Question
a) According to the article blow, How ARRA Increased Output and Employment, what were CBO's estimates of the multipliers (bang-for-the-buck) of the major components of
a) According to the article blow, "How ARRA Increased Output and Employment", what were CBO's estimates of the multipliers ("bang-for-the-buck") of the major components of fiscal stimulus adopted during the Great Recession?
b) What may be the reason why the multiplier of federal government purchases of goods and services was much larger than the multiplier of tax cuts for lower- and middle-income people? Please analyze and explain this phenomenon.
c) What may be the reason why the multiplier of unemployment insurance payments was much larger than the multiplier of the corporate tax cuts? Please analyze and explain this phenomenon.
How ARRA Increased Output and Employment
Effective economic stimulus and recovery measures work by increasing the demand for goods and services at a time when there is economic "slack" insufficient demand to keep businesses operating at full capacity and to generate full employment. Measures that increase demand stop the destruction of jobs and begin to put people back to work during times when business and consumer confidence is low and economic activity is declining. They continue to do so in the early stages of a recovery from a recession if there is still substantial economic slack.
For the most part, ARRA was well-designed to produce stimulus as quickly as could be done. It included fast-spending, high "bang-for-the-buck"* items such as expansions in SNAP and UI provisions that a broad range of economists and CBO rate as some of the most highly stimulative types of spending per dollar of cost. Its state fiscal relief was essential to moderate the drag on the economy from the even larger budget cuts and tax increases that states otherwise would have had to impose. The package also included infrastructure investments, which are highly stimulative once projects are underway but sometimes require significant lead time. Finally, some of the package's tax provisions were targeted on low- and moderate-income households, such as expansions of the Earned Income Tax Credit and Child Tax Credit, making them effective as stimulus. Various other ARRA tax provisions were less well-targeted and, according to CBO, had a far smaller stimulative effect.
CBO's range of estimates of the percentage boost to GDP from ARRA is based on low and high estimates of the bang for the buck of the various ARRA measures. Among major provisions, these were 0.5 to 2.5 for federal purchases of goods and services, 0.4 to 2.1 for transfer payments to individuals such as SNAP and UI, and 0.3 to 1.5 for tax cuts for lower- and middle-income people. In contrast, CBO's estimates of bang for the buck were 0.1 to 0.6 for alternative minimum tax relief for higher-income people, and 0 to 0.4 for the corporate tax provisions in ARRA, suggesting that the latter two provided little or no stimulus.
*Dollars of net new aggregate demand for goods and services stimulated per dollar of budget cost. A value above 1 means that for every dollar of cost to the Treasury, the demand for private sector goods and services increased by more than a dollar.
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