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 

January 2010 Through March 2010

May 2010
Pub. No. 4136
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 

January 2010 Through March 2010

May 2010
CBO
Preface

CBO

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

provisions 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 the 

reports filed by certain recipients of funding under ARRA that detail how many jobs were created or retained through funded 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 first 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 Bill Randolph. Jared Brewster, Mark Lasky, and Joshua Shakin 

contributed to the analysis. John Skeen edited the report, and Jeanine Rees prepared it for 

publication. Lenny Skutnik printed the report, and Linda Schimmel handled the distribution. 

This report, along with previous ones on the topic, is available on CBO’s Web site 

(www.cbo.gov).

Douglas W. Elmendorf

Director

May 2010

Contents

CBO

Measuring ARRA’s Impact Using Recipients’ Reports 3

Measuring ARRA’s Impact Using Economic Models and Historical Data 3

CBO’s Modeling Approach 4

Change from CBO’s Previous Estimates of the Impact of ARRA 7

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 2

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 January 2010 Through March 2010

Under the American Recovery and Reinvestment 

Act of 2009 (ARRA), also known as the economic stimulus package, certain recipients of funds appropriated in 

ARRA (most grant and loan recipients, contractors, and 

subcontractors) are required to report, after the end of 

each calendar quarter, the number of jobs they created or 

retained with ARRA funding. The law also requires the 

Congressional Budget Office (CBO) to comment on 

those reported numbers.1

Recipients reported that ARRA funded almost 700,000 

full-time-equivalent (FTE) jobs during the first quarter of 

2010.2

 Such reports, however, do not provide a comprehensive estimate of the law’s impact on employment in 

the United States. That impact may be higher or lower 

than the reported number for several reasons (in addition 

to any issues about the quality of the data in the reports).3

First, some of the reported jobs might have existed in the 

absence of the stimulus package, with employees working 

on the same activities or other activities. Second, the 

reports filed by recipients measure only the jobs created 

by employers who received ARRA funding directly or by 

their immediate subcontractors (so-called primary and 

secondary recipients), not by lower-level subcontractors. 

Third, the reports do not attempt to measure the number 

of jobs that may have been created or retained indirectly, 

as greater income for recipients and their employees 

boosted demand for products and services. Fourth, the 

recipients’ reports cover only certain appropriations made 

in ARRA, which encompass about one-sixth of the total 

amount spent by the government or conveyed through 

tax reductions in ARRA during the first 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 

individuals. 

Estimating the law’s overall effects on employment 

requires a more comprehensive analysis than the recipients’ reports provide. Therefore, looking at recorded 

spending to date as well as 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 on 

the economy and using various mathematical models that 

represent the workings of the economy. On that basis, 

CBO estimates that in the first quarter of calendar year 

2010, ARRA’s policies: 

B Raised the level of real (inflation-adjusted) gross 

domestic product (GDP) by between 1.7 percent and 

4.2 percent, 

B Lowered the unemployment rate by between 0.7 percentage points and 1.5 percentage points, 

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

288. 

2. The number of jobs and other information compiled from recipients’ reports are shown at www.recovery.gov. A year of full-timeequivalent employment is 40 hours of employment per week for 

one year.

3. For a discussion of data-quality issues, 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), available at 

www.gao.gov/new.items/d10437.pdf.
2 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, JAN. 2010–MAR. 2010

CBO

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.

B Increased the number of people employed by between 

1.2 million and 2.8 million, and 

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

1.8 million to 4.1 million compared with what those 

amounts would have been 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 and employment are 

expected to increase further during calendar year 2010 

but then diminish in 2011 and fade away by the end of 

2012.

CBO’s current estimates reflect small revisions to earlier 

projections of the timing and magnitude of changes to 

federal spending and revenues under ARRA and small 

revisions to the estimated impact of changes in spending 

and revenues on GDP and employment.4

CBO has examined data on output and employment during the period since ARRA’s enactment. However, those 

data are not as helpful in determining ARRA’s economic 

effects as might be supposed, because isolating those 

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. 

Q1 0.1 0.1 * * * * * 0.1

Q2 0.9 1.5 -0.2 -0.3 0.3 0.5 0.5 0.8

Q3 1.3 2.7 -0.4 -0.7 0.7 1.3 1.0 1.9

Q4 1.5 3.5 -0.5 -1.1 1.0 2.1 1.4 3.0

Q1 1.7 4.2 -0.7 -1.5 1.2 2.8 1.8 4.1

Q2 1.7 4.6 -0.8 -1.9 1.4 3.4 2.0 4.9

Q3 1.4 4.2 -0.8 -2.0 1.4 3.7 2.0 5.3

Q4 1.1 3.6 -0.7 -1.9 1.3 3.6 1.8 5.1

2009 1.0 2.0 -0.3 -0.5 0.5 1.0 0.7 1.4

2010 1.5 4.2 -0.7 -1.8 1.3 3.4 1.9 4.8

2011 0.7 2.2 -0.5 -1.4 0.9 2.6 1.2 3.6

2012 0.1 0.3 -0.1 -0.4 0.2 0.7 0.2 0.7

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

4. In March 2009, CBO projected that in the first quarter of 2010, 

real GDP would be 1.4 percent to 4.0 percent higher and that 

employment would be 1.1 million to 2.3 million higher with 

ARRA than it would be without the law. See Congressional 

Budget Office, letter to the Honorable Charles E. Grassley about 

the estimated macroeconomic impacts of the American Recovery 

and Reinvestment Act of 2009 (March 2, 2009).
ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, JAN. 2010–MAR. 2010 3

CBO

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 requirement covers most grant and loan recipients, 

contractors, and subcontractors but excludes individuals. 

The required information includes the amount of stimulus funding received and spent; the name, description, 

and completion status of the funded projects or activities; 

the number of jobs created or retained; and, for investments in infrastructure, the purpose and cost of the 

investment. For reports filed in April 2010, recipients 

reported the number of jobs on the basis of the number 

of employee hours paid for with ARRA funds in the first 

quarter.5

According to the recipients’ reports, a total of 682,226 

full-time-equivalent jobs—more than two-thirds of them 

in education—were created or retained using ARRA 

funds during the first quarter.6

 However, adding up the 

reported numbers of jobs created or retained is not a 

comprehensive measure of ARRA’s effect on overall 

employment, or even of the effect of those provisions of 

ARRA for which recipients’ reports are required. The 

actual impact of those provisions could, in principle, be 

significantly larger or smaller than the total reported 

number of jobs. 

One factor that could make the reported figure too high 

is that recipients’ reports may include some employment 

that would have occurred without ARRA. Some people 

whose employment was attributed to ARRA might have 

worked on other activities in the absence of the law—for 

example, firms might have bid on other projects if their 

resources were not committed to projects funded by 

ARRA. In the case of government employees, state or 

local taxes might have been raised in the absence of 

ARRA funding (or transfer payments might have been 

reduced) to maintain some of the jobs counted as created 

or retained. 

A factor that could make the reported figure too low is 

that the reporting requirement is limited to primary and 

secondary recipients of funds and excludes lower-level 

recipients, such as subcontractors hired by a main subcontractor. Thus, if expenditures under ARRA led to 

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

reports. 

Recipients’ reports also do not incorporate indirect 

effects, which could either increase or decrease the impact 

on employment. Those indirect effects include potential 

declines in employment in other firms or economic sectors as demand shifts toward the recipients of ARRA 

funding—a phenomenon often referred to as the “crowding out” effect of government policies. Conversely, spending under ARRA could lead to higher employment at 

companies not directly connected to that spending—for 

example, because of additional purchases made by workers who are directly employed through ARRA funds and 

who would otherwise have been unemployed. CBO estimates that, under current conditions, the positive indirect 

effects outweigh the negative ones. In other words, taken 

together, indirect effects boost ARRA’s impact on economic output and employment. 

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

of the total dollar amount of spending increases or tax 

reductions that resulted during the first quarter of 2010 

from 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 

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 information from various economic models 

and from analyses of historical data to estimate how output and employment were affected by those increases in 

outlays and reductions in revenues. CBO’s assessment is 

that different elements of ARRA (such as particular types 

of tax cuts, transfer payments, and government pur5. Specifically, recipients were instructed to calculate the number of 

full-time-equivalent jobs created or retained through ARRA by 

counting the total number of hours worked that were funded by 

ARRA during the first quarter, divided by the number of hours in 

a full-time schedule for a quarter. See http://www.whitehouse.gov/

omb/recovery_faqs_contractors/#report15 for details and examples.

6. For the number of jobs funded by each agency, see 

www.recovery.gov/Pages/TextView.aspx?data=jobSummary

Agency&topnumber=200&qtr=2010Q1.
4 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, JAN. 2010–MAR. 2010

CBO

chases) have 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 result 

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, 

as shown in Table 2. 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 and 

increases in transfer payments or 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.

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 a longer-lasting 

change to disposable income will, because the onetime payment has less effect on total lifetime disposable income. 

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

higher-income ones. The difference arises, at least in 

part, because a larger share of lower-income households would like to borrow in order to spend more 

than they do now but are unable to. 

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 can also have indirect effects that 

enhance or offset the direct effects. Direct effects are 

enhanced when, for instance, a government policy leads 

directly to higher income for workers who are employed 

because of the policy, and those workers use their higher 

income to boost their consumption. Direct effects are 

also enhanced when greater demand for goods and services prompts companies to increase investment spending 

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 firms and sectors to 

government-funded projects. That indirect crowdingout 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 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 borrowed funds. However, that mechanism was 

not an important factor through the first quarter of 2010 

because the Federal Reserve kept short-term interest rates 

very low. Activities funded by ARRA could also reduce 

7. On household spending, for example, see 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; 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; 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; and Jonathan A. Parker and others, “Consumer Spending 

and the Economic Stimulus Payments of 2008” (draft, December 

2009), available at http://finance.wharton.upenn.edu/~souleles/

research/papers/ESP2008_v7b_results.pdf.
ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, JAN. 2010–MAR. 2010 5

CBO

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 

much smaller in the past year than it might have been 

otherwise because of the high unemployment rate and 

large amount of unused resources (as well as the diversity 

of activities funded under ARRA). In estimating the size 

of such 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 category. The ranges between high and low multipliers 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. For 

instance, CBO estimates that a one-time increase of $1 in 

federal purchases of goods and services in one calendar 

quarter last year would raise GDP above what it would 

otherwise be by a total of $1 to $2.50 over several quarters. That cumulative multiplier of $2.50 on federal purchases comprises increases in GDP of roughly $1.45 in 

the quarter when the spending occurs, 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 

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 the ones 

that CBO used in its initial analysis of the economic 

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

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, CBO has 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 full-time-equivalent employment in a series of steps. First, the impact on the output 

gap—the percentage difference between actual output 

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

8. See Congressional Budget Office, cost estimate 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), available at www.jct.gov/

x-19-09.pdf.

10. Potential output is the amount that the economy is capable of 

producing given its labor supply, capital stock, and technology.

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 reduced 

unemployment.
6 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, JAN. 2010–MAR. 2010

CBO

Table 2.

Estimated Output Multipliers of Major Provisions of the American Recovery and 

Reinvestment Act

Continued

schooling 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 

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 first quarter of 

2010 depended partly on its 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. 

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

12. The natural rate of unemployment is the rate arising from all 

sources except fluctuations in aggregate demand.
ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, JAN. 2010–MAR. 2010 7

CBO

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 Joint Committee on Taxation’s (JCT’s) estimate (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 to persons.

A key disadvantage of the model-based approach is that 

considerable uncertainty exists about many of the economic relationships that are important in the modeling. 

Economists differ on which analytical approaches provide 

the most convincing evidence about such relationships, 

and therefore they reach different conclusions about 

those relationships. In addition, each individual 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 

CBO’s current estimates of the impact of ARRA on output and employment differ slightly from those presented 

in its February 2010 report primarily because the agency 

has revised its estimates of ARRA’s impact on federal 

spending on the basis of new information. 

Outlays resulting from ARRA in the first quarter of calendar year 2010 were higher than the amount that CBO 

projected in February 2010 in preparing its estimate of 

the law’s likely impact on output and employment, primarily because a larger-than-expected amount of refundable tax credits was disbursed in the first quarter rather 

than later in the year. That change makes the estimated 

impact of ARRA on output and employment in the first 

quarter slightly higher than what CBO projected in 

February. 

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

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 individuals and businesses. Direct extrapolations of past data 

are generally based on correlations among economic variables in the past or the effects of specific types of policy 

events in the past.

Macroeconometric Forecasting Models 

In analyzing the economic effects of ARRA, CBO drew 

heavily on versions of the commercial forecasting models 

of two economic consulting firms, Macroeconomic 

Advisors and Global Insight, as well as 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 

widely used, and they underlie most of the forecasts 

offered to paying 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 firms. 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 uncertainty about the financial and economic outlook remains 

high, and 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 to which 

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

that CBO used 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, JAN. 2010–MAR. 2010

CBO

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 leading 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 to eventually pay 

for any increased government spending or reduced revenues in the form of future tax increases and that they 

incorporate those expected payments—even if far in the 

future beyond their lifetime—into their current spending 

plans. Thus, they are assumed to reduce 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, cash 

transfer payments and tax refunds have little or no effect 

on current consumption in such models. People in the 

models generally also have full access to credit markets, so 

they can borrow to maintain their consumption when 

faced with a temporary loss of income. This class of models 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 a fixed rule by 

which increased output or inflation implies higher real 

(inflation-adjusted) interest rates. 

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 relative to government 

spending and revenues in the past. However, estimates of 

economic effects from this research vary widely and are 

sensitive to the time period and estimation strategy used. 

Many estimates of this sort suggest that in the case of 

government purchases, crowding-out effects dominate, 

and the impact on output tends to be less than one for 

one and tends to fade over time. Some estimates, however, suggest multipliers higher than the range estimated 

by CBO. Estimated multipliers for tax cuts are generally 

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. Currently, however, that effect is likely to be smaller than 

usual. The federal funds rate (the interest rate directly controlled 

by the Federal Reserve) is near zero and is unlikely to rise significantly until economic conditions have substantially improved. 

Interest rates on short-term government securities tend to move 

closely with the federal funds rate, so they are also unlikely to rise. 

For that reason, 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 interest rates or inflation 

in the future. Policies that imply steep increases in future deficits 

may 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 major impact on the size of the capital stock or 

interest rates in the future. 

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

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

macroeconomic forecast, that assumption implies that at the end 

of 2011, 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 of 

excessive inflation. 
APPENDIX ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, JAN. 2010–MAR. 2010 11

CBO

higher than those for spending and 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 cuts in 

government spending for causing the recession. When 

causation runs in both directions in this way, the historical correlation between variables may not be a good guide 

for predicting the effects of a newly proposed policy.

A strategy that has been used to try to overcome that 

obstacle is to identify policies, such as wartime spending, 

that are arguably unrelated to other economic conditions 

and to try to isolate their impact on the economy. Wartime spending, however, may not be indicative of the 

effects of other increases in government spending. For 

example, during World War II, the rationing of many 

goods may have reduced the indirect effects of government spending on private consumption. 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 

there are high levels of idle resources—effects may be 

greater than they were, on average, in the past. 4. For examples of model estimates that incorporate a lower-thanusual response of interest rates to policy changes, see Lawrence 

Christiano, Martin Eichenbaum, and Sergio Rebelo, When Is the 

Government Spending Multiplier Large? Working Paper No. 15394 

(Cambridge, Mass.: National Bureau of Economic Research, 

October 2009); Troy Davig and Eric M. Leeper, Monetary–Fiscal 

Policy Interactions and Fiscal Stimulus, Working Paper No. 15133 

(Cambridge, Mass.: National Bureau of Economic Research, July 

2009); and Robert E. Hall, By How Much Does GDP Rise If the 

Government Buys More Output? Working Paper No. 15496 

(Cambridge, Mass.: National Bureau of Economic Research, 

November 2009). For examples of models that include liquidityconstrained agents, see 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; and 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. 

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 No. 15153 

(Cambridge, Mass.: National Bureau of Economic Research, 

July 2009).

5. See 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

(November 2002), pp. 1329–1368; Andrew Mountford and 

Harald Uhlig, What Are the Effects of Fiscal Policy Shocks? Working 

Paper No. 14551 (Cambridge, Mass.: National Bureau of 

Economic Research, December 2008); Roberto Perotti, In Search 

of the Transmission Mechanism of Fiscal Policy, Working Paper 

No. 13143 (Cambridge, Mass.: National Bureau of Economic 

Research, June 2007); 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; and Robert J. Barro and 

Charles J. Redlick, Macroeconomic Effects from Government Purchases and Taxes, Working Paper No. 15369 (Cambridge, Mass.: 

National Bureau of Economic Research, September 2009). In 

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

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

the largest effect on output in any one quarter of a dollar change 

to policy that persists in a way consistent with historical behavior—rather than the cumulative effect of a one-time dollar’s worth 

of policy change, as CBO defines its multipliers.