CBO

CONGRESSIONAL BUDGET OFFICE

SECOND AND D STREETS, S.W.

WASHINGTON, D.C. 20515

A

REPORT

Estimated Impact of the American Recovery and 

Reinvestment Act on Employment and 

Economic Output From 

April 2010 Through June 2010

August 2010
Pub. No. 4201
The Congress of the United States O Congressional Budget Office

A

REPORT

CBO

Estimated Impact of the American 

Recovery and Reinvestment Act on 

Employment and Economic Output from 

April 2010 Through June 2010

August 2010
CBO
Preface

CBO

The American Recovery and Reinvestment Act of 2009 (ARRA) contains provisions 

that are intended to boost economic activity and employment in the United States. 

Section 1512(e) of the law requires the Congressional Budget Office (CBO) to comment 

on reports filed by recipients of ARRA funding that detail the number of jobs funded 

through their activities. This CBO report fulfills that requirement. It also provides CBO’s 

estimates of ARRA’s overall impact on employment and economic output in the second 

quarter of calendar year 2010. Those estimates—which CBO considers more comprehensive 

than the recipients’ reports—are based on evidence from similar policies enacted in the past 

and on the results of various economic models.

Benjamin Page of CBO’s Macroeconomic Analysis Division wrote the report under 

the supervision of Robert Dennis and William Randolph. Jared Brewster, Mark Lasky, 

and Joshua Shakin contributed to the analysis. Kate Kelly edited the report, 

Maureen Costantino prepared it for publication, Chris Howlett proofread it, Monte Ruffin 

printed it, and Linda Schimmel handled the distribution. This report, along with previous 

reports on the topic, is available on CBO’s Web site (www.cbo.gov).

Douglas W. Elmendorf

Director

August 2010

Contents

CBO

Measuring ARRA’s Impact Using Recipients’ Reports 2

Measuring ARRA’s Impact Using Economic Models and Historical Data 4

CBO’s Modeling Approach 4

Change from CBO’s Previous Estimates of the Impact of ARRA 8

Appendix: Evidence on the Economic Effects of Fiscal Stimulus 9

Tables

1. Estimated Macroeconomic Impact of the American Recovery and 

Reinvestment Act, 2009 to 2012 3

2. Estimated Output Multipliers of Major Provisions of the 

American Recovery and Reinvestment Act 6

CBO

Estimated Impact of the American Recovery and 

Reinvestment Act on Employment and Economic 

Output from April 2010 Through June 2010

In February 2009, in response to significant weakness 

in the economy, lawmakers enacted the American 

Recovery and Reinvestment Act (ARRA). The legislation’s numerous spending and revenue provisions can be 

grouped into several categories according to their focus:

B Providing funds to states and localities—for example, 

by raising federal matching rates under Medicaid, 

providing aid for education, and increasing financial 

support for some transportation projects;

B Supporting people in need—such as by extending and 

expanding unemployment benefits and increasing 

benefits under the Supplemental Nutrition Assistance 

Program (formerly the Food Stamp program);

B Purchasing goods and services—for instance, by funding construction and other investment activities that 

could take several years to complete; and

B Providing temporary tax relief for individuals and 

businesses—such as by raising exemption amounts for 

the alternative minimum tax, adding a new Making 

Work Pay tax credit, and creating enhanced deductions for depreciation of business equipment.

When ARRA was being considered, the Congressional 

Budget Office (CBO) and the staff of the Joint Committee on Taxation estimated that it would increase budget 

deficits by $787 billion between fiscal years 2009 and 

2019. CBO now estimates that the total impact over the 

2009–2019 period will amount to $814 billion. Close to 

half of that impact is estimated to occur in fiscal year 

2010, and about 70 percent of ARRA’s budgetary impact 

will have been realized by the close of that fiscal year.

Various recipients of ARRA’s funds (most recipients of 

grants and loans, contractors, and subcontractors) are 

required to report, after the end of each calendar quarter, 

the number of jobs funded through ARRA. The law also 

requires CBO to comment on those reported numbers.1

During the second quarter of 2010, recipients reported, 

ARRA funded almost 750,000 full-time-equivalent 

(FTE) jobs.2

 Those reports, however, do not provide a 

comprehensive estimate of the law’s impact on U.S. 

employment, which could be higher or lower than the 

number of FTE jobs reported, for several reasons (in 

addition to any issues concerning the quality of the

1. Public Law 111-5, sections 1512(c) and 1512(e); 123 Stat. 115, 

288. This current report is the fourth in CBO’s series of quarterly 

reports. For the previous report, see Congressional Budget Office, 

Estimated Impact of the American Recovery and Reinvestment Act on 

Employment and Economic Output from January 2010 Through 

March 2010 (May 2010).

2. Data compiled from recipients’ reports (on jobs funded and other 

information) are shown at www.recovery.gov. Recipients were 

asked to calculate FTEs by taking the total number of hours 

worked in a quarter that were funded by ARRA, and dividing the 

total by the number of hours that a full-time employee would 

have worked in that quarter.
2 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, APRIL 2010–JUNE 2010

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reports’ data).3

 First, some of the jobs included in the 

reports might have existed even without the stimulus 

package, with employees working on the same activities 

or other activities. Second, the reports cover employers 

that received ARRA funding directly and those employers’ immediate subcontractors (the so-called primary and 

secondary recipients of ARRA funding) but not lowerlevel subcontractors. Third, the reports do not attempt to 

measure the number of jobs that were created or retained 

indirectly as a result of recipients’ increased income, and 

the increased income of their employees, which could 

boost demand for other products and services as they 

spent their paychecks. Fourth, the recipients’ reports 

cover only certain ARRA appropriations, which encompass about one-fifth of the total either spent by the government or conveyed through tax reductions in ARRA 

during the second quarter; the reports do not measure the 

effects of other provisions of the stimulus package, such 

as tax cuts and transfer payments (including unemployment insurance payments) to individual people. 

Estimating the law’s overall effects on employment 

requires a more comprehensive analysis than can be 

achieved by using the recipients’ reports. Therefore, 

looking at recorded spending to date along with estimates 

of the other effects of ARRA on spending and revenues, 

CBO has estimated the law’s impact on employment 

and economic output using evidence about the effects 

of previous similar policies and drawing on various 

mathematical models that represent the workings of the 

economy. On that basis, CBO estimates that ARRA’s 

policies had the following effects in the second quarter 

of calendar year 2010:

B They raised real (inflation-adjusted) gross domestic 

product (GDP) by between 1.7 percent and 

4.5 percent, 

B Lowered the unemployment rate by between 

0.7 percentage points and 1.8 percentage points,

B Increased the number of people employed by between 

1.4 million and 3.3 million, and

B Increased the number of full-time-equivalent jobs by 

2.0 million to 4.8 million compared with what would 

have occurred otherwise (see Table 1). (Increases in 

FTE jobs include shifts from part-time to full-time 

work or overtime and are thus generally larger than 

increases in the number of employed workers). 

The effects of ARRA on output are expected to gradually 

diminish during the second half of 2010 and beyond. 

The effects of ARRA on employment and unemployment 

are expected to lag slightly behind the effects on output; 

they are expected to wane gradually in 2011 and beyond.

CBO’s current estimates reflect small revisions to its 

earlier projections of the timing and magnitude of 

changes to federal revenues and spending under ARRA. 

They also reflect, for 2011 and 2012, a small shift in 

CBO’s assumptions about the future actions of the 

Federal Reserve.

Although CBO has examined data on output and 

employment during the period since ARRA’s enactment, 

those data are not as helpful in determining ARRA’s economic effects as might be supposed because isolating the 

effects would require knowing what path the economy 

would have taken in the absence of the law. Because that 

path cannot be observed, the new data add only limited 

information about ARRA’s impact.4

Measuring ARRA’s Impact Using 

Recipients’ Reports

ARRA requires primary and secondary recipients of more 

than $25,000 from appropriations made under the law to 

report a variety of information each calendar quarter. 

That group includes most grant and loan recipients, 

3. For a discussion of data quality, see Government Accountability 

Office, Recovery Act: One Year Later, States’ and Localities’ Uses of 

Funds and Opportunities to Strengthen Accountability, GAO-10-

437 (March 2010), www.gao.gov/new.items/d10437.pdf. 

4. For an analysis of the economic effects of ARRA based on the 

amount of ARRA spending and employment outcomes by state, 

see Daniel J. Wilson, Fiscal Spending Multipliers: Evidence from the 

2009 American Recovery and Reinvestment Act, San Francisco 

Federal Reserve Bank Working Paper 2010-17 (June 2010), 

www.frbsf.org/publications/economics/papers/2010/wp10-

17bk.pdf.
ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, APRIL 2010–JUNE 2010 3

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Table 1.

Estimated Macroeconomic Impact of the American Recovery and 

Reinvestment Act, 2009 to 2012

Source: Congressional Budget Office.

Note: * = between -0.05 and 0.05.

a. A year of full-time-equivalent employment is 40 hours of employment per week for one year.

contractors, and subcontractors, but it excludes individual people. The information to be submitted includes the 

amount of funding received and spent; the name, 

description, and completion status of the project or 

activity funded; the number of jobs funded; and, for 

investments in infrastructure, the purpose and cost of 

the investment. Recipients who filed second-quarter 

reports in July 2010 reported the number of jobs on 

the basis of the number of employee hours paid for 

with ARRA funds in the quarter.5

According to those reports, 749,142 full-time-equivalent 

jobs were funded by ARRA during the second quarter.6

However, the reported number of jobs funded is not a 

comprehensive measure of ARRA’s effect on overall 

employment, or even of those provisions of ARRA for 

which recipients’ reports are required. The actual impact 

could, in principle, be significantly larger or smaller than 

the number of jobs reported. 

If, for example, recipients’ reports include employment 

that would have occurred without ARRA, the impact on 

employment suggested by the reports could be too great. 

Some people whose employment was attributed to ARRA 

might have worked on other activities in the absence of 

the law—for example, a business might have bid on other 

projects if its resources had not been committed to projects funded by ARRA. In the case of government employees, state or local taxes might have been raised in the 

Q1 0.1 0.1 * * * * * 0.1

Q2 0.8 1.3 -0.2 -0.3 0.3 0.5 0.4 0.7

Q3 1.2 2.4 -0.3 -0.6 0.6 1.1 0.9 1.7

Q4 1.4 3.3 -0.5 -1.0 0.9 1.9 1.3 2.7

Q1 1.7 4.1 -0.7 -1.5 1.2 2.7 1.7 3.9

Q2 1.7 4.5 -0.7 -1.8 1.4 3.3 2.0 4.8

Q3 1.5 4.2 -0.8 -2.0 1.4 3.6 2.0 5.2

Q4 1.1 3.6 -0.7 -1.9 1.3 3.5 1.8 5.0

2009 0.9 1.8 -0.3 -0.5 0.5 0.9 0.7 1.3

2010 1.5 4.1 -0.7 -1.8 1.3 3.3 1.9 4.7

2011 0.7 2.3 -0.5 -1.5 0.9 2.7 1.2 3.7

2012 0.2 0.5 -0.2 -0.5 0.3 0.9 0.3 1.0

Change Attributable to ARRA

2009 (Calendar Year Quarter)

2010 (Calendar Year Quarter)

(Millions of people)

Full-Time-Equivalent

 Employment (Millions)a

Low High

Estimate Estimate Estimate Estimate

Low High

Estimate

Calendar Year Average

Real Gross Domestic 

Product (Percent) (Percentage points)

Unemployment Rate Employment

Low High

Estimate Estimate Estimate

Low High

5. Specifically, recipients were instructed to calculate the number 

of FTE jobs funded through ARRA by counting the total number 

of hours worked that were funded by ARRA during the second 

quarter, divided by the number of hours in a full-time schedule for 

a quarter. For details and examples, see Office of Management and 

Budget, “Recovery FAQs for Federal Contractors on Reporting,” 

www.whitehouse.gov/omb/recovery_faqs_contractors/#report15.

6. For the number of jobs by agency, see “Top Agencies, as Reported 

by Recipients (Apr 1–Jun 30, 2010),” www.recovery.gov/Pages

/TextView.aspx?data=jobSummaryAgency&topnumber

=200&qtr=2010Q2.
4 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, APRIL 2010–JUNE 2010

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absence of ARRA funding (or transfer payments might 

have been reduced) to pay for some of the jobs that were 

counted as funded by ARRA. 

Conversely, the reported figure could be too low because 

the reporting requirement is limited to primary and 

secondary recipients of funds and thus excludes lowerlevel recipients, such as subcontractors hired by a main 

subcontractor. Thus, if expenditures under ARRA led 

to increases in employment among lower-level subcontractors and vendors, those effects would be missed 

by the reports. 

Recipients’ reports also do not include indirect effects 

that could increase or decrease the impact on employment. Among those effects are potential declines in 

employment in other businesses or economic sectors as 

demand shifts toward the recipients of ARRA funding—a 

phenomenon often called the “crowding out” effect of 

government policies. Conversely, spending under ARRA 

could lead to higher employment at companies that are 

not directly connected to that spending—for example, 

because of additional purchases made by people who 

would be unemployed were it not for ARRA funds. 

CBO estimates that, under current conditions, the positive indirect effects outweigh the negative indirect effects. 

Taken together, in CBO’s estimation, ARRA’s indirect 

effects boost the law’s impact on economic output and 

employment. 

Finally, the recipients’ reports reflect only about one-fifth 

of the total amount of spending increases or tax reductions during the second quarter of 2010 that are attributable to ARRA’s provisions. The reports cover direct government purchases of goods and services, grants and 

loans to private entities, and grants to states and localities, 

but they do not cover tax cuts or increases in transfer payments to individuals. The tax reductions and spending 

that are not covered by the recipients’ reports probably 

had substantial effects on purchases of goods and services 

and, therefore, on employment.

Measuring ARRA’s Impact Using 

Economic Models and Historical Data

CBO used various economic models and historical data 

to guide its estimate of the way in which output and 

employment are affected by increases in outlays 

and reductions in revenues under ARRA. CBO’s assessment is that different elements of ARRA (such as particular types of tax cuts, transfer payments, and government 

purchases) have had different effects on economic output 

per dollar of higher spending or lower tax receipts. Multiplying estimates of those per-dollar effects by the dollar 

amounts of each element of ARRA yields an estimate of 

the law’s total impact on output. To produce estimates 

of ARRA’s total impact on employment, CBO combined 

that estimate with estimates of how changes in output 

affect the unemployment rate and participation in the 

labor force.

CBO’s Modeling Approach

CBO used evidence from models and historical relationships to determine estimated “multipliers” for each of several categories of spending and tax provisions in ARRA 

(see Table 2 on page 6). Each multiplier represents the 

estimated direct and indirect effects on the nation’s output of a dollar’s worth of a given policy. Therefore, a provision’s multiplier can be applied to the budgetary cost of 

that provision to estimate its overall impact on output. 

Direct effects consist of immediate (or first-round) effects 

on economic activity. Government purchases of goods 

and services directly elicit economic activity that would 

not occur otherwise and thereby have a direct dollar-fordollar impact on output. For reductions in taxes, 

increases in transfer payments, and increases in aid to 

state and local governments, the size of the direct effect 

depends on the policy’s impact on the behavior of recipients. If someone receives a dollar in transfer payments 

and spends 80 cents (saving the other 20 cents), production increases over time to meet the additional demand 

generated by that spending, and the direct impact on output is 80 cents. Similarly, if a dollar in aid to a state government leads that government to spend 50 cents more 

on employees’ salaries (but causes no other changes in 

state spending or revenues, with the other 50 cents used 

to reduce borrowing or build up rainy-day funds), the 

direct impact on output is 50 cents.
ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, APRIL 2010–JUNE 2010 5

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CBO reviewed evidence on the responses of households, 

businesses, and governments to various types of tax cuts 

and transfer payments to estimate the size of those policies’ direct effects on output.7

 For example:

B A one-time cash payment is likely to have less impact 

on a household’s purchases than is a longer-lasting 

change to disposable income because the one-time 

payment has a smaller effect on total lifetime disposable income. 

B Increases in disposable income are likely to boost purchases more for lower-income than for higher-income 

households. That difference arises, at least in part, 

because a larger share of people in lower-income 

households cannot borrow as much money as they 

would wish in order to spend more than they do 

currently. 

B Changes to corporate taxes that primarily affect aftertax profits on past investment generally have a smaller 

impact on output than do policies that alter the return 

from new investment. 

Government policies also can have indirect effects that 

enhance or offset the direct effects. Direct effects are 

enhanced when, for example, a government policy creates 

jobs and those who are hired use their income to 

boost consumption. Direct effects also are enhanced 

when greater demand for goods and services prompts 

companies to increase investment to bolster their future 

production. 

In the other direction, substantial government spending 

can cause a shift in resources (including employees) 

away from production in other businesses and sectors to 

government-funded projects. That indirect crowding-out 

effect could cause growth in employment among recipients of ARRA funding to be offset by declines in employment elsewhere in the economy. Increases in interest rates 

are one possible mechanism for such crowding out: 

Higher interest rates discourage spending on investment 

and on durable goods such as cars because they raise the 

cost of borrowing. However, because the Federal Reserve 

kept short-term interest rates very low, that mechanism 

does not appear to have been an important factor 

through the second quarter of 2010. Another mechanism 

for crowding out is that activities funded by ARRA could 

reduce production elsewhere in the economy if they used 

scarce materials or workers with specific skills, creating 

bottlenecks that hindered other activities. That effect, 

too, was probably much smaller in the past year and a 

half than it might have been otherwise because of high 

unemployment and a large amount of unused resources 

(as well as the diversity of activities funded under ARRA). 

In estimating the magnitude of indirect effects, CBO 

relied heavily on estimates from macroeconometric forecasting models, informed by evidence from other types of 

models and from direct estimation using historical data. 

(For more details about those sources of information, see 

the appendix.)

CBO grouped the provisions of ARRA into general categories and assigned high and low multipliers to each. The 

ranges between high and low were chosen judgmentally 

to encompass most economists’ views about the direct 

and indirect effects of different policies. The multipliers 

indicate the cumulative impact of policies on GDP over 

several quarters, and they should be understood to apply 

to periods when the Federal Reserve is holding short-term 

interest rates about as low as possible and would not 

tighten monetary policy in response to a fiscal stimulus, 

as over the past year and a half. For instance, CBO estimates that a one-time increase of $1 in federal purchases 

of goods and services in one calendar quarter last year 

raised GDP above what it would have been otherwise by 

a total of $1 to $2.50 over several quarters. That cumulative multiplier of $2.50 at the high end of the range comprises increases in GDP of roughly $1.45 in the quarter 

when the federal spending occurred, roughly 60 cents 

in the following quarter, and roughly 45 cents in later 

quarters combined.

The multipliers are applied to outlays when they occur 

and to changes in taxes or transfer payments when they 

7. On household spending, for example, see Jonathan A. Parker 

and others, “Consumer Spending and the Economic Stimulus 

Payments of 2008” (February 2010), www.kellogg

.northwestern.edu/faculty/parker/htm/research/PSJM2010.pdf; 

Matthew D. Shapiro and Joel Slemrod, “Did the 2008 Tax 

Rebates Stimulate Spending?” American Economic Review, vol. 99, 

no. 2 (May 2009), pp. 374–379; Sumit Agarwal, Chunlin Liu, 

and Nicholas S. Souleles, “The Reaction of Consumer Spending 

and Debt to Tax Rebates: Evidence from Consumer Credit Data,” 

Journal of Political Economy, vol. 115, no. 6 (December 2007), 

pp. 986–1019; and David S. Johnson, Jonathan A. Parker, and 

Nicholas S. Souleles, “Household Expenditure and the Income 

Tax Rebates of 2001,” American Economic Review, vol. 96, no. 5 

(December 2006), pp. 1589–1610.
6 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, APRIL 2010–JUNE 2010

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Table 2.

Estimated Output Multipliers of Major Provisions of the American Recovery and 

Reinvestment Act

Continued

affect disposable income. CBO’s estimates, therefore, 

account for the different rates of spending for various 

types of appropriations and, similarly, for the timing of 

different tax cuts or transfer payments. In some cases, 

when different elements of a single provision were 

estimated to have different multipliers, the total cost of a 

provision was divided among more than one category. In 

those cases, the provision is shown in Table 2 in the category to which most of its budgetary cost applied. Provisions that affect outlays (including refundable tax credits) 

are identified by the same names used in CBO’s cost estimate for the conference agreement on ARRA.8

 Provisions 

that affect revenues are identified by the names used in 

the revenue estimate prepared by the staff of the Joint 

Committee on Taxation for the same legislation.9

The ranges for multipliers in Table 2 are close to those 

that CBO used in its initial analysis of the economic 

effects of ARRA in March 2009. Since then, CBO has 

Type of Activity Major Provisions of ARRA

Purchases of Goods and Services 1.0 2.5 Division A, Title II: Other; Title IV: Energy Efficiency and

by the Federal Government Renewable Energy; Title IV: Innovative Technology Loan

Guarantee Program; Title IV: Other Energy Programs; Title V: 

Federal Buildings Fund; Title VIII: National Institutes of Health;

Title VIII: Other Department of Health and Human Services

Transfer Payments to State and 1.0 2.5 Division A, Title VII: Clean Water and Drinking Water State 

Local Governments for Revolving Funds; Title XI: Other Housing Assistance; Title XII: 

Infrastructure Highway Construction; Title XII: Other Transportation 

Transfer Payments to State and 0.7 1.8 Division A, Title VIII: Education for the Disadvantaged; Title 

Local Governments for Other VIII: Special Education; Title IX: State Fiscal Stabilization Fund; 

Purposes Division B, Title V: State Fiscal Relief Fund

Transfer Payments to Individuals 0.8 2.1 Division A, Title I: Supplemental Nutrition Assistance Program; 

Title VIII: Student Financial Assistance; Division B, Title II: 

Unemployment Compensation; Title III: Health Insurance 

Assistanceb

One-Time Payments to Retirees 0.3 1.0 Division B, Title II: Economic Recovery Payments

Two-Year Tax Cuts for Lower- 0.6 1.5 Division B, Title I: Refundable Tax Credits; Making Work Pay 

and Middle-Income People Credit; American Opportunity Tax Credit

One-Year Tax Cut for Higher- 0.2 0.6 Increase in Individual AMT Exemption Amount

Income People

Extension of First-Time 0.3 0.8 Extension of First-Time Homebuyer Credit

Homebuyer Credit

Estimated Output Multipliersa

Low Estimate High Estimate

8. See Congressional Budget Office, cost estimate for the conference 

agreement for H.R. 1, the American Recovery and Reinvestment 

Act of 2009 (February 13, 2009).

9. See Joint Committee on Taxation, Estimated Budget Effects of the 

Revenue Provisions Contained in the Conference Agreement for H.R. 

1, JCX-19-09 (February 12, 2009), www.jct.gov/x-19-09.pdf. 
ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, APRIL 2010–JUNE 2010 7

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Table 2. Continued

Estimated Output Multipliers of Major Provisions of the American Recovery and 

Reinvestment Act

Source: Congressional Budget Office.

Notes: Provisions affecting outlays (including refundable tax provisions) are identified by the same names used in CBO’s cost estimate for 

the conference report on H.R. 1. Provisions affecting revenues—all of which are included in title I of the American Recovery and

Reinvestment Act—are identified by the names used in the estimate by the staff of the Joint Committee on Taxation (JCT) (see 

www.house.gov/jct/x-19-09.pdf).

Some provisions include individual elements that have different multipliers, by CBO’s estimate; in those cases, the provisions are listed 

with the multiplier used for the majority of the 2009–2019 budgetary cost.

The economic impact of three tax provisions with budgetary costs over $5 billion was analyzed using a different methodology, and 

their effects cannot easily be summarized by a multiplier. Those provisions were titled “Extend by Three Years the Placed-In-Service 

Date for Each Section 45 Qualified Facility” and “One-Year Extension of Special Allowance for Certain Property Acquired During 2009” 

in JCT’s estimate and “Health Information Technology” in CBO’s estimate. Some other provisions, with total budgetary costs of less 

than $7 billion, were included in the analysis but are not shown in the table.

AMT = alternative minimum tax.

a. The output multiplier is the cumulative impact of spending under the provisions on gross domestic product over several quarters. The 

ranges shown in the table assume that the Federal Reserve is holding short-term interest rates about as low as possible and would not 

tighten monetary policy in response to a fiscal stimulus.

b. This provision is a reduction in taxes, but it is treated as having the same economic impact as a transfer payment to an individual.

continued to review research on the economic impact of 

various government policies. Although some new 

research has emerged, CBO judges that the evidence, 

taken as a whole, continues to support roughly the same 

ranges for multipliers. However, earlier in the year CBO 

revised the multipliers slightly, primarily to better reflect 

the relatively low probability of different parameters 

being at the same extremes (high or low) of the ranges of 

assumptions that CBO considered. As a result, the current ranges for multipliers are generally a bit narrower 

than the ranges reported last year. 

The estimates of ARRA’s effects on output were translated into estimates of the effects on the unemployment 

rate, total employment, and FTE employment in a series 

of steps. First, the impact on the output gap—the percentage difference between actual and potential output—

was calculated.10 Next, the effect of the change in the output gap on the unemployment rate was estimated using 

the historical relationship between those two measures.11

Then, the effect of changes in the unemployment rate on 

the labor force was taken into account: If unemployment 

declines and the economic environment improves, discouraged workers and people who have chosen to pursue 

activities such as education rather than work will tend to 

return to the labor force. Together, the estimated effect 

on the unemployment rate and the effect on the labor 

force were used to estimate the impact on the number of 

people employed. The change in FTE employment was 

then estimated using the historical relationship between 

changes in hours per employed worker and changes in the 

Type of Activity Major Provisions of ARRA

Corporate Tax Provisions 0 0.4 Deferral and Ratable Inclusion of Income Arising from Business 

Primarily Affecting Cash Flow Indebtedness Discharged by the Reacquisition of a Debt 

Instrument; Clarification of Regulations Related to Limitations 

on Certain Built-In Losses Following an Ownership Change; 

Recovery Zone Bonds; Qualified School Construction Bonds 

Low Estimate High Estimate

Estimated Output Multipliersa

10. Potential output is the level of production that corresponds to a 

high rate of use of labor and capital.

11. Changes in the output gap affect unemployment gradually over 

several quarters. Initially, part of a rise in output shows up as 

higher productivity and hours per worker rather than as reduced 

unemployment.
8 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, APRIL 2010–JUNE 2010

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gap between the unemployment rate and CBO’s estimate 

of the natural rate of unemployment.12 Because higher 

spending and lower taxes can affect output and unemployment for some time after they occur, the impact of 

ARRA on employment in the second quarter of 2010 

depended partly on the law’s effect on spending and 

revenues in the previous year.

A key advantage of the model-based approach used in 

this analysis is the ability to provide estimates of the total 

effects throughout the economy of the government 

spending, transfer payments, and tax cuts resulting from 

ARRA. By focusing on the net change in employment, 

that approach captures both the jobs created and the jobs 

retained as a result of ARRA. 

A key disadvantage of the model-based approach is the 

considerable uncertainty about many of the economic 

relationships that are important in the modeling. Because 

economists differ on which analytical approaches provide 

the most convincing evidence about such relationships, 

they can reach different conclusions about those relationships. In addition, each study involves uncertainty about 

the extent to which the results reflect the true effects of 

a given policy or the effects of other factors. For those 

reasons, CBO provides ranges of estimates of ARRA’s 

economic effects that are intended to encompass most 

economists’ views and thereby reflect the uncertainty 

involved in such estimates.

Change from CBO’s Previous Estimates of the 

Impact of ARRA 

The current estimates of the impact of ARRA on output 

and employment differ from those presented in May 

2010 primarily because new information has led CBO to 

revise its estimates of ARRA’s impact on tax revenues and 

because CBO now projects that ARRA’s policies will not 

result in higher interest rates until slightly later than 

previously forecast.

The estimated effect on revenues through the first quarter 

of 2010 was revised downward by roughly $25 billion 

from the amount CBO estimated in May 2010 largely 

because preliminary tax data indicated lower than previously estimated revenue losses from subsidies for the continuation of health insurance for certain involuntarily terminated employees (under the Consolidated Omnibus 

Reconciliation Act or COBRA) and from increased 

expensing of business investment.13 In addition, CBO’s 

estimates now incorporate the assumption, based on 

CBO’s most recent economic forecast, that the economic 

impact of ARRA will not affect the Federal Reserve’s 

interest rate targets until the first quarter of 2012, rather 

than the final quarter of 2011.14 That change increases 

the projected economic effects of ARRA slightly in the 

fourth quarter of 2011 and in 2012. 

12. The natural rate of unemployment is the rate that arises from all 

sources except cyclical fluctuations in economywide demand for 

goods and services.

13. Provisions allowing businesses to take rapid depreciation of 

investments were in effect under ARRA in 2009. The lower than 

previously estimated revenue losses from those provisions through 

the first quarter of 2010 are largely offset by lower revenue gains 

over the next several years.

14. See Congressional Budget Office, The Budget and Economic 

Outlook: An Update (August 2010).
CBO

Appendix: 

Evidence on the Economic Effects of Fiscal Stimulus

The Congressional Budget Office (CBO) based its 

estimates of the economic effects of the American 

Recovery and Reinvestment Act of 2009 (ARRA) on 

information from various sources: macroeconometric 

forecasting models, general-equilibrium models, and 

direct extrapolations of past data. Macroeconometric 

forecasting models incorporate relationships among 

aggregate economic variables that are based largely on historical evidence. General-equilibrium models, by contrast, are built on explicit assumptions about the decisionmaking of individual people and businesses. Direct 

extrapolations of past data are generally based on correlations among economic variables in the past or on the 

effects of specific types of policy events in the past.

Macroeconometric Forecasting Models

In analyzing ARRA’s economic effects, CBO drew heavily 

on versions of the commercial forecasting models of two 

economic consulting firms, Macroeconomic Advisors and 

Global Insight, and on the FRB-US model used at the 

Federal Reserve Board. Those models assume that the 

economy has an underlying potential output determined 

by the size of the labor supply, the capital stock, and technology. They also assume that actual output can change 

relative to potential output because of shifts in aggregate 

demand for goods and services from households, businesses, and the government. With those basic assumptions, the details of interactions among economic variables in the models are based largely on historical 

relationships, informed by theories of how those variables 

are determined (for example, the theory that total consumption depends mostly on disposable income, wealth, 

and interest rates).1

 Because they emphasize the influence 

of aggregate demand on output in the short run, the 

macroeconometric forecasting models tend to predict 

greater economic effects from demand-enhancing policies 

such as ARRA than some other types of models do.

Macroeconometric forecasting models of this sort are 

used widely, and they underlie most of the forecasts 

offered to the clients of economic consulting firms. In 

addition, the models that CBO uses generally produce 

results that are roughly in line with the consensus of 

private-sector forecasters, as compiled in the Blue Chip 

Economic Indicators. However, some analysts criticize this 

sort of model for being based on historical relationships 

among aggregate economic variables, such as income and 

consumption, rather than being built up from clearly 

specified rules governing the behavior of households and 

businesses. In particular, some critics argue that models 

based on historical relationships will not provide accurate 

predictions in the face of new policies or new circumstances. Partly to address that concern, CBO presents a 

range of possible effects rather than a single number for 

each economic variable.

To reflect current economic conditions—in which there 

is considerable uncertainty about the financial and economic outlook and in which short-term interest rates are 

low and are expected to remain so for some time—CBO 

altered the models’ usual formulation to reduce the extent 

1. The FRB-US model differs from the other two forecasting models 

in that it explicitly incorporates the influence of expected future 

developments on current outcomes.
10 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, APRIL 2010–JUNE 2010

CBO

to which interest rates respond to increases in output.2

Under more normal economic conditions, higher interest 

rates would offset roughly two-thirds of the cumulative 

impact of stimulative policies on gross domestic product 

over two years.3

General-Equilibrium Models 

Some skeptics of the efficacy of stimulus policies have 

cited the results of an alternative class of models, which 

tend to imply more modest economic effects from such 

policies. In those models, people are assumed to make 

decisions about how much to work, buy, and save on the 

basis of current and expected future values of the wage 

rate, interest rates, taxes, and government purchases, 

among other things. In the basic form of such models, 

stimulus policies tend to crowd out a significant amount 

of other economic activity, and multipliers tend to be less 

than 1—meaning that stimulative policies have less than 

a dollar-for-dollar impact on output.

Although some analysts favor the rigor of that approach 

to modeling behavior, other analysts view the assumptions underlying households’ and businesses’ decisionmaking in those models to be unrealistic and to lead to 

unrealistic predictions. In particular, this type of model 

generally assumes that people are fully rational and forward-looking, basing their current decisions on a full lifetime plan. The extreme version of the forward-looking 

assumption implies that people expect eventually to pay 

for any increased government spending or reduced revenues in the form of tax increases and that they incorporate those expected payments—even if beyond their own 

lifetimes—into their current spending plans. Thus, they 

are assumed to curtail their consumption when government spending rises because their lifetime income and 

that of their heirs has fallen by the amount of the eventual taxes. For the same reason, in such models, cash 

transfer payments and tax refunds have little or no effect 

on current consumption. People in the models generally 

also have full access to credit markets, so they can borrow 

to maintain consumption in the face of a temporary loss 

of income. This class of model does not typically incorporate involuntary unemployment: People can work as 

many hours as they choose at the wage rate determined 

by the market. Finally, in these models, monetary policy 

usually follows the rule that increased output or inflation 

implies higher inflation-adjusted interest rates. 

2. Stimulative policies such as ARRA can lead to higher interest rates 

in two ways. First, if they increase economic activity, they can 

prompt the Federal Reserve to raise interest rates to combat 

inflation. However, that effect has been smaller than usual during 

the past year and a half and is likely to remain so in the near term. 

The federal funds rate (the interest rate directly controlled by the 

Federal Reserve) has been near zero since late 2008 and is unlikely 

to be increased significantly until economic conditions have 

improved substantially. Interest rates on short-term government 

securities, which tend to move closely with the federal funds rate, 

also are unlikely to rise for some time. Therefore, CBO estimates 

that expansionary government policies are likely to have less effect 

on interest rates now than under more normal conditions, which 

implies less crowding out. Second, stimulative policies can 

influence longer-term interest rates if they create expectations of 

higher inflation-adjusted interest rates or higher inflation in the 

future. In particular, policies that imply increases in future deficits 

could lead to higher current interest rates to the extent that people 

expect that the deficits will crowd out private investment and 

result in a lower capital stock (which tends to imply both higher 

rates of return on capital and higher interest rates). However, 

the policies in ARRA are temporary and thus are unlikely by 

themselves to have a large impact on the interest rates that people 

expect beyond the next few years. 

3. CBO assumes that as the recovery progresses, the Federal Reserve 

will see less need to provide monetary stimulus. Under CBO’s 

current macroeconomic forecast, that assumption implies that in 

early 2012, the Federal Reserve will gradually begin to offset fiscal 

policy actions by raising interest rates (or engaging in other 

actions to tighten monetary policy) in order to reduce the risk in 

later years of excessive inflation. 
APPENDIX ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, APRIL 2010–JUNE 2010 11

CBO

Recent research has shown that relaxing some of those 

modeling assumptions can result in much higher multipliers.4

 CBO has incorporated the results of that research 

into its view of the effects of government policies. However, the research results appear to be too dependent on 

particular assumptions for CBO to rely on them heavily.

Extrapolations from Historical Data 

Another type of research uses historical data to directly 

project how government policies will affect the economy 

on the basis of how economic variables such as output 

and consumption have behaved in the past relative to 

government spending and revenues. However, estimates 

of economic effects from this research vary widely and are 

sensitive to the period and estimation strategy used. 

Many estimates of this sort suggest that crowding-out 

effects dominate in the case of government purchases so 

that the impact on output tends to be less than one-forone and tends to diminish over time. Some estimates, 

however, suggest multipliers higher than the range estimated by CBO. Estimated multipliers for tax cuts are 

generally higher than those for spending, and they tend 

to grow over time.5

One pitfall of this approach is that the direction of causation between policies and the economy is not always 

clear. For example, poor economic conditions can 

prompt the government to enact policies such as ARRA 

in an effort to boost economic activity. If weak economic 

performance led to such a policy, it would not be accurate 

to ascribe that performance to the policy, rather than vice 

versa. Likewise, if states and localities reduced purchases 

and laid off employees when their budgets deteriorated in 

a recession, it would not be accurate to blame the recession on the cuts in government spending. When causation runs in both directions in this way, the historical correlation between variables is not always the best guide for 

predicting the effects of a new policy proposal.

One strategy that has been applied to overcome that 

obstacle is to try to isolate the economic impact of 

specific policies, such as wartime spending, that are 

arguably unrelated to other economic conditions. 

Wartime spending, however, might not be indicative 

4. For examples of model estimates that incorporate a lowerthan-usual response of interest rates to policy changes, see 

Robert E. Hall, By How Much Does GDP Rise If the Government 

Buys More Output? Working Paper 15496 (Cambridge, Mass.: 

National Bureau of Economic Research, November 2009); 

Lawrence Christiano, Martin Eichenbaum, and Sergio Rebelo, 

When Is the Government Spending Multiplier Large? Working Paper 

15394 (Cambridge, Mass.: National Bureau of Economic 

Research, October 2009); and Troy Davig and Eric M. Leeper, 

Monetary–Fiscal Policy Interactions and Fiscal Stimulus, Working 

Paper 15133 (Cambridge, Mass.: National Bureau of Economic 

Research, July 2009). For examples of models that include 

liquidity-constrained or “rule of thumb” agents, see Marco Ratto, 

Werner Roeger, and Jan in ’t Veld, “An Estimated Open-Economy 

DSGE Model of the Euro Area with Fiscal and Monetary Policy,” 

Economic Modelling, vol. 26, no. 1 (January 2009), pp. 222–233; 

Lorenzo Forni, Libero Monteforte, and Luca Sessa, The General 

Equilibrium Effects of Fiscal Policy: Estimates for the Euro Area, 

Banca d’Italia Working Paper 652 (November 2007); and 

Jordi Gali, J. David López-Salido, and Javier Vallés, 

“Understanding the Effects of Government Spending on 

Consumption,” Journal of the European Economic Association,

vol. 5, no. 1 (March 2007), pp. 227–270. For model estimates in 

which government spending can contribute to future production, 

see Eric M. Leeper, Todd B. Walker, and Shu-Chun Susan Yang, 

Government Investment and Fiscal Stimulus in the Short and Long 

Runs, Working Paper 15153 (Cambridge, Mass.: National Bureau 

of Economic Research, July 2009). For a model that incorporates 

financial frictions in the form of a wedge between the interest rate 

paid by businesses on loans and the rate received by households on 

savings, see Jesús Fernández-Villaverde, “Fiscal Policy in a Model 

with Financial Frictions,” American Economic Review, vol. 100, 

no. 2 (May 2010), pp. 35–40.

5. See Christina D. Romer and David H. Romer, “The 

Macroeconomic Effects of Tax Changes: Estimates Based on a 

New Measure of Fiscal Shocks,” American Economic Review, 

vol. 100, no. 3 (June 2010), pp. 763–801; Robert J. Barro and 

Charles J. Redlick, Macroeconomic Effects from Government 

Purchases and Taxes, Working Paper 15369 (Cambridge, Mass.: 

National Bureau of Economic Research, September 2009); 

Andrew Mountford and Harald Uhlig, What Are the Effects of 

Fiscal Policy Shocks? Working Paper 14551 (Cambridge, Mass.: 

National Bureau of Economic Research, December 2008); 

Roberto Perotti, In Search of the Transmission Mechanism of Fiscal 

Policy, Working Paper 13143 (Cambridge, Mass.: National 

Bureau of Economic Research, June 2007); Olivier Blanchard and 

Roberto Perotti, “An Empirical Characterization of the Dynamic 

Effects of Changes in Government Spending and Taxes on 

Output,” Quarterly Journal of Economics, vol. 117, no. 4 

(November 2002), pp. 1329–1368; and Valerie Ramey and 

Matthew Shapiro, “Costly Capital Reallocation and the Effects of 

Government Spending,” Carnegie–Rochester Conference Series on 

Public Policy, vol. 48, no. 1 (June 1998), pp. 145–194. In 

interpreting the results of this research, it is important to note that 

the reported multipliers are generally “peak” multipliers—that is, 

they represent the largest effect on output in any one quarter of a 

dollar change to policy that persists in a way that is consistent 

with historical behavior—rather than the cumulative effect of a 

one-time dollar’s worth of policy change, as CBO defines its 

multipliers.
12 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, APRIL 2010–JUNE 2010

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of the effects of other increases in government spending. 

For example, during World War II, the rationing of many 

goods might have reduced the indirect effects of 

government spending on private consumption and 

investment. More generally, historical evidence shows the 

effects of policies under average economic conditions. 

Under current conditions—in which interest rates are apt 

to be less affected than usual by expansionary government 

policies and in which there are large amounts of idle 

resources—the effects would probably be greater than 

they were, on average, in the past.