Criticism of the ARRA has also been strident, focusing on the high price tag, the slow speed of delivery, and the fact that the unemployment rate rose much higher than the Administration predicted in January 2009.
While we would not defend every aspect of the stimulus, we believe this criticism is largely misplaced, for these reasons:
The unusually large size of the fiscal stimulus (equal to about 7% of GDP) is consistent with the extraordinarily severe downturn and the limited ability to use monetary policy once interest rates neared zero.
Regarding speed, almost $500 billion has been spent to date (see Table 2). What matters for economic growth is the pace of stimulus spending, which surged from nothing at the start of 2009 to over $100 billion (over $400 billion at an annual rate) in the second quarter. That is a big change in a short period, and it is one major reason why the Great Recession ended and recovery began last summer.7
Critics who argue that the ARRA failed because it did not keep unemployment below 8% ignore the facts that (a) unemployment was already above 8% when the ARRA was passed and (b) most private forecasters (including Moody’s Analytics) misjudged how serious the downturn would be. If anything, this forecasting error suggests the stimulus package should have been even larger than it was.
This study attempts to quantify the contributions of the TARP, the stimulus, and other government initiatives to ending the financial panic and the Great Recession. In sum, we find they were highly effective. Without such a determined and aggressive response by policymakers, the economy would likely have fallen into a much deeper slump.