Podcast: Correcting Myths About the Stimulus Bill

August 17, 2009

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I’m Michelle Bazie. In this podcast we’ll discuss a few misconceptions about the stimulus legislation that became law this February. It’s officially known as the American Recovery and Reinvestment Act.

I’m joined by the authors of a paper that corrects some common myths about the stimulus. Jim Horney is the Center’s Director of Federal Fiscal Policy and Nick Johnson is the Director of the State Fiscal Project.

1. Jim, let’s start with you. There is an ongoing debate about whether the stimulus has worked. The economy didn’t stop shrinking after the bill was passed, which makes some critics believe that it didn’t work fast enough. Do these critics have a point?

A: No, they actually don’t have a point. This criticism indicates a misunderstanding of what the stimulus bill was supposed to do or what any stimulus bill could do. No mainstream economist believed that the stimulus would stop the recession immediately. Instead, it was supposed to slow the economy's downward spiral and help generate an economic turnaround sooner than would otherwise occur. And it seems to be doing just that.

2. Critics have also pointed out that the economy is still losing jobs. Is that a sign the stimulus isn’t doing what it was supposed to do?

A: No, it’s not. Employment is a "lagging indicator,” which means that it usually doesn’t begin improving until long after the economy starts growing again. So even though most economists, including those at the non-partisan Congressional Budget Office, believe the recession will end this fall, we can expect the unemployment rate to keep growing until sometime next year. But the stimulus is having a positive effect on jobs. It’s keeping unemployment from rising as much as it otherwise would have and is speeding up the return of job growth. The Congressional Budget Office estimates that by the end of 2010, there will be about 2.5 million people employed who would not have jobs if the stimulus bill had not been enacted.

3. Nick, let me turn to you to talk about state issues. Some critics have complained about the fact that states have used the fiscal relief in the Recovery Act to balance their budgets. Is this criticism justified?

A: It’s really not justified. This is exactly what states were supposed to do with the fiscal relief. Because of the severe recession, states right now are facing declining revenue and very, very large budget gaps.

Now, states have to balance their budgets. So they are cutting programs in areas like health care and education and raising taxes to bring their budgets into balance. The problem is that when states do these things, cut spending and so on, they not only hurt families who rely on public services, but they reduce aggregate demand which further slows the economy.

The Recovery Act sends about $140 billion to states over two years, mostly for education and health care. And these funds are reducing the extent of the cuts that states have to make and reducing the extent of tax increases. This is good for jobs, it’s good for the economy, and it’s good for families and communities.

4. Can you give some examples?

A: Well, before the Recovery Act was passed, Virginia had planned to end funding for hundreds of sheriff’s deputies, for thousands of school personnel, and for three mental health facilities. Those plans were reversed due to the Recovery Act. New York reversed a big proposed cut to senior citizens' prescription drug benefits and another big cut to school funding – again, due to the Recovery Act. The Government Accountability Office is doing an intensive study of how 16 states are using their funds, and they have found that at least eight of those 16 states used their stimulus funds to help keep public school teachers on the payroll. Those are just a few examples.

5. Where can listeners go for more information?

A: On the Center’s website, which is centeronbudget.org, you can find the paper that Jim and I wrote. It’s called “Five Myths About the Stimulus Bill.” And you can also find a special series of papers called “Economic Recovery Watch.”

Thank you both for joining me.

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