Proffesor Willoughby
Brian Smith
Stimulus Package Essay
November 30, 2009
Obama Stimulus Program
On December 1, 2008, the National Bureau of Economic Research announced that the United States officially entered a recession. Many factors contributed to the formation of the recession; the subprime mortgage crisis where lenders were making loans to borrowers who could not afford the home they purchased, a rise in unemployment, a downturn in economic growth, and the bad financial states of financial institutions such as AIG and Fannie Mae. To combat this problem, former President George Bush created a stimulus package that did not live up to its full expectations. Inaugurated on January 20, 2009, President Barack Obama came into presidency while the economy was in a bad recession. To help bring the United States out of the recession, President Obama created the American Recovery and Reinvestment Act of 2009. The act was than passed by the 111th United States Congress on February 13, 2009. Stated on recovery.org, the official website for the recovery act,
“The American Recovery and Reinvestment Act had three immediate goals which were create new jobs as well as existing ones, spur economic activity and invest in long-term economic growth, and foster unprecedented levels of accountability and transparency in government spending” (The Act).
The act plans to achieve these goals by providing $288 billion in tax cuts and benefits in which $237 billion of that is for individuals. These tax cuts for individuals are shown in “payroll tax cuts, increase in alternative minimum tax, expansion in childcare tax credit, expanded college tax credit and etc.” (Willoughby). The remaining $51 billion tax cuts are for companies. For example, tax credits for renewable energy production. The act also increases federal funds for education and health care by $224 billion. The rest of the money is allocated to different organizations and groups such as $83 billion in aid to low income workers, $81 billion to infrastructure investment, $61 billion to energy investments, $13 billion to housing investments, $9 billion to scientific research, and the remaining $18 billion to other groups. Another main aspect of the bill is that recipients of recovery money have to report quarterly on the amount of money spent and the status of the project that they are involved with so that the public can track where the $787 billion Recovery funds are going and how they are being spent.
While there are many critics of President Obama’s stimulus package, there are also many Keynesian economists that believe it will work. In fact, President Obama’s stimulus package directly relates to Keynesian economics. The reason why the stimulus package and Keynesian economics are directly related is because the basis of Keynesian economics is that when an economy is in a recession, the government intervenes with fiscal policies. Keynesians believe that this will work because increased tax cuts and government spending will increase total demand therefore, increasing total output and employment. Similarly the Obama stimulus package offers $288 billion in tax cuts and $503 billion in government spending. Keynesian economists also believe that an initial increase in spending (either by the government or individuals who received the tax cuts) will increase income for new individuals who will spend their new money, which will increase income for other individuals. Eventually this results in a total increase in GDP, which is greater than the original government spending or reduction of taxes. In Keynesian theory Real GDP equals consumption + investments + government spending + net exports. An increase in one of the four categories will cause an increase in the rest of the categories, which is known as the multiplier effect. When all these categories increase, real GDP will increase. Similarly, Obama’s stimulus plan increases government spending, which will
