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Letter to the Honorable Charles E. Grassley 1 (March 2009)

handle is hein.congrec/cbo8541 and id is 1 raw text is: O CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director U.S. Congress Washington, DC 20515 March 2, 2009 Honorable Charles E. Grassley Ranking Member Committee on Finance United States Senate Washington, DC 20510 Dear Senator: At your request, the Congressional Budget Office (CBO) has prepared a year-by-year estimate of the economic effects of the American Recovery and Reinvestment Act of 2009 (ARRA, Public Law 111-5), which was enacted on February 17, 2009. Short-Run Effects The macroeconomic impacts of any economic stimulus program are very uncertain. Economic theories differ in their predictions about the effectiveness of stimulus. Furthermore, large fiscal stimulus is rarely attempted, so it is difficult to distinguish among alternative estimates of how large the macroeconomic effects would be. For those reasons, some economists remain skeptical that there will be any significant effects, while others expect very large ones. CBO has developed a range of estimates of the effects of stimulus legislation on gross domestic product (GDP) and employment that encompasses a majority of economists' views. By CBO's estimation, in the short run ARRA will raise GDP and increase employment by adding to aggregate demand and thereby boosting the utilization of labor and capital that would otherwise be unused because the economy is in recession. Most of the budgetary effects of the legislation are estimated to occur over the next few years, and as those effects diminish, the short-run impact on the economy will fade. Different provisions in the law differ in both the magnitude and timing of their effects on aggregate demand. To simplify analysis of the overall effects, CBO grouped the various provisions into a number of more general categories. Each category was assumed to have a range of effects on the economy that could by summarized by multipliers-the cumulative effect on output of a one-time increase in spending, or reduction in taxes, of one dollar. The numbers in Table 1 indicate the cumulative impact of the provisions in each category, on average, on GDP over several quarters. For example, a one-time increase in federal purchases of goods and services of $1.00 in the second quarter of this year would raise GDP by $1.00 to $2.50 in total over several quarters, with most of that effect in the first two quarters and little effect beyond a year. www.cbo~gov

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