The American Recovery and Reinvestment Act - Research Paper Example

? Table of Contents 2 Introduction 2 The American Recovery and Reinvestment Act 3 History of Policy 4 Evaluation 9 A Policy 14 Works Cited 15 Abstract The American Recovery and Reinvestment Act of 2009 (ARRA, Pub.L. 111-5) represented a determined fiscal policy maneuver to meet the economic regression that had begun to swiftly undermine the American economy in late 2008. In contrast to monetary policy it entailed a Keynesian policy of government spending to meet the meet the rapidly declining demand curve then taking over the American population. At the same time the Federal Reserve pursued monetary policy of injecting more money into the American economy, albeit the banks, to buy up failed assets of the larger banks. Both of these policies, working in consort, and in spite of a polarizing political climate, did manage to turn the American economy around. However, it was because of the desperate political climate that the ARRA was made to suffer less than a full effect on the American economy. It could have done much more, but the damaging political climate refused to allow deeper systemic problems to be addressed. Introduction The UN International Labor Organization estimated that the recent global regression resulted in worldwide job losses at 50 million by the end of 2009 (Taylor and Weepapana, 2009). With demand of goods falling worldwide, global economic growth was expected to shrink by 2 percent, effecting emerging economics as far as in Eastern Europe and in mainland China. Taiwan saw its exports fall 42.9 percent. Unemployment in the United Kingdom which was 4.7 in 2000 and grew to 5.0 in 2008, reached 7.9 by December 2010. In the United States, the Bureau of Labor Statistics charted unemployment rates that varied between 4.1 and 5.0 percent 2000 through November 2005. These rates begin to worsen by September 2008, reaching 6.5 by October 2008 and the highest level of 10.0, 15.4 million people out of work, by November 2009. A total of 750,000 jobs was being lost per month in an economy that was contracting 6 percent annually (CEA). Clearly, economic policy had faltered worldwide and particularly in the United States. By December 2008, the National Bureau of Economic Research had finally declared the U.S. had been in a recession since December 2007. Growth in the fourth quarter of 2008 had shrunk to a negative 6.2%, the lowest since 1982. The American Recovery and Reinvestment Act Immediately after his election, President Barak Obama led the 111th United States Congress through a series of emergency measures. These measures capitalized to his signing into law, on February 17 2009, The American Recovery and Reinvestment Act of 2009 (ARRA, Pub.L. 111-5), referred to as the Stimulus or the Recovery Act. This $787 billion spending program consisted of $286 billion in tax cuts to stimulate the economy and expenditures for spending on infrastructure, State, revenue sharing, unemployment benefits, food stamps, and business and middle class tax cuts. Specifically the ARRA directed $88 billion for direct purchase of goods; $44 billion for infrastructure transfers to state and local governments; $215 billion for non-infrastructure transfers to state and local governments, accounting for such as public safety and education spending; $100 billion for direction transfers to persons in form of unemployment insurance benefits, and student loans; $18 billion to retirees; and tax cuts totaling $266 billion that covered business tax provisions and such as the first-time homebuyer tax credit (Berger and Gaffney, 2009). The ARRA funded many specific programs that sought to influence change in greenhouse technology, rapid transit, electronic medical health records among a large number of broad base initiatives. For education, the ARRA allocated $5 billion to the Department of Education to fund programs under the Race to the Top program that closed the achievement gap and improved student achievement. The DoE allowed successful programs to compete for grants from a $650 million fund that would enable them to continue progress in education innovation and reform efforts (Berger and Gaffney, 2009). The ARRA funded $7.2 billion for expansion of broadband access in rural communities across the country from Vermont to Colorado, places that were uneconomically feasible for private companies to invest materials and supplies. Under the ARRA, the Health Information Technology for Economic and Clinical Health (HITECH) allowed $2 billion for a National Coordinator Office to plan and coordinate development of a digitized medical record and accounting system. An additional $30 billion was allowed to develop incentive payments for health professionals and hospitals to use electronic health records. The funds support an HIT infrastructure and training for use of electronic health records (Jain et al, 2010). The ARRA was actually the second government stimulus. Under President Bush the Troubled Assts Relief Program (TARP) had been passed on October 3 2008 as a $700 billion stimulus program to inject funds into major Wall Street banks to buy their failed assets. The Federal Reserve system undertook monetary policy and had dropped interest rates to zero and began printing $1 trillion in money to offset Wall Street failures (Thecapital.net, p. 4). History of Policy By the end of 2008, the number of Americans losing their homes was over two million. Home sales had such a powerful decline that home value and prices for homes fell 20 percent. The series of defaults that suddenly rose shook up a financial industry that had been based on secularization of bonds sold on rising home prices. These mortgage backed securities immediately became toxic assets and the country was plunged into losses facing trillions of dollars. President Bush signed the Emergency Economic Stabilization Act (EESA) in October 2008. This was the first stimulus based on fiscal policy that allowed to U.S. Department of Treasury to begin pumping $700 billion in the financial industry. This was taxpayer money of which $350 was released under the Troubled Asset Relief Program (TARP) in October 2008. President Obama would release the final $350 billion in January 2009 and then release more funds under the ARRA in February 2009 (Fenn, 2009). Part of TARP and ARRA dealt with the way the financial industry had promoted the economic debacle and by awarding itself with large executive and staff bonuses for soft-term gains from profits built in a speculating housing market. There were restrictions built into the TARP and ARRA limiting executive compensation. The question whether these restrictions had pointed to the culprits of the financial mess points to the significance of the underlying question concerning the then ongoing deregulation of the financial markets. In a study of the crisis, McClendon expresses a belief that the blame of the financial meltdown pointed to federal government policy in supporting homeownership and "its deregulation of a financial industry that is incapable of self-regulating" (McClendon, 2010). But homeownership is more a personal matter and depends on the individual and their assets. If the federal government pursued a policy of promoting one's assets to own a home directly, then this is a different matter from that allowing private industry or financial markets to promote homeownership. The first can be seen as positive policy while the second has been shown to open the den to the wolves. ARRA and TARP were fiscal policy measures that entailed infusions of cash into a sickened economy whose demand curve had deflated. Both operated in consort with the Federal Reserve which used monetary policies of reducing bank to bank interest rates and a policy of 'quantitative easing.' The latter was merely a policy of creating cash by buying securities from banks while using no money in the purchase. Both fiscal and monetary policy maneuvers were pursued in response to earlier polices of the 1980s which led to bank and financial market deregulation. A history of ARRA would entail going back to government policy after the Great Depression. McClendon explains how federal policy led to legislation that created the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) in response to the Great Depression. The value that these two organizations promoted, was a good and trusted one shared by Americans. Fannie Mae and Freddie Mac only insured government sponsored mortgages written and secured by the Federal Housing Administration or the Department of Veteran Affairs. The firms operated in the banking secondary market and packaged loans into securities which they sold in domestic and international financial markets for insurance. During the early 1970s Fannie Mae and Freddie Mac entered the conventional loan market, buying loans from banks and savings and loans associations. They would later enter the nonconventional market of derivative bonds. Since the Great Depression, there have been several rounds of deregulation policy expressed through passage of federal acts that freed banks, including Fannie Mae and Freddie Mac, to eventually enter and make a mess of the subprime lending market. In 1980 the Depository Institutions Deregulation and Monetary Control act freed banks from state usury ceilings, enabling them to charge conventional high interest rates to appropriate populations for home mortgage longs. This act also raised the deposit insurance limit up to $100,000. It had been $40,000. The Alternative Mortgage Transaction Parity Act of 1982 soon followed and allowed banks to make adjustable rate and interest-only mortgages outside of state restrictions. The Garn–St. Germain Depository Institutions Act of 1982 enabled savings and loans banks to enter the lending market with low loan-to-value ratios (McClendon, 2010). The result was that the savings and loans industry collapsed from speculation and little oversight. Thousands of Americans lost their life savings, and thousands of savings and loans executives went to jail. Regan appointed Alan Greenspan as chairman of the Federal Reserve Bank. Greenspan had been Charles Keating's lawyer and Keating had went to jail as one of the main savings and loans executive cheating speculators. Greenspan had argued that his client had 'a sound business plan' and that there had been 'no foreseeable risk'. In 1999, under President George Clinton, Congress passed the Gramm-Leach-Bliley Act which overturned Glass-Steagall, allowing future mergers of financial interests and freeing investment bankers to begin risky investments insured with consumer deposits (McClendon, 2010).. Not only did the banks become larger, but the executive salaries of the bankers became astronomical. Robert Rubin, vice chair of the new Citigroup conglomerate and later President Clinton's Secretary of the Treasury, made $126 million in his eight years as CEO of Citigroup. The growing might of the investment banks gave them power to manipulate the new technology market of the later 1990s into a massive bubble that crashed the stock market in 2001. Five trillion were lost in deposits. The major investment banks, including Merrill Lynch, Lehman Brothers, and Bear Stearns, were eventually fined 1.4 billion dollars for their duplicity. The misguided policy of deregulation reached its crowning period at the end of the 1990s as the new banking instrument, the derivative, merged with computer technology. Investment bankers used the derivatives to make innovative forays into the financial markets. President Clinton's economic advisors, Greenspan and Larry Summers, refused to allow the Commodity Future Trading Commission to regulate the derivatives market. Senator Phil Gramm sponsored a bill, which passed Congress and was signed into law that banded regulation of the derivatives market. Greenspan, Larry Summers, and Robert Rubin demonstrate how it is that the titans of financial industry, CEOs and attorney’s of the big investment banks themselves become federal government policy makers. This point is driven with more power with the example of Henry Paulson. Paulson, as CEO of Goldman Sachs urged the SEC under the Bush administration to relax limits on leverage allowed banks, so that they may increase the borrowing during the rising housing market in 2004. President Bush appointed Paulson Treasury Secretary in 2006. His wish for more leverage had been granted back in 2004. By 2008 investment banks including Merrill Lynch, Lehman Brothers, and Bear Stearns, signaled the economic crises. All three banks went belly up insolvent with unheard of loan to bank deposits ratios of 28:1, 31:1, and 33:1 (Conlan and Posner). Evaluation The ARRA was one of several measures the government used to stabilize the financial system and stop the collapsing economy to enable recovery. A total of $1 trillion was injected into the economy and many economists claim the efforts were successful (Zander, 2010). The TARP funds proved to be economically beneficial, rescuing the auto market and placing a temporary floor in the housing market. Major banks paid back the TARP funds enabling the government to realize a profit. Yet ARRA was delayed in slow but deliberate distribution of funds to the states. Some states even refused funds on political grounds but were forced by their constituents to cooperate. This illustrated one of the basic problems of the ARRA act which it would never be able to overcome, the fact that it was push forwarded by the Democratic Party under the leadership of an African American president (Lowe, 2010). Zander explains that the success of the ARRA was due to the fact that a big change, the expenditure of $400 billion injection into the economy, occurred all in the second quarter of 2009. But critics have maintained the economy did not show the improvements that, such as in job creation, that the Obama administration had forecasted. However, more somber accounts of the stimulus explained that the depth of the recession setback of the economy had not been fully appreciated. Daniel Gross pointed out how the economy had been in a "death spiral" (Gross). American had lost up to 20 percent of its net worth between 2007 and the first quarter of 2009. To Gross, the economy was not "merely wounded." It had been "flatlined" (Gross). The Center on Budget and Policy Priorities argued that the ARRA prevented a record number of Americans from falling into poverty (Shermon, 2011). Using figures from the Census Bureau, the CBPP demonstrated that 4.5 million Americans were kept out of poverty. In 2008 the poverty rate was 15.8 and in 2009 it 15.7. Specific measures of the ARRA which did this were extensions of unemployment benefits, renewal of the Child Tax Credit and Earned Income Tax Credit, extensions of the food stamp program (SNAP), the Making Work Pay tax credit, and a one-time payment to the elderly. The ARRP proved an effective and successful policy measure in alleviating poverty compared only to the Social Security Act of 1935 (Shermon, 2011). The ARRA followed Keynesian economic fiscal policy, based on government created spending to stimulate total spending in an economy where demand had fallen. The Congressional Budget Office (CBO) estimated that the government deficit would be necessarily increased to 1.3% of the GDP in 2009 and 2.2% in 2010. By August 2010 and through October 2010 the unemployment figure leveled off at 9.6 percent, but then climbed to 9.8 percent in November 2010. By January, 2011, the unemployment figure decreased to 9.0%, holding to a 0.4% decrease for the second month in a row. The fourth quarter GDP, which had decreased 2.6% a year ago in 2009, increased 2.8% in 2010 (BEA). These figures seem to demonstrate that the ARRA and the policies it laid upon had worked to stem the tide of the repression and turn the economy around (BLS). The ARRA was one of several measures the government used to stabilize the financial system and stop the collapsing economy to enable recovery. A total of $1 trillion was injected into the economy and many economists claim the efforts were successful (Zander). The TARP funds proved to be economically beneficial, rescuing the auto market and placing a temporary floor in the housing market. Major banks paid back the TARP funds enabling the government to realize a profit. Yet ARRA was delayed in slow but deliberate distribution of funds to the states. Some states even refused funds on political grounds but were forced by their constituents to cooperate. This illustrated one of the basic problems of the ARRA act which it would never be able to overcome, the fact that it was push forwarded by the Democratic Party under the leadership of an African American president (Lowe, 2010). In her article Suzanne Mettler writes of how the policies of President Obama faced a difficult task of challenging a buried “submerged state” that not only favored particularly interests, but also ways and methods of delivering social policy. This submerged stated comprised “a conglomeration of federal social policies that incentivize and subsidize activities engaged in by private actors and individuals” (Mettlerer, 2010). It operated in a way such that it opposed sweeping reforms and buried their effects, such that “Obama’s policy achievements confront a public that appears largely unimpressed” (Mettler). The point is that most of the American citizen, for example were not aware that they had received a $400 tax break under the Making Work Pay credit. In part, this was the fault of the President’s publicity machine and also because of the heavy political polarization foisted by the Republican Party that sought to obscure and bury any accomplishments of the Obama administration. There were many politically motivated arguments that fought against the stimulus. The arguments took the position that the stimulus act was too large in spending and not enough in tax cuts. The bill resulted in bitter and sustained arguments mainly from the Republican Party and the Tea Party. Arguments from the other side of the political fence defended a position that the stimulus was too small and did not have enough spending to effectively push the economy forward. Certainly policymakers will always have to consider the political climate and many forward moving projects will have to be negotiated in a way that progress is maintained in spite of caustic opposition. The act allocated $70 billion in renewable energy projects. A significant part of the ARRA stimulus, 37 percent was in tax credits. But in lieu of tax credits, many of the renewable energy projects were funded by temporary grants or loan guarantees. Projects that were funded included renewable energy solar and wind technologies, alternative battery research and technologies, and housing weatherization projects. In the polarizing political climate Texas had been one of the opposing states to ARRA benefits. In his report on the progress of the ARRA’s renewable energy projects, Adam Umanoff highlighted the Penascal Wind Farm in Texas as one of the impressive examples of ARRA funding (Umanoff, 2011). The Penascal Wind Farm had received $225 million. Up to $6 billion had been paid in grants through December 31, 2010. The Meadow Lake Wind Farm in Indiana had received $276 million and in Washington State, the Windy Flats Wind Farm had received $219 million. A Policy In pursuit of government policy it, it is important that leaders also inform the public clearly measures that of being done and undertaken on their behalf. Tax cuts are difficult to appreciate and most of the American citizens were not aware that they had received the multiple benefits of the ARRA tax relief policies. It is a difficult fate of the politician who can point to many accomplishments and yet not be acknowledged by the citizenry. Hence the Obama administration saw many of its talented administrators leaving after holding their positions for short periods of time. Another challenge the current policymakers faced also derived from public perception. To the public the obvious moves of the administration was the financial relief given to the banks and the way in which moral hazard was allowed to be interpreted. It appeared to the public that Wall Street was the major blame for the recession and yet for all the strictures that the government placed on the rising executive salaries, the news media however waved all the details of executive pay before the public. It appeared that these salaries were still not held in check. Also, many people still draw anger that most of the executives have not been charged of financial crimes and were let off free or merely accessed a small fee in comparison to the millions they were able to extract in executive pay from their companies. It also appears that the dominant dialogue is presently engaged with a mean, selfish spirit. Millions of people are losing their homes due to the subprime lending fiasco. Banks, instead of negotiating mortgages in good faith, are putting people out. These are the same banks that had been bailed out by the government. The public is pressed with the belief that the fault was on the people who took on loans that they could not afford. But yet the government policy of deregulation had allowed the banks to trick their clients with mortgages that soon escalated out of hand. Researchers such as Anne Balcer Norton elaborate how these policies had explicitly evolve to allow unscrupulous agents to trick a public willing to own their own home. She explains how the “borrower, left to obtain a loan from a subprime lender, doesn’t get the second mortgage loan needed; rather, the borrower must take on a costly new first mortgage loan. The subprime lender eludes state usury caps and obtains a first lien position on the borrower’s home” (Norton, 2005). What kind of government policy is called for in this case? Several positions, several sides, must be met and resolved. It will have to be decided whether the goal is one of public service or of continuing the same subsystem that, left unchecked, produced the dire circumstances that gave rewards to a few. Works Cited Berger, B.T. and Gaffney, S. 2009. President signs stimulus package. Government Finance Review, 25(2):60-65. Buntin, M.B., Jain, S.H., and Blumenthal, D. 2010. Health information technology: Laying the infrastructure for national health reform. Health Affairs, 29(6): 1214-1219. Bureau of Labor Statistics (Bls). 2008-2010. United States Department of Labor. http://www.bls.gov/home.htm Capitol.Net. 2009. Economic policy crisis and the stimulus. TheCapitol.net. http://books.google.com/books?id=lYne_qbjo6kC&printsec=frontcover&dq=Economic+policy+crisis+and+the+stimulus&hl=en&ei=NFVxTfvuDIHqgAevz8VA&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDQQ6AEwAA#v=onepage&q&f=false Fenn, C. 2009. Congressional plan for economic recovery: Overview of recent tax acts. The CPA Journal, 79(8): 38-47. 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The perfect storm: How mortgage-backed securities, federal deregulation, and corporate greed provide a wake-up call for reforming executive compensation. University of Pennsylvania Journal of Business Law, 12: 131-179. Mettler, S. 2010. Reconstituting the submerged state: The challenges of social policy reform in the Obama era. Perspectives on Politics, 8(2): 803-824. Norton, A.B. 2005. Reaching the glass usury ceiling: Why state ceilings and federal preemption force low-income bnorrowers into subprime mortgage loans. University of Baltimore Law Review. 35:1-36. Schwabe, P., Cory, K., and J. Newcomb. 2009. Renewable energy project financing: Impacts of the financial crisis and federal legislation. National Renewable Energy Laboratory. U.S. Department of Energy. Shermon, Arloc. 2011. Despite deep recession and high unemployment, government efforts - including the recovery act - prevented poverty from rising in 2009, new Census data show. Center on Budget and Policy Priorities. (CBPP) http://www.cbpp.org/files/1-5-11pov.pdf Taylor, J.B., and A. Weerapana. 2009. Principles of economics: Global financial crisis edition. (6th edition). Cengage Learning. http://books.google.com/books?id=3XwuBPNpqEAC&printsec=frontcover&dq=Taylor/Weerapana%27s+Macroeconomics&hl=en&ei=S1ZxTcHgL5P2gAf6z9yZAQ&sa=X&oi=book_result&ct=result&resnum=4&ved=0CD8Q6AEwAw#v=onepage&q&f=false Umanoff, A. 2011. A report card on stimulus support for renewable energy. Powermag.com http://www.powermag.com/issues/departments/commentary/A-Report-Card-on-Stimulus-Support-for-Renewable-Energy_3491_p3.html Wyatt, D.F. 2009. The perceived challenges of implementing the American Recovery and Reinvestment Act. State and Local Government Review, 14(2):128-32. Zandi, Mark, and Blinder, Alan S. 2010. How the Great Recession was brought to an end. Moody's Analytics. http://www.economy.com/mark-zandi/documents/End-of-Great-Recession.pdf Read More