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1 .What was the American Recovery and Reinvestment Act (ARRA)? 2) What is the criticism of this act from the left? What is the criticism from the right? What does the author believe? Overall, did the act help or not? 3) What is the author concerned about for the future of our economy? 4) What are the authors three suggestions for this concern and what are the potential issues for each that he states? 5) How does this article relate to the Keynesian School of Thought
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Lessons from the Recovery Act on its 10-year anniversary
washingtonpost.com/outlook/2019/02/18/lessons-recovery-act-its-year-anniversary/
Jared Bernstein, a former chief economist to Vice President Joe Biden, is a senior fellow
at the Center on Budget and Policy Priorities and author of ‘The Reconnection Agenda:
Reuniting Growth and Prosperity’.
February 18
Ten years ago Sunday, less than four weeks into his first term, President Barack Obama
signed the American Recovery and Reinvestment Act, the $800 billion Keynesian stimulus
designed to help offset the downturn that came to be known as the Great Recession.
Its impact has been widely debated, with critics from the left arguing it was too small and
critics from the right arguing it was too large (my personal critique is not that it was too
small; it’s that it phased out too soon as we prematurely pivoted to deficit reduction). Full
disclosure, I was an Obama administration economist in those days, and it seems like
yesterday that I was out there in front of the White House trying to explain to the
cameras, with little success, that the Recovery Act was helping.
But the consensus is that it did help and that, along with the aggressive monetary
stimulus by the Federal Reserve, the ARRA helped pull forward the economic expansion
that began in 2009 and is now in its 10th year.
What is ARRA’s relevance today?
While I don’t think a recession is imminent, a couple of reports from last week threw
some shade on the U.S. economy: Both retail sales and industrial production were
surprisingly downbeat. Both are noisy, monthly series, and such blips shouldn’t be
overweighted, especially given their inconsistency with the almighty, ever-acquisitive
American consumer, bolstered by robust job growth, low unemployment and even, as of
late, decent real wage gains. But there’s a recession out there somewhere, and we’re not
ready for it.
One reason we’re ill-prepared is our elevated public debt levels. We will very likely enter
the next downturn with a debt-to-GDP ratio that’s over 80 percent, a whopping 40
percentage points higher than usual. That doesn’t mean there won’t be fiscal space to
offset the downturn. Such spending is temporary and, if anything, improves our fiscal
outlook by hastening the recovery, as did the ARRA. But fiscal history is quite clear that
entering downturns with historically high debt levels leads to a weaker fiscal response
and, in turn, a weaker recovery.
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By the way, if you’re a member of the “deficits-don’t-matter” club, please reread the
above. Again, the problem isn’t the lack of actual fiscal space. It’s the lack of perceived
fiscal space.
Then there’s the politics. When the ARRA passed, Democrats held majorities in both
chambers, and three Senate Republicans broke ranks and supported the bill. The idea
that this president and Congress would act that quickly and harmoniously seems like a
faraway dream.
Is there anything we can do to incorporate lessons from the ARRA into today’s much
more fractious politics? I’ve got three suggestions, which I’ll present in order of
plausibility.
First, though it hasn’t gotten the attention it deserves, there’s a steep fiscal cliff coming
later this year with the return of previously legislated spending caps and “sequestration”
cuts, leading to potentially deep cuts in the discretionary side of the federal budget. As I
read the numbers, these cuts have the potential to shave half a point off real GDP growth
toward the end of this year and into next year.
Congress has consistently agreed to ignore the caps, and while I’ve been critical of rising
deficits in a heretofore strong economy, based on the concerns noted above, this would
be a bad time for fiscal tightening. I admit to sounding like the fiscal version of St.
Augustine: “Give me fiscal rectitude … but not quite yet.” But as I’ve written on this page,
there’s good debt and bad debt. And to avoid a hard hit to a potentially vulnerable
economy, Congress should avoid this cliff (I’ll soon have something to say on smart
versus dumb ways to spend these allocations). Even given peak dysfunction, I’d give
better than even odds that they will do so.
Next, depending on its depth, we’ll need the Federal Reserve to act as aggressively as the
last time to fight the next downturn. Note, however, that the central bank will be entering
the next recession with less firepower, as their primary weapon — lowering the
benchmark interest rate they control — will have less room to fall. That rate was 5
percent going into the last downturn and will likely be between 2-percent to 3 percent
this time.
That monetary constraint implies an elevated role for a robust fiscal response, but the
best thing Congress could do in that regard is also the least likely: Strengthen and
expand the programs that automatically switch on in recessions. We can muddle through
with gridlock and dysfunction in strong economies, but we cannot do so in recessions.
It’s extremely hard to imagine this Congress passing a ARRA-like stimulus in less than a
month. Thus, a forward-looking agenda would depend less on discretionary measures
and more on extended unemployment insurance and SNAP benefits, job subsidies and
grants to states (which must balance their budgets regardless of the economy), all of
which were part of ARRA.
A decade ago, a new administration managed to quickly craft and implement, with
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Congress’s help, a large and effective response to a deep recession. I was there. I saw it
unfold. It can be done. Or, more accurately, it could be back then. Now, I’m not at all so
sure.
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