger position to face 21st century challenges.

Jobs, of course, remain the focus of political debate. This makes it especially important to understand the forthcoming jobs data. The Council of Economic Advisers’ estimates of employment gains—to be released later in August and in subsequent quarterly reports, as required under the act—will calculate direct, indirect, and induced jobs. However, “[t]his procedure is more complicated than it might appear because of the limitations of the reporting data,” the council points out.

The Recovery Act requires direct recipients of recovery dollars to report on jobs created and saved. These are the numbers that the Recovery Accountability and Transparency Board will release for the first time in October. Yet direct contractors and grantees are vastly outnumbered by subcontractors and vendors who do not report jobs data and thus may not be included in the tally—unless direct recipients reliably gather and report these numbers.

Indirect jobs are not reported either. Construction contractors must purchase materials for recovery projects, for example, and suppliers and manufacturers may hire or retain workers as a result of this boost in demand. But only jobs created directly from Recovery Act funds are reported—and then only from prime contractors and recipients—potentially leaving millions of indirect jobs uncounted.

Moreover, workers and companies can afford to spend more because of money earned from recovery projects. This additional spending promises to create and save jobs in other sectors of the economy, such as retail and hospitality. These “induced” jobs also will not be part of the numbers reported in October.

These holes in reporting mean that employment gains will be significantly understated in the data released by the Recovery Board. The Council of Economic Advisers will supplement the reported numbers with estimates of subcontractor jobs, indirect jobs, and induced jobs. These numbers will come closer to the truth, but they should be understood as estimates based on incomplete data. The Recovery Act will boost jobs in both obvious and hidden ways, some easily measured and others not.

The council’s first estimates in August also should be considered in context. The council and Recovery Act proponents did not expect to realize 3.5 million jobs created or saved until the end of 2010—and certainly not by August. It’s fair to assess progress toward this goal, but we are at the very beginning of a multiyear implementation process.

The now 20-month-old economic crisis has put the country in a very deep hole. The Obama administration is accountable for the response to this crisis beginning in 2009. But the Recovery Act is not the cause. The economy began its slide after years of conservative rule, well before the act’s adoption. Conservatives are advocating a return to policies that led to the current mess while trying to assign responsibility to President Obama for their own failures.

The overheated condemnations of the Recovery Act are motivated by this political objective. Fair evaluation is taking a backseat.

Reece Rushing is Director of Regulatory and Information Policy at the Center for American Progress. To read more about our analysis of the Recovery Act and the economy, please see the Economy page on our website.

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