Economic Stimulus (Jobs Bills)

Updated: Oct. 19, 2010

Overview

An economic stimulus is an effort by the goverment to pump money into an ailing

economy, whether through spending, tax cuts or interest rate reductions. By
replacing money not being spent by businesses or consumers, a stimulus is meant to
put a floor under a recession and pave the way for a return to growth. In most
circumstances, economists consider interest rate cuts by the Federal Reserve to be
the most effective form of stimulus. But when the economy continued to sink in late
2008 even after the Fed cut rates to practically zero, pressure grew for a fiscal
intervention, that is, action by Congress.

Even before taking office, President Obama began work on a stimulus package. On
Feb. 11, 2009, Congress gave final approval to a $787 billion bill, the American
Recovery and Reinvestment Act. The bill had been bitterly resisted by Republicans —
none voted for the measure in the House and only three did in the Senate.
Conservative protestors regularly cited the bill's pricetag as a sign that the Obama
administration was running up unaffordable debt and was devoted to big
government.

By November 2009, a consensus had developed among analysts across a wide range
of views that the stimulus package, as messy as it is, was working. But as
unemployment rose above 10 percent, administration officials acknowledged that
they had underestimated the depth of the recession, and pressure began to rise for a
second round of stimulus — to be called a jobs bill, to avoid the stigma that
Republicans had sought to attach to stimulus.

In December, the House narrowly passed a $154 billion measure, but from there on
things got tougher. Senate Democrats cut the bill down to $15 billion, focused on a
payroll tax exemption for companies that hire new workers, to get the Republican
votes needed to avoid a filibuster. In May, Democratic leaders in the House and
Senate pushed to complete a new package of tax breaks and unemployment aid. The
original plan was for $200 billion in spending and tax breaks, offset by $50 billion in
new revenue. But the measure was trimmed to meet the concerns of a number of
conservative Democrats worried about the deficit's power as a political issue and it
stalled in the Senate, which in July passed a smaller bill that added only $34 billion
to the deficit.

Republicans also blocked a package of tax breaks and other assistance to small
business, but Congress in August passed a $26 billion bill to help states with their
Medicaid costs and to limit teacher layoffs.

In September, Mr. Obama proposed a package of roughly $180 billion in expanded

business tax cuts and infrastructure spending -- measures that had long had
Republican support -- whose cost would be offset by closing other tax breaks for
multinational corporations, oil and gas companies and others. With the help of two
Republican votes, Congress passed legislation that would create a $30 billion loan
fund for small businesses and provide other tax incentives to encourage hiring and
stimulate growth, but the rest of Mr. Obama's proposal went nowhere.

BACKGROUND

The Congressional Budget Office defines the goal of any such package this way:
"Fiscal stimulus aims to boost economic activity during periods of economic
weakness by increasing short-term aggregate demand." The theory is that if more
goods and services are being bought, whether cement for a new highway or groceries
paid for with a tax rebate, there is less chance that falling demand will lead
companies to lay off workers, resulting in greater falls in demand and a deeper
downturn.

Over the decades since the Depression, a consensus had developed among
economists that fiscal policy was an ineffective tool in combating recessions
compared with monetary policy, that is, the ability of the Federal Reserve to make
more money available — thereby increasing demand — by lowering interest rates.
The stimulus passed in early 2008 was held up as an example of the shortcomings of
fiscal policy. It consisted primarily of tax rebates, and surveys showed that much of
the extra money was saved or used to pay debts, neither of which generates direct
economic activity.

But in the most dire situations, monetary policy can cease to have traction, when
banks are so shellshocked that they are unwilling or unable to make new loans even if
a central bank provides the money with no interest charges at all. The United States
appeared to be in such a "liquidity trap'' in the winter of 2008 and early 2009, as the
credit crisis that followed Wall Street's implosion barely eased even as the Fed
reduced its rates to virtually zero.

THE HOUSE PLAN

As Mr. Obama began work with Democratic Congressional leaders even before his
swearing in, there was little disagreement over the need for a large fiscal stimulus.
The parties split, however, on what the size and shape of the plan should be. When
Mr. Obama outlined a plan in which just under 40 percent of the stimulus rested on
tax cuts, it was criticized by Senate Democrats who argued for more spending and by
Republicans who sought deeper tax cuts. House Republicans in particular argued for
an approach that would rely primarily on permanent cuts in income and business
taxes.

On Jan. 15, 2009, House Democrats unveiled the details of their economic recovery
package, an $825 billion combination of spending and tax cuts. The package,
developed by Congressional Democrats in partnership with Mr. Obama, included aid
to states for Medicaid costs, temporary increases in unemployment benefits and a
vast array of public works projects to create jobs.

The House bill as passed consisted roughly of two-thirds spending and one-third tax
cuts. Its cost decreased by $6 billion as Democrats voluntarily dropped from the
package several provisions that Republicans had singled out for derision, including
money to restore the Jefferson Memorial and for family planning programs.

THE SENATE PLAN

Even before debate began, the Senate version of the bill was substantially different
from the House package, including a provision to protect millions of middle-class
Americans from having to pay the alternative minimum tax in 2009 that brought the
total cost of the Senate bill to nearly $884 billion.

Democrats entered into negotiations with two moderate Republicans, Olympia

Snowe and Susan Collins of Maine, and a conservative Democrat, Ben Nelson of
Nebraska, to cut tens of billions in spending from the bill. The talks produced an
$838 billion package of government spending and tax cuts, which dropped some $40
billion in aid to states from the House version of the bill and scaled back President
Obama's signature middle-class tax cut. The Senate plan also created new tax
incentives to encourage Americans to buy homes and cars within the next year.
Just three Senate Republicans pledged to support the measure, with Arlen Specter of
Pennsylvania joining Ms. Collins and Ms. Snowe of Maine. But their votes were
enough to lift Democrats over the filibuster-proof number of 60 votes needed, and
the legislation passed a key hurdle on Feb. 9, when the Senate voted 61 to 36 to allow
it to move forward toward a final vote. Final passage followed the next day, by 61 to
37.

THE FINAL BILL

Significant differences existed between the House and Senate versions of the stimulus
package, primarily over tens of billions of dollars in aid to states and local
governments, tax provisions and programs for education, health and renewable
energy. But the negotiations between the two chambers and the White House moved
rapidly, and on Feb. 11, a little more than 24 hours after the Senate vote,
Congressional leaders announced an agreement on a $789 billion final bill.

The deal reflected a calculated gamble by Mr. Obama in the first weeks of his term.
To win Republican votes, the final stimulus package is considerably leaner than what
many economists say is now needed to jolt the economy, given its grave condition.

The final bill includes $507 billion in spending programs and $282 billion in tax
relief, including a scaled-back version of Mr. Obama's middle-class tax cut proposal,
which would give credits of up to $400 for individuals and $800 for families within
certain income limits. It will also provide a one-time payment of $250 to recipients of
Social Security and government disability support.

The bill contains more than $150 billion in public works projects for transportation,
energy and technology, and $87 billion to help states meet rising Medicaid costs.
Despite intense lobbying by governors around the country, the final deal slashed $25
billion from a proposed state fiscal stabilization fund, eliminated a $16 billion line
item for school construction and sharply curtailed spending to provide health
insurance for the unemployed. In driving down the total cost — from $838 billion for
the Senate stimulus bill and $820 billion for the House-passed measure — lawmakers
also reduced the Senate's proposed tax incentives for buyers of homes and cars. The
final agreement retained a $70 billion tax break to spare millions of middle-income
Americans from paying the alternative minimum tax in 2009.

It also created a new tax credit for 95 percent of working families at a cost of $116
billion. To the administration's chagrin, this became the tax cut that no one noticed.
In a sense the tax cut was hard to notice by design. Faced with evidence that people
were more likely to save than spend the tax rebate checks they received during the
Bush administration, the Obama administration decided to take a different tack: it
arranged for less tax money to be withheld from people’s paychecks. They reasoned
that people would be more likely to spend a small, recurring extra bit of money that
they might not even notice, and that the quicker the money was spent, the faster it
would cycle through the economy.

Economists are still measuring how stimulative the tax cut was. But the hard-to-
notice part has succeeded wildly. In a New York Times/CBS News Poll lin September
2010, fewer than one in 10 respondents knew that the Obama administration had
lowered taxes for most Americans. Half of those polled said they thought that their
taxes had stayed the same, a third thought that their taxes had gone up, and about a
tenth said they did not know.

AFTER PASSAGE

A number of high-profile Republican governors, including Sarah Palin in Alaska,

Mark Sanford in South Carolina and Bobby Jindal of Louisiana, vowed not to accept
portions of the stimulus money being sent to states, but were eventually forced to
back down. Nonetheless, the giant price tag on the package helped Republicans make
the skyrocketing federal deficit a more potent political issue than it had been under
Mr. Bush.

In early May, some states and cities began to complain that the money had yet to
reach them. Some states have been slow to get their paperwork to Washington. Other
complaints were that cities were shortchanged on the transportation funds, as much
of the road-building funds were steered by states to rural areas, sometimes because
the urban projects were too complicated to begin quickly, and sometimes as a
reflection of the clout of rural lawmakers.

Administration officials had predicted that the stimulus program would save or
create 600,000 jobs by summer. But by July, the economy had lost more than two
million jobs since Mr. Obama took office, while officials were estimating that the
program has saved only about 150,000 jobs. Administration officials acknowledged
that their initial forecasts, which anticipated that unemployment would peak at 8.5
percent, were too optimistic, although they were in line with Federal Reserve and
most private forecasters.
An increase in the rate of home sales was credited in large part to a provision in the
bill that gave a credit to first-time buyers, and the stimulus program also gave car
companies an added lift through the cash-for-clunkers program that offered rebates
of up to $4,500 for people who trade in gas guzzlers for new cars. The program was
extended by Congress after the $1 billion originally set aside for it was snapped up
more quickly than had been expected.

There is little dispute among economists that the measure kept the jobless rate from
going even higher than it did. But with unemployment at 9.7 percent on average, and
higher in some states, the president conceded that there was widespread confusion
about the bill, and a sense that it had not lived up to expectations.

A SECOND ROUND

As unemployment topped 10 percent and appeared likely to stay at that level,

administration officials acknowledged that they had been too optimistic about the
power of the stimulus bill to produce a strong recovery.The worth of the measure
became the subject of a bitter partisan battle, as Republicans declared that it had
failed. In February 2010, Mr. Obama declared that the bill had created or saved as
many as two million jobs, lowered taxes for 95 percent of Americans and spared the
nation the next Great Depression.

Despite the calls from some economists for another large-scale effort at stimulus, the
bills taken up by Congress were closer to the size of the $158 billion stimulus bill
signed by President George W. Bush in the spring of 2008. A $174 billion bill barely
squeaked through the House in December, as conservative Democrats tried to
distance themselves from new spending and debt.

In the Senate, Mr. Baucus and Mr. Grassley reached agreement on an $85 billion bill
that was far more targeted on corporate tax breaks than the House measure. But it
was set aside by Mr. Reid, who said he planned to introduce measures in chunks
designed to peel off the one or two Republicans needed to avoid a filibuster. The first,
a $15 billion bill, passed after making it to the Senate floor with the support of five
Republicans. The bill was built around an approach that has won bipartisan support
in the past: a $13 billion plan to give companies who hire unemployed Americans an
exemption from paying payroll taxes on those workers through the end of 2010. It
also provides a $1,000 tax credit to employers who keep new workers on the payroll
for at least for 52 weeks.
Opinion is divided on whether the approach is effective or simply gives businesses a
break on workers they would have hired anyway. But lawmakers said that given the
dismal unemployment picture, they were willing to give it a try, and estimated the tax
breaks would put 300,000 people to work.

The bill passed in the House on a nearly party line vote after Democrats adjusted the
bill to cover its costs more completely, to satisfy their party's fiscal hawks. To attract
liberal lawmakers who contended the measure was too meager, they added a
provision to generate business for minority contractors. The bill won final passage in
the Senate on March 17, with the votes of 11 Republicans.

The law provides an exemption from the 6.2 percent Social Security payroll tax for
every worker who has been unemployed at least 60 days and is hired after Feb. 3
through the end of this year. Employers will get an additional $1,000 income tax
credit for new employees retained for at least a year. The Senate estimated the
measure will cost $13 billion over 10 years, though most of the cost will be in the first
two years.

STIMULUS VS. DEFICIT

In May, Democratic Congressional leaders put together a $200 billion bill chock-full
of provisions Democrats would typically embrace — extended jobless pay, health
insurance subsidies for the unemployed, a summer jobs program and a tax increase
on wealthy investors. But a number of Democrats were wary of adding to the deficit
by approving emergency measure programs that did not need offsetting cuts or
revenue increases.

The bill passed the House after being cut to $124 billion, and Democratic leaders
reduced the cost of the measure by limiting a provision on Medicare fees paid to
doctors, extending unemployment benefits through Nov. 30 instead of Dec. 31 and
cutting aid to the states &mdash a development met with howls of pain from state
capitals around the country. The bill also did away with a tax loophole that allowed
hedge fund managers to report their fees as capital gains rather than ordinary
income. That measure, which is expected to raise $17 billion over 10 years, had been
blocked prior to the Wall Street meltdown.

When Senate Democrats took up their $140 billion measure, they said they expected
it to pass because it included provisions both parties favor, like the $40 billion
extension of unemployment pay along with billions of dollars in business and
personal tax breaks. Democrats were also looking for lobbying help from governors
who supported the inclusion of $24 billion sought by states for help with health care
costs — one element of the Senate bill that drove the cost higher than the price tag in
the House.

But the bill bogged down as it faced fierce Republican opposition and one Democrat,
Senator Bill Nelson of Nebraska, joined them in blocking a vote. With the economic
recovery looking shaky, it appeared that both parties were staking out ground for the
fall election -- Democrats as supporters of government action to get hiring started
again, and Republicans as opponents of what they called out of control spending.