Wednesday, May 26, 2010

The CBO's Analysis of the Recovery Act

The Congressional Budget Office (CBO) has released its latest analysis of the economic impact of the American Recovery and Reinvestment Act of 2009 (ARRA). The CBO's key findings show the ARRA had a significant, or even pivotal, impact on GDP and unemployment:
Raised the level of real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.2 percent,
Lowered the unemployment rate by between 0.7 percentage points and 1.5 percentage points...
How reliable is the CBO's analysis? The CBO acknowledges the uncertainty of combining data from ARRA recipients with its models, which is one reason why the data are presented as a range instead of a single number.
To try to do some quick benchmarking, I turned to the multipliers or
the "bang for the buck" estimates presented a year and a half ago by Mark Zandi of Moody's Economy.com. Zandi, you may recall, was an economics advisor to John McCain during the 2008 campaign, so we can presumably trust him to not puff up numbers to make the case for Democratic stimulus policy.
I compared the CBO's multipliers to Zandi's. A figure of 1.0 means that one dollar of spending or tax cuts produces one dollar of economic activity:
Transfer Payments to State and Local Governments for Infrastructure
CBO: 1.0 to 2.5
Zandi: 1.59

Transfer Payments to State and Local Governments for Other Purposes
CBO: 0.7 to 1.8
Zandi: 1.38

Transfer Payments to Individuals (includes Supplemental Nutrition Assistance Program and Unemployment Compensation)
CBO: 0.8 to 2.1
Zandi: 1.63 for Unemployment, 1.73 for Food Stamps

Two-Year Tax Cuts for Lower- and Middle-Income People
CBO: 0.6 to 1.5
One-Year Tax Cut for Higher-Income People
CBO: 0.2 to 0.6
Zandi: 1.03 for across the board income tax cuts
(Tax cuts for lower- and middle-income people tend to be spent faster than cuts for higher-income people.)
Zandi's numbers fall consistently in the middle of the CBO's range.

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