What You Don't Understand About the Stimulus

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Following news coverage can be easy. Understanding some of the terms it uses, less so. In our Flashcard series, The Atlantic explains ideas you may read about but never see spelled out. In this installment, we explain the American Recovery and Reinvestment Act.570 stimulus.jpg
The News

The $862 billion American Recovery and Reinvestment Act (aka The Recovery Act, aka The Stimulus, aka Obamanomics) was supposed to cut short the recession and create millions of jobs when the president signed it in early 2009. A year and a half later, stimulus is a dirty word, and two-thirds of Americans think the bill did nothing to help the economy, or worse.

recovery act logo.png

Some of the anti-stimulus fever is understandable, and some of it is a misunderstanding. We were promised 8 percent unemployment with the stimulus, and we got 10 percent. That's frustrating. But it's also frustrating that plenty of smart people claim that the stimulus was all about government creating new powers, when it was overwhelmingly about helping states and families do old things, like pay teachers and credit card bill.

Journalists often illustrate stimulus articles with construction workers next to Recovery Act logos. But the stimulus wasn't a Big Dig. It was a Big Fill. Its chief role has been to fill the holes in state and family budgets. Here's how:

The Gist

It's best to think about the stimulus in three separate pieces: the Tax Cuts, the Big Fill, and the Fun Stuff.

First, the Tax Cuts. One-third of the stimulus goes to reducing our tax burden. There are two big ticket items here. First, in order to get money into working people's pockets, Congress passed the Making Work Pay tax credit, which incrementally refunds working Americans for up to $800 a year. Second, in order to keep upper-middle class families from paying higher taxes, the bill "patches" the Alternative Minimum Tax. Here's a breakdown of the rest of the individual tax credits with letter grades from the Tax Policy Center (this list does not include about $15 billion in business tax incentives, or $20 billion in green energy tax goodies).


Second, the Big Fill. About half of the stimulus supported state and federal programs that needed more money. To be clear: the role of this money was not to create new obligations, but to fulfill existing obligations. In 2009, 80 percent of spending went to five programs: Medicaid, unemployment compensation, Social Security, the State Fiscal Stabilization Fund (which mostly pays for education), and student financial aid. To date, two-thirds of federal outlays have gone to help states' pay for Medicaid, education and public employees through two programs known as the Medicaid Federal Medical Assistance Percentage and the Fiscal Stabilization Fund. Here is the clearest breakdown of spending I have found.

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Source: CBO.

Third, the "Fun Stuff," as Vice President Joe Biden calls it. Hundreds of contracts and loans for bridges and buildings are out the door already. But one-sixth of the full stimulus is waiting to be spent as part of a long-term effort to promote green energy, electronic health records, better schools, and new research. This is the "reinvestment" part of the Recovery and Reinvestment Act. As you can see from the table above, the Departments of Transportation, Energy and Education have more than $100 billion to spend on programs after 2010. [Read more about the Fun Stuff in TIME.]

The Debate

It's not hard to argue that the stimulus failed. Unemployment is higher than the administration ever dreamed and GDP growth is pathetic.

Conservatives and liberals alike have assailed the law from every angle imaginable. We spent too little, and we spent too much. The bill needed more spending and fewer tax breaks. No, it should have eliminated payroll taxes for two years. No, it should have permanently cut tax rates. We should have hired people directly, but also we should have paid companies not to fire workers. Or maybe we should have done nothing! Any of those solutions might have been more successful than the Recovery Act, and all of them might have been worse.

But when critics say "the stimulus didn't work," they often don't mention the work it tried to do: replace state spending and wages. If the state rescue funds failed, it is because states plugged the money into historic deficits. If the tax cuts failed, it is because the average American worker entered the recession with debt equal to 122 percent of her yearly salary that had to be paid down.

If the Recovery Act failed to stimulate Americans' confidence, it's because it replaced more things than it built. It filled the crater left by the financial crisis. By and large, it succeeded. But its success has been nearly invisible. After all, a filled hole looks like nothing at all.

Photo source: Time Magazine
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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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