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Stimulus Paying Big Dividends for GDP, State Budgets

August 3, 2009

Beginning in early July, Capitol Hill Republicans introduced a new talking point, proclaiming the $787 billion economy recovery package (ARRA) a "dismal failure." Sadly for the GOP, as Stephen Colbert might say, reality is showing its well-known liberal bias. After steep declines of 5.4% and 6.4% in the previous two quarters, gross domestic product fell only 1% in the last three months. And while the ARRA overall added "up to 3 full percentage points of annualized growth in the quarter," President Obama's stimulus helped precisely where it was needed most - rescuing devastated state budgets.
As the Economic Policy Institute detailed last week, along with declining business inventories and an improving trade picture, the American Recovery and Reinvestment Act was one of the key factors driving the turnaround on GDP:

Despite the overall contraction, the fingerprints of the American Recovery and Reinvestment Act could be seen in some aspect of today's report. Federal government spending grew at an 11% rate in the quarter, adding roughly 0.8% to overall GDP. State and local government spending grew at a 2.4% annual rate, the fastest growth since the middle of 2007. It is clear that the large amount of state aid contained in the ARRA made this growth possible.
Furthermore, real (inflation-adjusted) disposable personal income rose by 3.2% in the quarter, after rising by only 1% in the previous quarter. A large contribution to this increase was made by the Making Work Pay tax credit passed in conjunction with the ARRA, as this was the first full quarter that the credit was in effect...
...The consensus of macroeconomic forecasters is that ARRA contributed roughly 3% to annualized growth rates in the second quarter. This means that absent its effects, economic performance would have resembled that of the previous three quarters, when the economy contracted at an average annual rate of 4.9%. In short, the recovery act turned this quarter's economic performance from disastrous to merely bad.

Nowhere was the impact seen more than in spending by the states.
Like the federal government, which has seen the recession gut tax receipts by 18% to produce the biggest drop-off since 1932, state revenues plummeted 11.7% in the first three months of this year. 47 of the 50 states, most of which must run balanced budgets, saw revenue declines. And as the New York Times warned, the second quarter would likely be even worse, with "preliminary data for the first two months of the quarter, April and May, collected from 45 states, indicated that tax revenues declined by 20 percent compared with the same period last year."
But as USA Today documented Monday, the stimulus package is having a dramatic impact in warding off the calamity in the states:

A huge influx of federal stimulus money to state and local governments more than offset a sharp drop in tax collections, helping to put the brakes on the nation's economic decline, new government data show.
The stimulus funds helped reverse six months of spending declines, pushing state and local government expenditures up 4.8% in the second quarter, reports the Bureau of Economic Analysis.
"The money has caused a very sharp change in the path of the economy, which had been in steep decline," said Chad Stone, chief economist at the liberal Center on Budget and Policy Priorities in Washington, D.C.

The influx of federal dollars boosted state coffers by 7.5%, offsetting the steep drop in tax collections. As a result, state and local governments added 12,000 workers in the quarter, which boosted pay and benefits at a 4% annual rate.
Of course, had the obstructionist Republicans in Congress, these modest improvements would never have happened. The GOP not only withheld virtually all of its votes from the Obama stimulus plan, but had insisted desperate states only receive loans from the federal government. As Senate Minority Leader Mitch McConnell complained in January:

"If the money were lent rather than just granted, states would, I think, spend it wisely and the states that didn't need it at all wouldn't take any."

For his part, in February Nevada's John Ensign amazingly declared to stimulus supporters like Barney Frank that there was no crisis in the states at all:

"To get back to what Congressman Frank said, is that we're going to be laying off teachers and firefighters. You know, that's just fearmongering. We're not going to be doing that in any of the states... [The states'] budgets are bloated, the federal government's budget is bloated. What we should be doing is cutting back."

In any event, the good news on GDP, on housing and the stock market has undermined the Republicans' "dismal failure" stimulus talking point. But as Indiana's Mike Pence revealed to Fox News' Chris Wallace on Sunday, that hasn't stopped the Republican naysayers from introducing a new one:

"Well, let me say I hope the recession is leveling off. Slowing the rate of descent is encouraging, I'm sure, to millions of Americans. But I really believe that it's in spite of the prescriptions of Washington, D.C., Chris."

One comment on “Stimulus Paying Big Dividends for GDP, State Budgets”


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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