Congressional Budget Office
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Under the American Recovery and Reinvestment Act of 2009 (ARRA), also known as the economic stimulus package, certain recipients of funds appropriated in ARRA (most grant and loan recipients, contractors, and subcontractors) are required to report the number of jobs funded through ARRA after the end of each calendar quarter. The law also requires CBO to comment on those reported numbers. A CBO report released this afternoon satisfies that requirement and under the law is required to be submitted no later than today. The report provides CBO’s estimates of ARRA’s overall impact on employment and economic output in the second quarter of calendar year 2010. The most recent estimates for the second quarter and beyond vary only slightly from those in our quarterly ARRA report released in May.

When ARRA was being considered, CBO and the staff of the Joint Committee on Taxation estimated that it would increase budget deficits by $787 billion between fiscal years 2009 and 2019. CBO now estimates that the total impact over the 2009–2019 period will amount to $814 billion. Close to half of that impact is estimated to occur in fiscal year 2010, and about 70 percent of ARRA’s budgetary impact will have been realized by the close of that fiscal year.

CBO’s Estimates of ARRA’s Impact on Employment and Economic Output

Looking at recorded spending to date as well as estimates of the other effects of ARRA on spending and revenues, CBO has estimated the law’s impact on employment and economic output using evidence about the effects of previous similar policies on the economy and using various mathematical models that represent the workings of the economy. On that basis, CBO estimates that in the second quarter of calendar year 2010, ARRA’s policies:

• Raised the level of real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.5 percent,
• Lowered the unemployment rate by between 0.7 percentage points and 1.8 percentage points,
• Increased the number of people employed by between 1.4 million and 3.3 million, and
• Increased the number of full-time-equivalent (FTE) jobs by 2.0 million to 4.8 million compared with what those amounts would have been otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers.)

The effects of ARRA on output and employment are expected to gradually diminish during the second half of 2010 and beyond. The effects of ARRA on employment and unemployment are expected to lag slightly behind the effects on output; they are expected to wane gradually in 2011 and beyond.

Although CBO has examined data on output and employment during the period since ARRA’s enactment, those data are not as helpful in determining ARRA’s economic effects as might be supposed because isolating the effects would require knowing what path the economy would have taken in the absence of the law. Because that path cannot be observed, the new data add only limited information about ARRA’s impact.

Limitations of Recipients’ Estimates

CBO’s estimates differ substantially from the reports filed by recipients of ARRA funding. Those recipients reported that ARRA funded nearly 750,000 FTE jobs during the second quarter of 2010. Such reports, however, do not provide a comprehensive estimate of the law’s impact on employment in the United States. That impact may be higher or lower than the reported number for several reasons (in addition to any issues about the quality of the data in the reports):

• Some of the reported jobs might have existed in the absence of the stimulus package.
• The reports cover employers that received ARRA funding directly and those employers’ immediate subcontractors (the so-called primary and secondary recipients of ARRA funding) but not lower-level subcontractors.
• The reports do not attempt to measure the number of jobs that were created or retained indirectly as a result of recipients’ increased income, and the increased income of their employees, which could boost demand for other products and services as they spent their paychecks.
• The recipients’ reports cover only certain ARRA appropriations, which encompass about one-fifth of the total either spent by the government or conveyed through tax reductions in ARRA during the second quarter; the reports do not measure the effects of other provisions of the stimulus package, such as tax cuts and transfer payments (including unemployment insurance payments) to individual people.

Consequently, estimating the law’s overall effects on employment requires a more comprehensive analysis than the recipients’ reports provide.

The report was prepared by Ben Page of CBO’s Macroeconomic Analysis Division.

In March, CBO estimated that the total cost of the Troubled Asset Relief Program (TARP) would be $109 billion over the life of the program.  That estimate (which represented the present value, adjusted for market risk, of the program’s activities) was based on market values in February, actions that had occurred up to that time, and an assumption that additional amounts would be allocated to programs that were not yet specified.  In the baseline budget projections that CBO released yesterday, the lifetime cost of the program has been reduced to $66 billion.  Three factors account for the reduction: further repurchases of preferred stock and sales of warrants from banks, a lower estimated cost for assistance to the automobile industry, and the elimination (due to the passage of time and provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203) of the opportunity to create new programs.  Additional information about CBO’s current projections of the cost of the TARP can be found on page 9 of yesterday’s Budget and Economic Outlook: An Update.  CBO will release its next report on the activities and cost of the TARP in the fall.
 

CBO estimates, in its annual summer update of the budget and economic outlook, that the federal budget deficit for 2010 will exceed $1.3 trillion—$71 billion below last year’s total and $27 billion lower than the amount that CBO projected in March 2010 when it issued its previous estimate. Relative to the size of the economy, this year’s deficit is expected to be the second largest shortfall in the past 65 years: At 9.1 percent of gross domestic product (GDP), it is exceeded only by last year’s deficit of 9.9 percent of GDP. As was the case last year, this year’s deficit is attributable in large part to a combination of weak revenues and elevated spending associated with the economic downturn and the policies implemented in response to it.

This report presents CBO’s updated budget and economic projections spanning the 2010–2020 period. Those projections reflect the assumption that current laws affecting the budget will remain unchanged—and thus the projections serve as a neutral benchmark that lawmakers can use to assess the potential effects of policy decisions. As such, CBO assumes that tax reductions enacted earlier in this decade that are currently set to expire at the end of this year do so as scheduled; it also assumes that no new legislation aimed at keeping the alternative minimum tax (AMT) from affecting many more taxpayers is enacted. In addition, CBO assumes that the measures enacted in the past two years to provide fiscal stimulus to the weakened economy will expire as currently scheduled and that future annual appropriations will be kept constant in real (inflation-adjusted) terms. Under those assumptions, the federal budget deficit would decline substantially over the next two years—to 4.2 percent of GDP in 2012—and, consequently, the budget would provide much less support to the economy than has been the case for the past two years.

According to CBO’s projections, the recovery from the economic downturn will continue at a modest pace during the next few years. Growth in the nation’s output since the middle of calendar year 2009 has been anemic in comparison with that of previous recoveries following deep recessions, and the unemployment rate has remained quite high, averaging 9.7 percent in the first half of this year. Such weak growth is typical in the aftermath of a financial crisis. The considerable number of vacant houses and underused factories and offices will be a continuing drag on residential construction and business investment, and slow income growth as well as lost wealth will restrain consumer spending.

All of those forces, along with the waning of federal fiscal support, will tend to restrain spending by individuals and businesses—and, therefore, economic growth—during the recovery. CBO projects that the economy will grow by only 2.0 percent from the fourth quarter of 2010 to the fourth quarter of 2011; even with faster growth in subsequent years, the unemployment rate will not fall to around 5 percent until 2014.

In CBO’s current-law projections, once the economy has recovered, the federal budget deficit amounts to between 2.5 percent and 3.0 percent of GDP from 2014 to 2020. Projected deficits total $6.2 trillion for the 10 years starting in 2011, raising federal debt held by the public to more than 69 percent by 2020, almost double the 36 percent of GDP observed at the end of 2007.

Those projections, which are similar in many respects to the ones that CBO prepared in March, reflect assumptions about spending and revenues that may significantly underestimate actual deficits. Because the projections presume no changes in current tax laws, they result in estimates of revenues that, as a percentage of GDP, would be quite high by historical standards. Because of the assumption that future annual appropriations are held constant in real terms, the projections yield estimates of discretionary spending relative to GDP that would be low by historical standards. Of course, many other outcomes are possible. If, for example, the tax reductions enacted earlier in the decade were continued, the AMT was indexed for inflation, and future annual appropriations remained the share of GDP that they are this year, the deficit in 2020 would equal about 8 percent of GDP, and debt held by the public would total nearly 100 percent of GDP.

A different fiscal policy would also yield different economic outcomes. For example, CBO estimates that under an alternative fiscal path similar to the one mentioned above, real growth of GDP in 2011 would be 0.6 to 1.7 percentage points higher than it is in the baseline forecast, and the unemployment rate at the end of 2011 would be 0.3 to 0.8 percentage points lower. However, later in the coming decade, real GDP would fall below the level in CBO’s baseline because the larger budget deficits would reduce investment in productive capital.

Beyond the 10-year budget window, the nation will face daunting long-term fiscal challenges posed by rising costs for health care and the aging of the population. Continued large deficits and the resulting increases in federal debt over time would reduce long-term economic growth. Putting the nation on a sustainable fiscal course will require policymakers to restrain the growth of spending substantially, raise revenues significantly above their average percentage of GDP of the past 40 years, or adopt some combination of those approaches.
 

The federal budget deficit was about $1.2 trillion in the first ten months of fiscal year 2010, CBO estimates in its latest Monthly Budget Review—about $90 billion less than the roughly $1.3 trillion deficit incurred through July 2009.

By CBO’s estimate, spending during the first 10 months of the fiscal year was about $81 billion (or 2.7 percent) less than outlays at the same point in 2009. That decline includes a net reduction of close to $370 billion in major components of spending related to the recent financial crisis: the Troubled Asset Relief Program (down $277 billion), federal deposit insurance (down $50 billion), and Treasury payments to Fannie Mae and Freddie Mac (down $42 billion).

Adjusted for calendar-related shifts in the timing of certain payments, spending through July for all other federal activities was about $284 billion, or 10 percent, higher than it was in 2009. Spending resulting from enactment of the American Recovery and Reinvestment Act (ARRA) accounted for about one-third of that increase. In addition, payments for Social Security and Medicare grew by $32 billion (or 6 percent) and $13 billion (or 4 percent), respectively. Excluding spending resulting from ARRA, expenditures for unemployment benefits were $33 billion higher and federal spending for Medicaid was $10 billion higher than a year earlier. Outlays for net interest on the public debt were $29 billion (or 18 percent) higher than during the same period last year, reflecting adjustments to the value of inflation-indexed securities.

Receipts for the first ten months of fiscal year 2010 were slightly greater—about $13 billion (or 0.7 percent) more—than the amounts collected during the same period last year. Increases in net corporate income taxes and receipts from the Federal Reserve were partially offset by declines in individual income and payroll taxes. Corporate income taxes rose by about $35 billion (or 33 percent), primarily because of higher taxable profits stemming from improved economic conditions and lower depreciation charges. Receipts from the Federal Reserve were more than double the amount received in the comparable period in 2009—an increase of $37 billion. The Federal Reserve’s higher remittances stem from a much larger portfolio and a shift to riskier and thus higher-yielding investments. 

In contrast, combined receipts from individual income and payroll taxes were about $58 billion (or 4 percent) lower than collections in the same 10-month period last year. Withheld income and payroll tax receipts fell by about $29 billion (or 2 percent), and nonwithheld receipts fell by about $37 billion (or 12 percent). In both instances, the declines occurred earlier in this fiscal year and are largely attributable to lower collections of tax liabilities incurred in 2009. Collections during the past three months were higher than those during the same months last year.

The Monthly Budget Review was prepared by Elizabeth Cove Delisle and Daniel Hoople of CBO's Budget Analysis Division, and by Barbara Edwards and Joshua Shakin of our Tax Analysis Division.
 

In responding to questions raised by Congressional staff and outside analysts, we have found some errors in one section of our report The Long-Term Budget Outlook, which was released on June 30, 2010 and discussed in a previous blog entry. To correct those errors, we issued a revised version of the report today along with a letter explaining the changes.

The errors did not affect CBO’s primary findings—the long-term budget projections under the extended-baseline scenario and the alternative fiscal scenario—as discussed in the summary of the report, nor did they affect numbers presented in any of the tables. Rather, the errors were limited to the analysis of how the projected growth of debt would reduce, or crowd out, private investment and thereby lower gross domestic product (GDP) in the United States. The corrected estimates of the effects of crowding out on GDP are smaller than those shown in the original report. Also, the effects of crowding out on gross national product (which equals GDP plus income received from other countries minus income sent abroad) are now shown; those effects were discussed in last year’s Long-Term Budget Outlook (released in June 2009) but were not included in the original publication this year.

A discussion of the original and revised projections of the crowding-out effects is included in the letter. The changes affect Figures 1-5 and 1-6 and related text, and appear on pages 19 through 22 of the revised report.