Stimulating My Nostalgia - ARRA's Five Year Anniversary

I woke up Sunday morning, opened up The New York Times and scrolled down to the Opinion section. Listed at the top was an Op-Ed penned by the NYT's Editorial Board about the five year anniversary of the American Recovery and Reinvestment Act and what it had accomplished. I couldn't help but feel nostalgic. At the time of the bill's passage I was 22 years old and finishing my last year of undergrad in beautiful San Luis Obispo, Ca. It was one of the happiest periods of my life, even despite the fact I was about to graduate right as the Great Recession began. 

At the time I was very hopeful about the Obama presidency (I voted for him in November 2008) and his stimulus bill; I was sympathetic to progressive economic ideology. But it didn't take long for my hope to turn to doubt. In January 2009, while ARRA was making its way through Congress, I was enrolled in two Economics courses taught by Dr. Michael Marlow. The key takeaways in class were that the macroeconomy is extremely complex and there is a hidden side to everything. The famous Friedrich Hayek quote became one of my favorites, "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

Hence my skepticism Sunday upon reading the NYT Editorial Board's proclamation that the stimulus package worked, even though the NYT stated ARRA was not well constructed nor big enough. My personal bias is that ARRA destroyed value and that the American economy would have been better off had we not borrowed and spent $832 billion through political and government channels, but instead let the American people keep the billions and save or invest it as they best saw fit. Although the Times eloquently claimed that the stimulus was worth it, their math was not convincing.

The NYT editorial board distilled ARRA's benefits into one paragraph, but one sentence succinctly summarized their evidence, "(ARRA) raised the nation’s economic output by 2 to 3 percent from 2009 to 2011."

Some back of the envelope math on these numbers are as follows...U.S. GDP grew from $14.5 trillion in 2009 to $15.2 trillion in 2011, or ~4.8%. 3% of which ($435 billion) is directly attributable to ARRA according to the NYT and their survey of "fair-minded economists."

Perhaps I'm misunderstanding the Times, but $435 billion of value is $397 billion short of the original investment five years in, using the rosiest assumption, and ignoring opportunity costs and the extra costs of interest rates. ARRA's actual GDP contribution of 3% could be lower, as is often the case with headline numbers. So much for that economic multiplier we kept hearing and reading about in early 2009. 

Taking into account the interest payments future generations are now forced to repay and the picture looks fuzzier (as well as selfish and unfair to those young Americans). Assuming the government financed the $832 billion ARRA package via 10 year notes at 2.5% (interest rates ranged from ~2% to ~4% in the 2.5 years following ARRA) is ~$21 billion in interest per year. A total of $210 billion in interest costs will by incurred by 2019 directly related to ARRA. By 2019 the total cost of ARRA will be $1.04 trillion. 

The final cost of ARRA will probably be much higher as there is no current plan from Democrats nor Republicans (save Rand Paul) to reduce our total outstanding debt...so ARRA will continue to sit on the government's books accruing billions in interest each year. This debt will most likely be a drag to future growth as future generations will be left to pay ARRA's bill...and by that time whatever short term 3% GDP blip will be long forgotten and arguably less significant than the $1+ trillion dollars of debt. 

The NYT tried to answer a seemingly simple question: was ARRA worth it? Too bad there is not a simple answer, and it's most likely not "yes". A tougher, more pertinent, question is what would have happened had we not borrowed $832 billion and spent it on a smorgasbord of spending bills and temporary tax cuts? That's impossible to answer but after analyzing the NYT's proof we probably would have been better off not adding $1 trillion of additional debt onto our collective books. 

In addition to the pleasant nostalgia I received while reflecting on early 2009, the NYT Editorial Board reminded me of that Hayek quote. The curious task of economics is to prove to politicians that the outcomes of their ambitious economic designs may end in a lesson in humility, and an example of the limitations of macroeconomics as a precise science.