What Was the Stimulus Package?

Updated February 23, 2012

Obama's First Major Act to Stimulate the Economy

The $787 billion economic stimulus package was approved by Congress in February, 2009. The package was designed to quickly jump-start economic growth, and save between 900,000-2.3 million jobs. The package allocated funds as follows:

• $288 billion in tax cuts.
• $224 billion in extended unemployment benefits, education and health care.
• $275 billion for job creation using federal contracts, grants and loans.

To find out exactly how these funds were allocated, see American Recovery and Reinvestment Act Details.The package was designed to be spent over ten years. However, to give maximum impact, $720 billion, or 91.5%, was budgeted for the first three fiscal years: $185 billion in FY 2009, $400 billion in FY 2010 and $135 billion in FY 2011.

What were the actual results? In fact, the package did better than planned. By the close of FY 2009, (October 30, 2009) $241.9 billion had been spent: $92.8 billion in tax relief, $86.5 billion in unemployment and other benefits and $62.6 billion in job creation grants. By March 30, 2011, (just after the close of FY 2010) the program had spent $633.5 billion: $259.9 billion in tax relief, $181.7 billion in entitlements and $191.9 billion in contracts, grants or loans. (Source: Recovery.gov)

The Congressional Budget Office projected the stimulus package would increase GDP growth by 1.4%-3.8% by the end of 2009. (Note: This did not mean GDP growth would be up1.4%-3.8%. It just meant the economy would be that much better, even if it remained in recession. Actually, the CBO projected the economy would contract 3% for 2009.) In fact, the economy contracted 2.6% in 2009, and expanded 2.6% in 2010.

The economic stimulus bill was supposed to save 900,000-2.3 million jobs. As of October 30, 2009, it saved 640,329 jobs.(most recent report).

Why the Economic Stimulus Package Was Created

The main purpose of the economic stimulus package was to instill the confidence needed to restore economy growth. Monetary policy had done all it could, and it was clear fiscal policy was needed. The stimulus plan also aimed to restore trust in the finance industry by further limiting bonuses for senior executives for companies that received TARP funds.(Sources: CBO, Letter to Senator Grassley, March 2, 2009; Economic Projections; Recovery.gov))

Once in office, Obama realized he needed to dramatically increase the fiscal stimulus from the $190 billion plan he proposed in his campaign. Since the economy was still spirally down, dramatic and aggressive action was needed to stem further economic crisis. Some components of his campaign plan, such as enacting a foreclosure moratorium, had already been implemented by Fannie Mae. Others, such as eliminating taxes for seniors making up to $50,000, were still part of Obama's economic agenda elsewhere.
Obama's biggest challenge was to create enough of an economic stimulus to soften the recession, but not big enough to create further doubts about the ballooning Federal Debt. Unfortunately, the plan has been blamed for doing both -- failing to stimulate the economy enough reduce unemployment below 9%, and adding to the debt. Even so, the stimulus plan was not blamed as much as health care reform, Medicare and Medicaid for the debt.

How Does the Plan Work?

Obama's tax rebates were supposed to encourage consumer spending, but many experts doubted it. Why? The rebates showed up as less tax withholding. Unlike the Bush tax cuts, workers did not receive checks. As a result, most people weren't aware they got a tax rebate.

The Stimulus for Small Business helped create jobs, increased lending from the SBA and community banks, and reduced capital gains tax for small business investors. The state aid helped, but many states were so underwater that their losses outweighed the Federal aid.

The public works construction was probably the most well-publicized, since signs were posted wherever stimulus money was used to construct roads or public buildings. It was estimated to retain or add 3 million jobs, many of which were sorely needed in the construction industry.

Was the Stimulus Act a Success?

By most economic indicators, the Economic Stimulus Package was a success. In March 2009, before it was launched, Q1 GDP was -6.4% (it has since been revised to -4.9%)and the Dow had slid to 6,500. By Q4 2009, GDP was +5% and the Dow had risen to 10,428. Not all of that success can be attributed to the Stimulus Package, since expansive monetary policy and strong emerging markets also helped boost the economy. However, those were all in place in March 2009. No doubt, the economic stimulus package inspired the confidence needed turn the economy around.