July 12, 2010

What Do We Know About the Effect of Fiscal Stimulus Measures?

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The understandable temptation to take action during a crisis should not lead lawmakers to take counterproductive actions. In response to the financial crisis, Congress passed the American Recovery and Reinvestment Act (ARRA) in February 2009, which totaled $789 billion in government spending and tax cuts. President Obama reassured anxious Americans that this spending would "revive our economy" and "create 3.5 million jobs" over the next two years.1 Since then the US economy has shed another 3.1 million jobs and the unemployment rate has climbed to 9.5%. That’s higher than the White House predicted it would have reached even without the stimulus. Examining the actual data shows us that fiscal stimulus doesn’t work.