Congressional Budget Office
IMF Fiscal Affairs and Research Departments
Conference on Fiscal Policy
Implementation Lags of Fiscal Policy
Doug Elmendorf
Director
June 2, 2009
The American Recovery and Reinvestment Act
(ARRA)
During Congressional debate from mid-December to
mid-February, the U.S. economy was contracting
rapidly.
The Federal Reserve cut the funds rate essentially to
zero in December and thus was out of ammunition for
its principal policy weapon.
As a result, there was a perception of great urgency
in providing fiscal stimulus.
2
How Important Was Timeliness?
Many forecasters expected a large gap between actual and
potential output to persist for some time. (In CBO’s forecast
the output gap was 7 percent of potential in 2009 and 2010
and 5 percent in 2011.) Therefore, policies that provided
stimulus for an extended period of time seemed appropriate.
Moreover, fiscal stimulus that ends before the economy has
started to regain its footing runs the risk of exacerbating
economic weakness when the stimulus ends.
Still, with the economy contracting rapidly, many analysts
(and politicians) wanted stimulus to work quickly in order to
mitigate further deterioration in the economy.
3
Components of the ARRA
Total
Amount
Share Disbursed by End of
Fiscal Year
($ billions)
2009
2010
2011
Discretionary spending (Highways,
mass transit, energy efficiency,
broadband, education, state aid)
308
11%
47%
72%
Entitlements
(Food stamps, unemployment
compensation, health IT, Medicaid
matching rate, refundable tax
credits)
267
32%
73%
91%
Revenues
(Personal tax credits, business,
energy, infrastructure)
212
31%
116%
119%
Total
787
24%
74%
91%
4
Estimated Budgetary Effects of ARRA
Billions of Dollars
Mandatory Outlays
Discretionary Outlays
Revenues
5
Spend-Out of Discretionary Budget Authority Usually
Takes Time
Share spent by end of:
1st year
2nd year
3rd year
Highways
27%
68%
84%
Water Projects
4%
24%
54%
Defense
65%
88%
96%
Average
60%
85%
95%
6
Special Factors for ARRA
ARRA include