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 as of September 2009

November 2009
Pub. No. 4037
The Congress of the United States O Congressional Budget Office

A

REPORT



	
	
			

Recovery and Reinvestment Act on 

Employment and Economic Output as of 

September 2009

November 2009
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 third quarter of calendar year 2009. Those estimates—which CBO considers more 

comprehensive than the recipients’ reports—are based on evidence from similar policies 

enacted in the past and various economic models. 

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

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

Shakin contributed significantly to the analysis. Chris Howlett edited the report, and Sherry 

Snyder proofread it. Maureen Costantino prepared the report for publication, with assistance 

from Jeanine Rees. Lenny Skutnik printed the report, Linda Schimmel handled the print distribution, and Simone Thomas prepared the electronic versions for CBO’s Web site 

(www.cbo.gov). 

Douglas W. Elmendorf

Director

November 2009

Contents

CBO

Measuring ARRA’s Impact Using Recipients’ Reports 2

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

CBO’s Modeling Approach 6

Updated 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 in the Third Quarter of Calendar Year 2009 2

2. Estimated Output Multipliers and Budgetary Costs of Major 

Provisions of the American Recovery and Reinvestment Act 4

CBO

Estimated Impact of the 

American Recovery and Reinvestment Act on 

Employment and Economic Output as of 

September 2009

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 the number of jobs 

they have created or retained with ARRA funding since 

the law’s enactment in February 2009. The law also 

requires the Congressional Budget Office (CBO) to 

comment on that reported number.1

Recipients report that about 640,000 jobs were created or 

retained with ARRA funding through September 2009.2

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, it is impossible to determine how many of the 

reported jobs would have existed in the absence of the 

stimulus package. 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 under ARRA, which 

encompass only about one-quarter of the total amount 

spent by the government or conveyed through tax reductions in ARRA through September 2009. The reports 

do not measure the effects of other provisions of the stimulus package, such as tax cuts and transfer payments to 

individuals. 

Estimating the law’s overall effects on employment 

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

amounts spent so far (where identifiable) and 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 how previous 

similar policies have affected the economy and various 

mathematical models that represent the workings of the 

economy. On that basis, CBO estimates that in the third 

quarter of calendar year 2009, an additional 600,000 to 

1.6 million people were employed in the United States, 

and real (inflation-adjusted) gross domestic product 

(GDP) was 1.2 percent to 3.2 percent higher, than would 

have been the case in the absence of ARRA (see Table 1). 

Those ranges are intended to reflect the uncertainty of 

such estimates and to encompass most economists’ views 

on the effects of fiscal stimulus. 

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.

3. For a discussion of data-quality issues, see Government Accountability Office, Recovery Act: Recipient Reported Jobs Data Provide 

Some Insight into Use of Recovery Act Funding, but Data Quality 

and Reporting Issues Need Attention, GAO-10-223 (November 19, 

2009), available at www.gao.gov/new.items/d10223.pdf.
2 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT AS OF SEPTEMBER 2009

CBO

Table 1.

Estimated Macroeconomic Impact of the American Recovery and 

Reinvestment Act in the Third Quarter of Calendar Year 2009

Source: Congressional Budget Office.

Note: These changes are relative to CBO’s estimate of what economic conditions would be without the American Recovery and Reinvestment 

Act of 2009.

CBO’s current estimates reflect small revisions to earlier 

projections of the timing and magnitude of changes to 

spending and revenues under ARRA. In March 2009, 

CBO projected that in the third quarter of 2009, U.S. 

employment would be higher by 600,000 to 1.5 million 

people with ARRA than it would be without the law, and 

real GDP would be 1.1 percent to 3.0 percent higher.4

CBO’s current estimates do not reflect any change in 

the agency’s assessment of the effect that each dollar of 

spending increase or revenue decrease has on output and 

employment. Since March, CBO has continued to examine new research on the relationships between changes in 

government policy and changes in output and employment. To date, that examination has generated no significant change in CBO’s assessment of those relationships. 

CBO has also examined incoming 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 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. Economic output and employment in the spring and summer of 2009 were lower than CBO had projected at the 

beginning of the year. But in CBO’s judgment, that 

outcome reflects greater-than-projected weakness in the 

underlying economy rather than lower-than-expected 

effects of ARRA.

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, in the case of 

infrastructure investments, the purpose and cost of the 

investment. Recipients are instructed to count the number of employees working on funded projects, adjusted 

for the number of hours they work. Reports filed in 

October 2009 cover the period from ARRA’s enactment 

on February 17, 2009, through September 30, 2009. 

Low estimate 1.1 1.2

High estimate 3.0 3.2

Low estimate -0.3 -0.3

High estimate -0.8 -0.9

Low estimate 0.6 0.6

High estimate 1.5 1.6

Change Attributable to ARRA

March 2009 November 2009

Estimate Estimate

Change in Real Gross Domestic Product (Percent)

Change in the Unemployment Rate (Percentage points)

Change in Employment (Millions of people)

4. 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 AS OF SEPTEMBER 2009 3

CBO

According to the recipients’ reports, a total of 640,329 

jobs—more than half of them in education—were 

created or retained with ARRA funds through the end of 

September.5 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 law’s actual impact 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 counted 

employees might have worked on other activities in the 

absence of ARRA—for example, firms might have bid on 

alternative 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 the 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 onequarter of the total dollar amount of spending increases 

or tax reductions that resulted through September 2009 

from ARRA’s policies. 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 (such as unemployment insurance 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 thus on 

employment. 

Measuring ARRA’s Impact Using 

Economic Models and 

Historical Data

CBO estimates that the enactment of ARRA raised federal outlays by about $100 billion and reduced tax collections by about $90 billion through September 2009. 

CBO has used information from a variety of economic 

models and from analyses of historical data to estimate 

how output and employment have responded to those 

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

purchases) 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. CBO combined that 

result with estimates of how changes in output affect 

the unemployment rate and participation in the labor 

force to produce estimates of ARRA’s total impact on 

employment.6

5. For the number of created or retained jobs that were in education, 

see Department of Education, U.S. Department of Education 

American Recovery and Reinvestment Act Report: Summary of Programs and State-by-State Data (November 2, 2009), available at 

www.ed.gov/policy/gen/leg/recovery/spending/arra-programsummary.pdf. 

6. To measure the impact of a policy, it is sometimes possible to 

observe both people affected by the policy and otherwise comparable people not affected by it. For example, programs that help 

recipients of unemployment insurance look for jobs have been 

studied in exactly that way. The impact of ARRA is economywide, 

however, so there is no suitable comparison group of people who 

are not affected by the law.
4 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT AS OF SEPTEMBER 2009

CBO

Table 2.

Estimated Output Multipliers and Budgetary Costs of Major Provisions of the 

American Recovery and Reinvestment Act

Continued

Total Budgetary Cost of 

Type of Activity Major Provisions of ARRA Provisions, 2009–2019b 

Purchases of Goods and 1.0 2.5 Division A, Title II: Other; Title IV: Energy Efficiency and $88 billion

Services by the Renewable Energy; Title IV: Innovative Technology 

Federal Government 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 1.0 2.5 Division A, Title VII: Clean Water and Drinking Water $44 billion

State and Local State Revolving Funds; Title XI: Other Housing 

Governments for Assistance; Title XII: Highway Construction; Title XII: 

Infrastructure Other Transportation

Transfer Payments to 0.7 1.9 Division A, Title VIII: Education for the $215 billion

State and Local Disadvantaged; Title VIII: Special Education;

Governments for Title IX: State Fiscal Stabilization Fund; Division B,

Other Purposes Title V: State Fiscal Relief Fund

Transfer Payments to 0.8 2.2 Division A, Title I: Supplemental Nutrition Assistance $100 billion

Individuals Program; Title VIII: Student Financial Assistance; 

Division B, Title II: Unemployment Compensation; 

Title III: Health Insurance Assistance

One-Time Payments to 0.2 1.2 Division B, Title II: Economic Recovery Payments, $18 billion

Retirees Temporary Aid to Needy Families, and Child Supportc

Two-Year Tax Cuts for 0.5 1.7 Division B, Title I: Refundable Tax Credits; Making $168 billion

Lower- and Middle- Work Pay Credit;d American Opportunity Tax Creditd

Income People

One-Year Tax Cut for 0.1 0.5 Increase in Individual AMT Exemption Amountd $70 billion

Higher-Income People

Extension of First-Time 0.2 1.0 Extension of First-Time Homebuyer Creditd $7 billion

Homebuyer Credit

Estimated 

Estimate Estimate

Output Multipliersa

Low High
ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT AS OF SEPTEMBER 2009 5

CBO

Table 2. Continued

	
	
					
				

American Recovery and Reinvestment Act

Sources: Congressional Budget Office and Joint Committee on Taxation (JCT).

Notes: This table includes provisions estimated by CBO or JCT as having total budgetary costs of $5 billion or more over the 2009–2019 

period. Certain provisions with lower total costs were included if the costs in the 2009–2011 period were large. 

Provisions affecting outlays (including refundable tax credits) are identified by the same names used in Congressional Budget Office, 

cost estimate for H.R. 1, American Recovery and Reinvestment Act of 2009 (February 13, 2009). Provisions affecting revenues—all of 

which are included in Title I of ARRA—are identified by the names used in 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.

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.

a. The output multiplier is the cumulative impact on real gross domestic product over several quarters for each dollar of spending or reduction in tax revenues.

b. The costs shown here do not add up to the total budgetary cost of $787 billion presented in CBO’s cost estimate for the conference report 

on H.R. 1 for two reasons. First, several provisions are excluded because CBO’s analysis of them cannot easily be summarized by a single 

multiplier. Second, the costs presented here are translations of budgetary costs to categories of the national income and product 

accounts. 

c. Most of the payments in this category go to retirees.

d. The budgetary impact of these provisions was estimated by JCT.

Total Budgetary Cost of 

Type of Activity Major Provisions of ARRA Provisions, 2009–2019b 

Corporate Tax Provisions 0 0.4 Deferral and Ratable Inclusion of Income Arising from $21 billion

Primarily Affecting Business Indebtedness Discharged by the

Cash Flow Reacquisition of a Debt Instrument;d Clarification of

Regulations Related to Limitations on Certain Built-In

Losses Following an Ownership Change;d Recovery 

Zone Bonds;d Qualified School Construction Bondsd

High

Estimate Estimate

Estimated 

Output Multipliersa

Low
6 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT AS OF SEPTEMBER 2009

CBO

CBO’s Modeling Approach

CBO used the evidence from models and historical data 

to determine estimated “multipliers” for each of several 

categories of tax and spending policies in ARRA (see 

Table 2 on page 4). Each multiplier represents the estimated direct and indirect effects on the nation’s output of 

a dollar’s worth of a given policy. Thus, a policy’s multiplier can be applied to the budgetary cost of that policy 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 tax cuts, increases in transfer 

payments, or 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 policy), 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 determine 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 generally have a smaller impact on output 

than do policies that alter the marginal return from 

economic activities such as investment. 

Government policies can also have indirect effects that 

enhance or offset the direct effects. Direct effects are 

enhanced, for instance, when 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 has 

not been an important factor this year because the Federal Reserve has held short-term interest rates at very low 

levels. Activities funded by ARRA could also 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, has 

been much smaller this year than it might be 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.)

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,” 	
	

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; and 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.
ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT AS OF SEPTEMBER 2009 7

CBO

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

category (see Table 2). The ranges between high and low 

multipliers are designed 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. For instance, 

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

purchases of goods and services in one calendar quarter 

would raise GDP 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 the same ones 

that CBO used in its initial analysis of the economic 

effects of ARRA in March. Since then, CBO has 

continued to review research on the economic impact of 

various government policies, and some new research has 

emerged. Taken as a whole, however, the evidence continues to support the same ranges for multipliers, in CBO’s 

judgment. 

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

rate and total employment in a series of steps. First, CBO 

calculated the impact on the output gap—the percentage 

difference between actual output and potential output.10

Next, CBO calculated the effect of the change in the output gap on the unemployment rate using the historical 

relationship between those two measures.11 Then, CBO 

took account of the effect of changes in the unemployment rate on the labor force. If unemployment declines 

and the economic environment improves, discouraged 

workers and people who have chosen to pursue activities 

such as schooling rather than work 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.

A key advantage of this model-based approach is the ability to provide estimates of the total effects throughout the 

economy of tax cuts, transfer payments, and government 

spending. By focusing on the net change in employment, 

this approach captures both jobs created and jobs 

retained as a result of ARRA. 

A key disadvantage of this 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 come to 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.

Updated Estimates of the Impact of ARRA

Because CBO’s estimates of the relationships between 

government policy changes and employment changes 

have remained essentially the same since last winter, the 

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.
8 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT AS OF SEPTEMBER 2009

CBO

slight revisions to CBO’s estimates of the impact of 

ARRA result only from new information on the rate at 

which provisions of the law are being implemented. Initially, CBO projected that ARRA would cut taxes and 

increase outlays by about $185 billion between February 

2009 and September 2009. Tax cuts through September 

turned out to be roughly $10 billion larger than initially 

projected, mainly because certain tax changes were carried out more quickly than anticipated.12 Outlays for 

ARRA programs, as reported by government agencies,

turned out to be slightly higher than CBO initially projected, but it appears that stimulus funds substituted for 

some spending from regular appropriations. On the 

whole, the net change in total outlays that can be attributed to the stimulus package was slightly smaller than 

CBO initially estimated.

Taking into account the slightly faster implementation of 

certain tax cuts and the slightly slower pace of outlays, 

CBO now estimates that in the third quarter of calendar 

year 2009, ARRA’s policies raised real GDP by between 

1.2 percent and 3.2 percent, lowered the unemployment 

rate by between 0.3 and 0.9 percentage points, and 

increased the number of people employed by between 

600,000 and 1.6 million compared with what those values would have been otherwise (see Table 1 on page 2).

12. That $10 billion change reflects the timing rather than the total 

size of the estimated impact on revenues. It is not possible to 

determine how close the actual 2009 revenue effects of ARRA 

were to initial estimates, because detailed data on 2009 tax 

collections are not yet available. 
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 a variety of sources: macroeconometric forecasting models, general-equilibrium models, and direct 

extrapolations of past data. Macroeconometric forecasting models incorporate relationships between 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. Another source of information on the economic effects of fiscal stimulus is research 

that makes projections for the future by directly examining the correlations between economic variables in the 

past or by evaluating 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 between 

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 demandenhancing 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 

between 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. 

To address that concern and to reflect current economic 

conditions—in which uncertainty about the financial 

and economic outlook remains high, and interest rates 

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

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 AS OF SEPTEMBER 2009

CBO

CBO altered the models’ usual formulation to reduce 

the extent to which interest rates respond to increases in 

output.2

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 for 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 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—into their 

current spending plans. Thus, they are assumed to reduce 

their consumption when government spending rises, 

because their lifetime income 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 interest 

rates. 

Recent research has shown that relaxing some of those 

modeling assumptions can result in much higher multipliers.3

 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.

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 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. (With the federal 

funds rate as low as possible, the Federal Reserve has used other 

policies to try to increase the availability of credit in order to stimulate economic activity. If ARRA caused the Federal Reserve to 

reduce those efforts, the law’s effects would be offset to some 

extent even without affecting interest rates; whether the Federal 

Reserve would indeed respond in that way under current financial 

and economic conditions is unclear.) 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. 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 liquidity-constrained 

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 ShuChun 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).
ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT AS OF SEPTEMBER 2009 11

CBO

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 

higher than those for spending and tend to grow over 

time.4

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 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. 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 consistent with historical behavior—rather 

than the cumulative effect of a one-time dollar’s worth of policy 

change, as CBO defines its multipliers.