CBO

CONGRESSIONAL BUDGET OFFICE

SECOND AND D STREETS, S.W.

WASHINGTON, D.C. 20515

Estimated Impact of the American 

Recovery and Reinvestment Act on 

Employment and Economic Output from 

October 2010 Through December 2010

February 2011
Pub. No. 4252
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 

October 2010 Through December 2010

February 2011

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 fourth 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 and Felix Reichling 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. John Skeen edited the report, 

Jeanine Rees prepared it for publication, 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

February 2011

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 of 2009 6

CBO

Estimated Impact of the American Recovery and 

Reinvestment Act on Employment and Economic 

Output from October 2010 Through December 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:

 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;

 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);

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

could take several years to complete; and

 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 $821 billion. By 

CBO’s estimate, close to half of that impact occurred in 

fiscal year 2010, and about 70 percent of ARRA’s budgetary impact was 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 fourth quarter of 2010, recipients reported, 

ARRA funded more than 580,000 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 

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 

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

288. This report is the sixth 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 July 2010 Through 

September 2010 (November 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.

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

Office, Recovery Act: Opportunities to Improve Management and 

Strengthen Accountability over States’ and Localities’ Uses of Funds,

GAO-10-999 (September 2010), www.gao.gov/new.items/

d10999.pdf. 
2 ESTIMATED IMPACT OF ARRA ON EMPLOYMENT AND ECONOMIC OUTPUT, OCTOBER 2010–DECEMBER 2010

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employers’ immediate subcontractors (the so-called primary and secondary recipients of ARRA funding) but not 

lower-level 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; 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 fourth quarter of calendar year 

2010:

 They raised real (inflation-adjusted) gross domestic 

product (GDP) by between 1.1 percent and 

3.5 percent, 

 Lowered the unemployment rate by between 

0.7 percentage points and 1.9 percentage points,

 Increased the number of people employed by between 

1.3 million and 3.5 million, and

 Increased the number of full-time-equivalent jobs by 

1.8 million to 5.0 million compared with what would 

have occurred otherwise, as shown in 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 peaked in the first half of 

2010 and are now diminishing, CBO estimates. The 

effects of ARRA on employment and unemployment are 

estimated to lag slightly behind the effects on output; 

CBO estimates that they began to wane in the fourth 

quarter.

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, 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 fourth-quarter reports 

in January 2011 reported the number of jobs 

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

amount of ARRA spending and employment outcomes by state, 

see James Feyrer and Bruce Sacerdote, Did the Stimulus Stimulate? 

Real Time Estimates of the Effects of the American Recovery and 

Reinvestment Act, Working Paper 16759 (Cambridge, Mass.: 

National Bureau of Economic Research, February 2011); and 

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

2009 American Recovery and Reinvestment Act, San Francisco 

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

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

17bk.pdf. For an analysis of ARRA’s effect on purchases of goods 

and services by federal, state, and local governments, see John F. 

Cogan and John B. Taylor, What the Government Purchases Multiplier Actually Multiplied in the 2009 Stimulus Package, Working 

Paper 16505 (Cambridge, Mass.: National Bureau of Economic 

Research, October 2010).
ESTIMATED IMPACT OF ARRA ON EMPLOYMENT AND ECONOMIC OUTPUT, OCTOBER 2010–DECEMBER 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.

on the basis of the number of employee hours paid for 

with ARRA funds in the quarter.5

According to those reports, 585,654 full-time-equivalent 

jobs were funded by ARRA during the fourth 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 

Q1 0.1 0.1 * * * * * 0.1

Q2 0.8 1.4 -0.2 -0.3 0.3 0.5 0.4 0.7

Q3 1.2 2.5 -0.3 -0.6 0.6 1.2 0.9 1.7

Q4 1.5 3.4 -0.5 -1.1 0.9 1.9 1.4 2.8

Q1 1.8 4.3 -0.7 -1.5 1.2 2.7 1.8 4.0

Q2 1.6 4.6 -0.8 -1.8 1.4 3.4 2.0 4.8

Q3 1.4 4.2 -0.8 -2.0 1.4 3.6 2.0 5.2

Q4 1.1 3.5 -0.7 -1.9 1.3 3.5 1.8 5.0

Q1 1.2 3.3 -0.7 -1.8 1.2 3.3 1.7 4.7

Q2 0.8 2.5 -0.6 -1.6 1.0 2.9 1.4 4.1

Q3 0.6 2.0 -0.4 -1.3 0.8 2.5 1.1 3.4

Q4 0.3 1.2 -0.3 -1.0 0.6 1.9 0.8 2.5

2009 0.9 1.9 -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 4.8

2011 0.7 2.2 -0.5 -1.4 0.9 2.7 1.2 3.7

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

2011 (Calendar Year Quarter)

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 fourth 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 (Oct 1–Dec 31, 2010),” www.recovery.gov/Pages/

TextView.aspx?data=jobSummaryAgency&topnumber=200&qtr=2010Q4.
4 ESTIMATED IMPACT OF ARRA ON EMPLOYMENT AND ECONOMIC OUTPUT, OCTOBER 2010–DECEMBER 2010

CBO

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 

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 lower-level 

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 that are attributable to ARRA’s provisions. The 

reports cover direct government purchases of goods and 

services, grants and loans to private entities, and some 

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, 

as shown in 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 add to the nation’s output on a 

dollar-for-dollar basis. 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.

CBO reviewed evidence on the responses of households, 

businesses, and governments to various types of tax cuts 
ESTIMATED IMPACT OF ARRA ON EMPLOYMENT AND ECONOMIC OUTPUT, OCTOBER 2010–DECEMBER 2010 5

CBO

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

 For example:

 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. 

 Increases in disposable income are likely to boost 

purchases more for lower-income than for higherincome 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. 

 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 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 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 fourth 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 

two years 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 two years. 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. By the end of 2013, when monetary policy is assumed to be fully responsive to fiscal stimulus, the 

estimated multipliers would be reduced by two-thirds.

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, Working Paper 16684 (Cambridge, Mass.: 

National Bureau of Economic Research, January 2011);

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

Rebates Stimulate Spending?” American Economic Review, vol. 9, 

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 ARRA ON EMPLOYMENT AND ECONOMIC OUTPUT, OCTOBER 2010–DECEMBER 2010

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Table 2.

Estimated Output Multipliers of Major Provisions of the American Recovery and 

Reinvestment Act of 2009

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 unchanged from 

those that CBO has used in its analysis of the economic 

effects of ARRA since early 2010. Although 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 ARRA ON EMPLOYMENT AND ECONOMIC OUTPUT, OCTOBER 2010–DECEMBER 2010 7

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Table 2. Continued

Estimated Output Multipliers of Major Provisions of the American Recovery and 

Reinvestment Act of 2009

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 ARRA—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 transfer payments to individuals.

continued to review research on the economic impact of 

various government policies—and some new research has 

emerged—CBO judges that the evidence, taken as a 

whole, continues to support roughly the same ranges for 

multipliers.

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 

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 

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 

Estimated Output Multipliersa

Low Estimate High Estimate

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.

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

sources except cyclical fluctuations in economywide demand for 

goods and services.
8 ESTIMATED IMPACT OF ARRA ON EMPLOYMENT AND ECONOMIC OUTPUT, OCTOBER 2010–DECEMBER 2010

CBO

impact of ARRA on employment in the fourth 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 slightly from those presented in 

November 2010 primarily because new information 

has led CBO to make small revisions in its estimates of 

ARRA’s impact on spending and revenues and because 

CBO now projects that the Federal Reserve will begin 

to adjust interest rates in response to fiscal policy a 

little sooner than previously forecast. First, CBO 

has raised its estimate of ARRA’s impact on spending 

by about $7 billion for fiscal year 2011 (which began 

on October 1, 2010), mostly as a result of higher-thananticipated outlays for Medicaid and other grant programs during the latter part of calendar year 2010 and a 

projected increase in outlays for refundable tax credits in 

the early months of 2011. Those changes increase the 

estimated economic effect of ARRA slightly in the first 

three quarters of 2011. Second, CBO now projects that 

the Federal Reserve will begin to adjust interest rates in 

response to fiscal policy by the final quarter of 2011, 

rather than the first quarter of 2012. That change 

decreases the projected economic effects of ARRA by a 

small amount in the fourth quarter of 2011 and in 2012. 

Finally, the Bureau of Economic Analysis has revised 

downward its estimate of GDP in 2009 and 2010, which 

has the effect of slightly boosting the estimated effects of 

ARRA as a percentage of GDP in those years. The net 

effect of those changes on the estimated budgetary cost 

and economic impact of ARRA through 2012 is small. 
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 

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 
10 ESTIMATED IMPACT OF ARRA ON EMPLOYMENT AND ECONOMIC OUTPUT, OCTOBER 2010–DECEMBER 2010

CBO

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.

Some analysts favor the rigor of that approach to modeling behavior; however, for several reasons, others view 

this class of models as not well-suited to analyze the 

effects of countercyclical fiscal policy. In particular, this 

class of model does not typically incorporate involuntary 

unemployment: In such models, people can work as 

many hours as they choose at the wage rate determined 

by the market. In addition, this type of model is generally 

predicated on the assumption 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 also are 

generally assumed to have full access to credit markets, so 

they can borrow to maintain consumption in the face of a 

temporary loss of income. Finally, in these models, monetary policy often follows the rule that increased output or 

inflation implies higher inflation-adjusted interest rates, 

an assumption that does not correspond to current conditions, in which interest rates are low and expected to 

remain so for some time. 

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.5

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. Multipliers for tax cuts are generally 

estimated to be higher than those for spending and to 

grow over time.6

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 employees off 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 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.7 More 

generally, most studies based on historical evidence estimate 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.8


ESTIMATED IMPACT OF ARRA ON EMPLOYMENT AND ECONOMIC OUTPUT, OCTOBER 2010–DECEMBER 2010 11

CBO

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.

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 two years 

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 the 

fourth quarter 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 

in later years of excessive inflation.

4. An International Monetary Fund review of the estimates of seven 

different models illustrates the importance of the assumed interest 

rate response in this type of model. See Günter Coenen and others, 

Effects of Fiscal Stimulus in Structural Models, Working Paper 10/73 

(Washington, D.C.: International Monetary Fund, March 2010). 

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

Woodford, “Simple Analytics of the Government Expenditure 

Multiplier” American Economic Journal: Macroeconomics, vol. 3, 

no. 1 (January 2011), pp. 1–35; Robert E. Hall, “By How Much 

Does GDP Rise If the Government Buys More Output?” Brookings 

Papers on Economic Activity, no. 2 (Fall 2009), pp. 183–231; 

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 liquidityconstrained or “rule of thumb” agents, see Marco Ratto, Werner 

Roeger, and Jan in ’t Veld, “QUEST III: An Estimated OpenEconomy 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,” Journal of Public Economics, vol. 93, no. 3–4 (April 2009), 

pp. 559–585; 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 Eric M. Leeper, Monetary Science, Fiscal Alchemy, Working Paper 

16510 (Cambridge, Mass.: National Bureau of Economic Research, 

October 2010), for a discussion of the complexities involved in estimating the economic effects of fiscal policy.

6. See Tommaso Monacelli, Roberto Perotti, and Antonella Trigari, 

Unemployment Fiscal Multipliers, Working Paper 15931 (Cambridge, 

Mass: National Bureau of Economic Research, April 2010); 

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?” Journal of Applied Econometrics, vol. 24, no. 6 

(September/October 2009); Roberto Perotti, “In Search of the 

Transmission Mechanism of Fiscal Policy,” NBER Macroeconomics 

Annual 2007, vol. 22, pp. 169–226; 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 definitions of “multiplier” 

may differ from study to study. In particular, reported multipliers are 

often “peak” multipliers—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. Similar research investigating the economic 

effects of fiscal consolidations—increases in taxes or decreases in 

government spending—may also inform analysis of the effects of 

fiscal stimulus. See International Monetary Fund, World Economic 

Outlook: Recovery, Risk, and Rebalancing (Washington, D.C., 

October 2010), Chapter 3; and Alberto Alesina and Silvia Ardagna, 

“Tales of Fiscal Adjustment,” Economic Policy, vol. 13, no. 27 

(October 1998), pp. 487–545.

7. For an analysis based on specific policies that avoids this issue, 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.

8. For an analysis using historical data that estimates that government 

spending has larger effects on output during recessions, see Alan J. 

Auerbach and Yuriy Gorodnichenko, Measuring the Output Responses 

to Fiscal Policy, Working Paper 16311 (Cambridge, Mass.: National 

Bureau of Economic Research, August 2010).