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Monday, March 02, 2009

Estimated Macroeconomic Impacts of the American Recovery and Reinvestment Act of 2009

Here are the latest multiplier estimates for the recovery package (table 1), and the estimated time it will take for the economy to recover (figure 1), from the CBO:

Estimated Macroeconomic Impacts of the American Recovery and Reinvestment Act of 2009: ...Short-Run Effects The macroeconomic impacts of any economic stimulus program are very uncertain. ... CBO has developed a range of estimates of the effects of stimulus legislation on gross domestic product (GDP) and employment that encompasses a majority of economists’ views. By CBO’s estimation, in the short run ARRA will raise GDP and increase employment by adding to aggregate demand and thereby boosting the utilization of labor and capital that would otherwise be unused because the economy is in recession. Most of the budgetary effects of the legislation are estimated to occur over the next few years, and as those effects diminish, the short-run impact on the economy will fade. ... The numbers in Table 1 indicate the cumulative impact ... on GDP over several quarters. For example, a one-time increase in federal purchases of goods and services of $1.00 in the second quarter of this year would raise GDP by $1.00 to $2.50 in total over several quarters, with most of that effect in the first two quarters and little effect beyond a year. ...

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Long-Run Effects

In the long run, the economy produces close to its potential output on average, and that potential level is determined by the stock of productive capital, the supply of labor, and productivity. Short-run stimulative policies can affect long-run output by influencing those three factors, although such effects would generally be smaller than the short-run impact of those policies on demand.

In contrast to its positive near-term macroeconomic effects, the legislation will reduce output slightly in the long run, CBO estimates. The principal channel for that effect ... is that the law will result in an increase in government debt. To the extent that people hold their wealth as government bonds rather than in a form that can be used to finance private investment, the increased debt will tend to reduce the stock of productive private capital. In economic parlance, the debt will “crowd out” private investment. (Crowding out is unlikely to occur in the short run under current conditions, because most firms are lowering investment in response to reduced demand, which stimulus can offset in part.) CBO’s basic assumption is that, in the long run, each dollar of additional debt crowds out about a third of a dollar’s worth of private domestic capital... Because of uncertainty about the degree of crowding out, however, CBO has incorporated both more and less crowding out into its range of estimates of the long-run effects of the stimulus legislation.

The crowding-out effect will be offset somewhat by other factors. Some of the legislation’s provisions, such as funding for improvements to roads and highways, might add to the economy’s potential output in much the same way that private capital investment does. Other provisions, such as funding for grants to increase access to college education, could raise long-term productivity by enhancing people’s skills. And some provisions will create incentives for increased private investment. According to CBO’s estimates, provisions that could add to long-term output account for between one-quarter and one-third of the legislation’s budgetary cost.

The effect of individual provisions could vary greatly. ... In order to encompass a wide range of potential effects, CBO used two assumptions in developing its estimates: first, that all of the relevant investments together will, on average, add as much to output as would a comparable amount of private investment, and second, that they will, on average, not add to output at all.

In principle, the legislation’s long-run impact on output also will depend on whether it permanently changes incentives to work or save. However, according to CBO’s estimates, the legislation will not have any significant permanent effects on those incentives.

Net Effects on Output and Employment

Taking all of the short- and long-run effects into account, CBO estimates that the legislation implies an increase in GDP relative to the agency’s baseline forecast of between 1.4 percent and 3.8 percent by the fourth quarter of 2009, between 1.1 percent and 3.4 percent by the fourth quarter of 2010, between 0.4 percent and 1.2 percent by the fourth quarter of 2011, and declining amounts in later years... Beyond 2015, the legislation is estimated to reduce GDP by between zero and 0.2 percent. To illustrate the short- and long-run effects of the legislation on output, with CBO’s January baseline projection of potential GDP set as a reference point, Figure 1 shows three different projections of the economy’s actual output: CBO’s January baseline projection of GDP (which does not include the effects of ARRA), GDP using CBO’s high estimate of the effects of the legislation; and GDP using CBO’s low estimate of the effects of the legislation.2

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Corresponding to the effects on output, CBO estimates that ARRA will increase employment by 0.9 million to 2.3 million by the fourth quarter of 2009, by 1.2 million to 3.6 million by the fourth quarter of 2010, by 0.6 million to 1.8 million by the fourth quarter of 2011, and by declining numbers in later years. The effect on employment is never estimated to be negative, despite lower GDP in later years, because CBO expects that the U.S. labor market will be at nearly full employment in the long run. The reduction in GDP is therefore estimated to be reflected in lower wages rather than lower employment, as workers will be slightly less productive because the capital stock is slightly smaller. ...

I hope this information is helpful to you. ...

Sincerely,
Douglas W. Elmendorf
Director

    Posted by on Monday, March 2, 2009 at 05:49 PM in Economics, Fiscal Policy | Permalink  TrackBack (0)  Comments (11)

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