CBO

CONGRESSIONAL BUDGET OFFICE

SECOND AND D STREETS, S.W.

WASHINGTON, D.C. 20515

A

REPORT

Estimated Impact of the American Recovery and 

Reinvestment Act on Employment and 

Economic Output From 

July 2010 Through September 2010

November 2010
Pub. No. 4229
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 

July 2010 Through September 2010

November 2010

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 third 

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

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

and on the results of various economic models.

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

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

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

November 2010

Contents

CBO

Measuring ARRA’s Impact Using Recipients’ Reports 2

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

CBO’s Modeling Approach 4

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

Appendix: Evidence on the Economic Effects of Fiscal Stimulus 9

Tables

1. Estimated Macroeconomic Impact of the American 

Recovery and Reinvestment Act, 2009 to 2012 3

2. Estimated Output Multipliers for Major Provisions of the American 

Recovery and Reinvestment Act 6

CBO

Estimated Impact of the American Recovery and 

Reinvestment Act on Employment and Economic 

Output from July 2010 Through September 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 $814 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 third quarter of 2010, recipients reported, 

ARRA funded more than 670,000 full-time-equivalent 

(FTE) jobs.2

 Those reports, however, do not provide a 

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

employment, which could be higher or lower than the 

number of FTE jobs reported, for several reasons (in 

addition to any issues concerning the quality of the

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

288. This report is the fifth 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 April 2010 Through June 

2010 (August 2010).

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

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

asked to calculate FTEs by taking the total number of hours 

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

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

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

CBO

reports’ data).3

 First, some of the jobs included in the 

reports might have existed even without the stimulus 

package, with employees working on the same activities 

or other activities. Second, the reports cover employers 

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

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

measure the number of jobs that were created or retained 

indirectly as a result of recipients’ increased income, and 

the increased income of their employees, which could 

boost demand for other products and services as they 

spent their paychecks. Fourth, the recipients’ reports 

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

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 third quarter 

of calendar year 2010:

 They raised real (inflation-adjusted) gross domestic 

product (GDP) by between 1.4 percent and 

4.1 percent, 

 Lowered the unemployment rate by between 

0.8 percentage points and 2.0 percentage points,

 Increased the number of people employed by between 

1.4 million and 3.6 million, and

 Increased the number of full-time-equivalent jobs by 

2.0 million to 5.2 million compared with what would 

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

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

work or overtime and are thus generally larger than 

increases in the number of employed workers). 

The effects of ARRA on output 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; 

they are expected to wane gradually beginning 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. 

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 

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. 

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

amount of ARRA spending and employment outcomes by state, 

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

2009 American Recovery and Reinvestment Act, San Francisco 

Federal Reserve Bank Working Paper 2010-17 (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 THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, JULY 2010–SEPTEMBER 2010 3

CBO

Table 1.

Estimated Macroeconomic Impact of the American Recovery and 

Reinvestment Act, 2009 to 2012

Source: Congressional Budget Office.

Note: * = between -0.05 and 0.05.

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

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

investments in infrastructure, the purpose and cost of 

the investment. Recipients who filed third-quarter 

reports in October 2010 reported the number of jobs on 

the basis of the number of employee hours paid for 

with ARRA funds in the quarter.5

According to those reports, 671,607 full-time-equivalent 

jobs were funded by ARRA during the third quarter.6

However, the reported number of jobs funded is not a 

comprehensive measure of ARRA’s effect on overall 

employment, or even of those provisions of ARRA for 

which recipients’ reports are required. The actual impact 

could, in principle, be significantly larger or smaller than 

the number of jobs reported. 

If, for example, recipients’ reports include employment 

that would have occurred without ARRA, the impact on 

employment suggested by the reports could be too great. 

Some people whose employment was attributed to ARRA 

might have worked on other activities in the absence of 

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 1.7 4.2 -0.7 -1.5 1.2 2.7 1.8 4.0

Q2 1.6 4.5 -0.8 -1.8 1.4 3.4 2.0 4.8

Q3 1.4 4.1 -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

2009 0.9 1.8 -0.3 -0.5 0.5 0.9 0.7 1.3

2010 1.5 4.1 -0.7 -1.8 1.3 3.3 1.9 4.8

2011 0.7 2.2 -0.5 -1.4 0.9 2.6 1.2 3.6

2012 0.2 0.5 -0.1 -0.5 0.3 0.9 0.3 0.9

Change Attributable to ARRA

2009 (Calendar Year Quarter)

2010 (Calendar Year Quarter)

(Millions of people)

Full-Time-Equivalent

 Employment (Millions)a

Low High

Estimate Estimate Estimate Estimate

Low High

Estimate

Calendar Year Average

Real Gross Domestic 

Product (Percent) (Percentage points )

Unemployment Rate Employment

Low High

Estimate Estimate Estimate

Low High

5. Specifically, recipients were instructed to calculate the number 

of FTE jobs funded through ARRA by counting the total number 

of hours worked that were funded by ARRA during the third 

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 (Jul 1–Sep 30, 2010),” www.recovery.gov/Pages

/TextView.aspx?data=jobSummaryAgency&topnumber

=200&qtr=2010Q3.
4 ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, JULY 2010–SEPTEMBER 2010

CBO

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 lowerlevel recipients, such as subcontractors hired by a main 

subcontractor. Thus, if expenditures under ARRA led 

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

by the reports. 

Recipients’ reports also do not include indirect effects 

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

employment in other businesses or economic sectors as 

demand shifts toward the recipients of ARRA funding—a 

phenomenon often called the “crowding out” effect of 

government policies. Conversely, spending under ARRA 

could lead to higher employment at companies that are 

not directly connected to that spending—for example, 

because of additional purchases made by people who 

would be unemployed were it not for ARRA funds. 

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

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

effects boost the law’s impact on economic output and 

employment. 

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

of the total amount of spending increases or tax reductions 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 

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

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

that provision to estimate its overall impact on output. 

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

on economic activity. Government purchases of goods 

and services directly 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.
ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, JULY 2010–SEPTEMBER 2010 5

CBO

CBO reviewed evidence on the responses of households, 

businesses, and governments to various types of tax cuts 

and transfer payments to estimate the size of those 

policies’ direct effects on output.7

 For example:

 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 higher-income 

households. That difference arises, at least in part, 

because a larger share of people in lower-income 

households cannot borrow as much money as they 

would wish in order to spend more than they do 

currently. 

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

impact on output than do policies that alter the return 

from new investment. 

Government policies also can have indirect effects that 

enhance or offset the direct effects. Direct effects are 

enhanced when, for example, a government policy creates 

jobs and those who are hired use their income to 

boost consumption. Direct effects also are enhanced 

when greater demand for goods and services prompts 

companies to increase investment to bolster their future 

production. 

In the other direction, substantial government spending 

can cause a shift in resources (including employees) 

away from production in other businesses and sectors to 

government-funded projects. That indirect crowding-out 

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

are one possible mechanism for such crowding out: 

Higher interest rates discourage spending on investment 

and on durable goods such as cars because they raise the 

cost of borrowing. However, because the Federal Reserve 

kept short-term interest rates very low, that mechanism 

does not appear to have been an important factor 

through the third 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 seven quarters 

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 

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

and others, “Consumer Spending and the Economic Stimulus 

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

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

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

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

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

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

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

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

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

Nicholas S. Souleles, “Household Expenditure and the Income 

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

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

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Table 2.

Estimated Output Multipliers for Major Provisions of the American Recovery and 

Reinvestment Act

Continued

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 

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

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).
ESTIMATED IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, JULY 2010–SEPTEMBER 2010 7

CBO

Table 2. Continued

Estimated Output Multipliers for Major Provisions of the American Recovery and 

Reinvestment Act

Source: Congressional Budget Office.

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

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

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

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

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

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

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

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

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

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

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

AMT = alternative minimum tax.

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

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

tighten monetary policy in response to a fiscal stimulus.

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

in the revenue estimate prepared by the staff of the Joint 

Committee on Taxation for the same legislation.9

The ranges for multipliers in Table 2 are close to those 

that CBO used in its initial analysis of the economic 

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

continued to review research on the economic impact of 

various government policies. Although some new 

research has emerged, CBO judges that the evidence, 

taken as a whole, continues to support roughly the same 

ranges for multipliers. However, earlier in the year CBO 

revised the multipliers slightly, primarily to better reflect 

the relatively low probability of different parameters 

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

of assumptions that CBO considered. As a result, the 

current ranges for multipliers are generally a bit narrower 

than the ranges reported last year. 

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

rate, total employment, and FTE employment in a series 

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

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

the historical relationship between those two measures.11

Then, the effect of changes in the unemployment rate on 

the labor force was taken into account: If unemployment 

Type of Activity Major Provisions of ARRA

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

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

Instrument; Clarification of Regulations Related to Limitations 

on Certain Built-In Losses Following an Ownership Change; 

Recovery Zone Bonds; Qualified School Construction Bonds 

Low Estimate High Estimate

Estimated Output Multipliersa

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. 

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

high rate of use of labor and capital.

11. Changes in the output gap affect unemployment gradually over 

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

higher productivity and hours per worker rather than as reduced 

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

CBO

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 impact of 

ARRA on employment in the third 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 

August 2010 primarily because new information has led 

CBO to revise its estimates of ARRA’s impact on tax revenues and spending. Preliminary tax data suggest that the 

total revenue effects of ARRA’s provisions occurred more 

quickly than previously estimated. Because of that, the 

estimated effect on revenues through calendar year 2010 

increased by roughly $6 billion from the amount CBO 

estimated in August 2010, tending to slightly increase the 

impact of ARRA on output and employment in some 

quarters during that earlier period. However, the estimated revenue change in 2011 was reduced by roughly 

$4 billion, tending to decrease the effects of ARRA on 

output in 2011 and 2012. In addition, the pattern of 

ARRA spending from the fourth quarter of 2009 to the 

third quarter of 2010 (that is, fiscal year 2010) was 

revised on the basis of new information. Spending was 

higher in the first half of that period, lower in the second, 

and about $1 billion less for the fiscal year than previously estimated. Although there have been revisions in 

the timing of revenue and spending effects, the net effect 

on the estimated budgetary cost and economic impact of 

ARRA through 2012 is small. (No amount shown in 

Table 1 changed by more than 0.1.) 

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

sources except cyclical fluctuations in economywide demand for 

goods and services.
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 THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, JULY 2010–SEPTEMBER 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 THE AMERICAN RECOVERY AND REINVESTMENT ACT ON EMPLOYMENT AND ECONOMIC OUTPUT, JULY 2010–SEPTEMBER 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 early 

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

actions by raising interest rates (or engaging in other actions to 

tighten monetary policy) in order to reduce the risk in later years of 

excessive inflation. 

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 lower-than 

usual response of interest rates to policy changes, see Michael Woodford, Simple Analytics of the Government Expenditure Multiplier,

Working Paper 15714 (Cambridge, Mass.: National Bureau of Economic Research, January 2010); Robert E. Hall, By How Much Does 

GDP Rise If the Government Buys More Output? Working Paper 

15496 (Cambridge, Mass.: National Bureau of Economic Research, 

November 2009); Lawrence Christiano, Martin Eichenbaum, and 

Sergio Rebelo, When Is the Government Spending Multiplier Large?

Working Paper 15394 (Cambridge, Mass.: National Bureau of Economic Research, October 2009); and Troy Davig and Eric M. 

Leeper, Monetary–Fiscal Policy Interactions and Fiscal Stimulus, 

Working Paper 15133 (Cambridge, Mass.: National Bureau of Economic Research, July 2009). For examples of models that include 

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

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

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

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

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

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

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).