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Overview

An economic stimulus is an effort by the government to pump money into an


ailing economy, whether through spending, tax cuts or interest rate reductions.
By replacing money not being spent by businesses or consumers, a stimulus is
meant to put a floor under a recession and pave the way for a return to growth.
In most circumstances, economists consider interest rate cuts by the Federal
Reserve to be the most effective form of stimulus. But when the economy
continued to sink in late 2008 even after the Fed cut rates to practically zero,
pressure grew for a fiscal intervention, that is, action by Congress.

Even before taking office, President Obama began work on a stimulus package.
On Feb. 11, 2009, Congress gave final approval to a $787 billion bill, the
American Recovery and Reinvestment Act. The bill had been bitterly resisted by
Republicans — none voted for the measure in the House and only three did in
the Senate. Conservative protestors regularly cited the bill's price tag as a sign
that the Obama administration was running up unaffordable debt and was
devoted to big government.

By November 2009, a consensus had developed among analysts across a wide


range of views that the stimulus package, as messy as it is, was working. But as
unemployment rose above 10 percent, administration officials acknowledged that
they had underestimated the depth of the recession, and pressure began to rise
for a second round of stimulus — to be called a jobs bill, to avoid the stigma that
Republicans had sought to attach to stimulus.

In December, the House narrowly passed a $154 billion measure, but from there
on things got tougher. Senate Democrats cut the bill down to $15 billion, focused
on a payroll tax exemption for companies that hire new workers, to get the
Republican votes needed to avoid a filibuster. In May, Democratic leaders in the
House and Senate pushed to complete a new package of tax breaks and
unemployment aid. The original plan was for $200 billion in spending and tax
breaks, offset by $50 billion in new revenue. But the measure was trimmed to
meet the concerns of a number of conservative Democrats worried about the
deficit's power as a political issue and it stalled in the Senate, which in July
passed a smaller bill that added only $34 billion to the deficit.

Republicans also blocked a package of tax breaks and other assistance to small
business, but Congress in August passed a $26 billion bill to help states with
their Medicaid costs and to limit teacher layoffs.

In September, Mr. Obama proposed a package of roughly $180 billion in


expanded business tax cuts and infrastructure spending -- measures that had
long had Republican support -- whose cost would be offset by closing other tax
breaks for multinational corporations, oil and gas companies and others. With
the help of two Republican votes, Congress passed legislation that would create a
$30 billion loan fund for small businesses and provide other tax incentives to
encourage hiring and stimulate growth, but the rest of Mr. Obama's proposal
went nowhere.

BACKGROUND

The Congressional Budget Office defines the goal of any such package this way:
"Fiscal stimulus aims to boost economic activity during periods of economic
weakness by increasing short-term aggregate demand." The theory is that if
more goods and services are being bought, whether cement for a new highway or
groceries paid for with a tax rebate, there is less chance that falling demand will
lead companies to lay off workers, resulting in greater falls in demand and a
deeper downturn.

Over the decades since the Depression, a consensus had developed among
economists that fiscal policy was an ineffective tool in combating recessions
compared with monetary policy, that is, the ability of the Federal Reserve to
make more money available — thereby increasing demand — by lowering
interest rates. The stimulus passed in early 2008 was held up as an example of
the shortcomings of fiscal policy. It consisted primarily of tax rebates, and
surveys showed that much of the extra money was saved or used to pay debts,
neither of which generates direct economic activity.

But in the most dire situations, monetary policy can cease to have traction, when
banks are so shell-shocked that they are unwilling or unable to make new loans
even if a central bank provides the money with no interest charges at all. The
United States appeared to be in such a "liquidity trap'' in the winter of 2008 and
early 2009, as the credit crisis that followed Wall Street's implosion barely eased
even as the Fed reduced its rates to virtually zero.

THE HOUSE PLAN

As Mr. Obama began work with Democratic Congressional leaders even before
his swearing in, there was little disagreement over the need for a large fiscal
stimulus. The parties split, however, on what the size and shape of the plan
should be. When Mr. Obama outlined a plan in which just under 40 percent of
the stimulus rested on tax cuts, it was criticized by Senate Democrats who
argued for more spending and by Republicans who sought deeper tax cuts. House
Republicans in particular argued for an approach that would rely primarily on
permanent cuts in income and business taxes.

On Jan. 15, 2009, House Democrats unveiled the details of their economic
recovery package, an $825 billion combination of spending and tax cuts. The
package, developed by Congressional Democrats in partnership with Mr. Obama,
included aid to states for Medicaid costs, temporary increases in unemployment
benefits and a vast array of public works projects to create jobs.
The House bill as passed consisted roughly of two-thirds spending and one-third
tax cuts. Its cost decreased by $6 billion as Democrats voluntarily dropped from
the package several provisions that Republicans had singled out for derision,
including money to restore the Jefferson Memorial and for family planning
programs.

THE SENATE PLAN

Even before debate began, the Senate version of the bill was substantially
different from the House package, including a provision to protect millions of
middle-class Americans from having to pay the alternative minimum tax in 2009
that brought the total cost of the Senate bill to nearly $884 billion.

Democrats entered into negotiations with two moderate Republicans, Olympia


Snowe and Susan Collins of Maine, and a conservative Democrat, Ben Nelson of
Nebraska, to cut tens of billions in spending from the bill. The talks produced an
$838 billion package of government spending and tax cuts, which dropped some
$40 billion in aid to states from the House version of the bill and scaled back
President Obama's signature middle-class tax cut. The Senate plan also created
new tax incentives to encourage Americans to buy homes and cars within the
next year.

Just three Senate Republicans pledged to support the measure, with Arlen
Specter of Pennsylvania joining Ms. Collins and Ms. Snowe of Maine. But their
votes were enough to lift Democrats over the filibuster -proof number of 60 votes
needed, and the legislation passed a key hurdle on Feb. 9, when the Senate voted
61 to 36 to allow it to move forward toward a final vote. Final passage followed
the next day, by 61 to 37.

THE FINAL BILL

Significant differences existed between the House and Senate versions of the
stimulus package, primarily over tens of billions of dollars in aid to states and
local governments, tax provisions and programs for education, health and
renewable energy. But the negotiations between the two chambers and the
White House moved rapidly, and on Feb. 11, a little more than 24 hours after the
Senate vote, Congressional leaders announced an agreement on a $789 billion
final bill.

The deal reflected a calculated gamble by Mr. Obama in the first weeks of his
term. To win Republican votes, the final stimulus package is considerably leaner
than what many economists say is now needed to jolt the economy, given its
grave condition.

The final bill includes $507 billion in spending programs and $282 billion in tax
relief, including a scaled-back version of Mr. Obama's middle-class tax cut
proposal, which would give credits of up to $400 for individuals and $800 for
families within certain income limits. It will also provide a one-time payment of
$250 to recipients of Social Security and government disability support.

The bill contains more than $150 billion in public works projects for
transportation, energy and technology, and $87 billion to help states meet rising
Medicaid costs. Despite intense lobbying by governors around the country, the
final deal slashed $25 billion from a proposed state fiscal stabilization fund,
eliminated a $16 billion line item for school construction and sharply curtailed
spending to provide health insurance for the unemployed. In driving down the
total cost — from $838 billion for the Senate stimulus bill and $820 billion for
the House-passed measure — lawmakers also reduced the Senate's proposed tax
incentives for buyers of homes and cars. The final agreement retained a $70
billion tax break to spare millions of middle-income Americans from paying the
alternative minimum tax in 2009.

It also created a new tax credit for 95 percent of working families at a cost of
$116 billion. To the administration's chagrin, this became the tax cut that no one
noticed.

In a sense the tax cut was hard to notice by design. Faced with evidence that
people were more likely to save than spend the tax rebate checks they received
during the Bush administration, the Obama administration decided to take a
different tack: it arranged for less tax money to be withheld from people’s pay
checks. They reasoned that people would be more likely to spend a small,
recurring extra bit of money that they might not even notice, and that the
quicker the money was spent, the faster it would cycle through the economy.

Economists are still measuring how stimulating the tax cut was. But the hard-to-
notice part has succeeded wildly. In a New York Times/CBS News Poll line
September 2010, fewer than one in 10 respondents knew that the Obama
administration had lowered taxes for most Americans. Half of those polled said
they thought that their taxes had stayed the same, a third thought that their
taxes had gone up, and about a tenth said they did not know.

AFTER PASSAGE

A number of high-profile Republican governors, including Sarah Palin in Alaska,


Mark Sanford in South Carolina and Bobby Jindal of Louisiana, vowed not to
accept portions of the stimulus money being sent to states, but were eventually
forced to back down. Nonetheless, the giant price tag on the package helped
Republicans make the skyrocketing federal deficit a more potent political issue
than it had been under Mr. Bush.

In early May, some states and cities began to complain that the money had yet to
reach them. Some states have been slow to get their paperwork to Washington.
Other complaints were that cities were short-changed on the transportation
funds, as much of the road-building funds were steered by states to rural areas,
sometimes because the urban projects were too complicated to begin quickly, and
sometimes as a reflection of the clout of rural lawmakers.

Administration officials had predicted that the stimulus program would save or
create 600,000 jobs by summer. But by July, the economy had lost more than two
million jobs since Mr. Obama took office, while officials were estimating that the
program has saved only about 150,000 jobs. Administration officials
acknowledged that their initial forecasts, which anticipated that unemployment
would peak at 8.5 percent, were too optimistic, although they were in line with
Federal Reserve and most private forecasters.

An increase in the rate of home sales was credited in large part to a provision in
the bill that gave a credit to first-time buyers, and the stimulus program also
gave car companies an added lift through the cash-for-clunkers program that
offered rebates of up to $4,500 for people who trade in gas guzzlers for ne w cars.
The program was extended by Congress after the $1 billion originally set aside
for it was snapped up more quickly than had been expected.

There is little dispute among economists that the measure kept the jobless rate
from going even higher than it did. But with unemployment at 9.7 percent on
average, and higher in some states, the president conceded that there was
widespread confusion about the bill, and a sense that it had not lived up to
expectations.

A SECOND ROUND

As unemployment topped 10 percent and appeared likely to stay at that level,


administration officials acknowledged that they had been too optimistic about
the power of the stimulus bill to produce a strong recovery. The worth of the
measure became the subject of a bitter partisan battle, as Republicans declared
that it had failed. In February 2010, Mr. Obama declared that the bill had
created or saved as many as two million jobs, lowered taxes for 95 percent of
Americans and spared the nation the next Great Depression.

Despite the calls from some economists for another large-scale effort at stimulus,
the bills taken up by Congress were closer to the size of the $158 billion stimulus
bill signed by President George W. Bush in the spring of 2008. A $174 billion bill
barely squeaked through the House in December, as conservative Democrats
tried to distance themselves from new spending and debt.

In the Senate, Mr. Baucus and Mr. Grassley reached agreement on an $85 billion
bill that was far more targeted on corporate tax breaks than the House measure.
But it was set aside by Mr. Reid, who said he planned to introduce measures in
chunks designed to peel off the one or two Republicans needed to avoid a
filibuster. The first, a $15 billion bill, passed after making it to the Senate floor
with the support of five Republicans. The bill was built around an approach that
has won bipartisan support in the past: a $13 billion plan to give companies who
hire unemployed Americans an exemption from paying payroll taxes on those
workers through the end of 2010. It also provides a $1,000 tax credit to
employers who keep new workers on the payroll for at least for 52 weeks.

Opinion is divided on whether the approach is effective or simply gives


businesses a break on workers they would have hired anyway. But la wmakers
said that given the dismal unemployment picture, they were willing to give it a
try, and estimated the tax breaks would put 300,000 people to work.

The bill passed in the House on a nearly party line vote after Democrats adjusted
the bill to cover its costs more completely, to satisfy their party's fiscal hawks. To
attract liberal lawmakers who contended the measure was too meager, they
added a provision to generate business for minority contractors. The bill won
final passage in the Senate on March 17, with the votes of 11 Republicans.

The law provides an exemption from the 6.2 percent Social Security payroll tax
for every worker who has been unemployed at least 60 days and is hired after
Feb. 3 through the end of this year. Employers will get an additional $1,000
income tax credit for new employees retained for at least a year. The Senate
estimated the measure will cost $13 billion over 10 years, though most of the cost
will be in the first two years.

STIMULUS VS. DEFICIT

In May, Democratic Congressional leaders put together a $200 billion bill chock-
full of provisions Democrats would typically embrace — extended jobless pay,
health insurance subsidies for the unemployed, a summer jobs program and a
tax increase on wealthy investors. But a number of Democrats were wary of
adding to the deficit by approving emergency measure programs that did not
need offsetting cuts or revenue increases.

The bill passed the House after being cut to $124 billion, and Democratic leaders
reduced the cost of the measure by limiting a provision on Medicare fees paid to
doctors, extending unemployment benefits through Nov. 30 instead of Dec. 31
and cutting aid to the states — a development met with howls of pain from state
capitals around the country. The bill also did away with a tax loophole that
allowed hedge fund managers to report their fees as capital gains rather than
ordinary income. That measure, which is expected to raise $17 billion over 10
years, had been blocked prior to the Wall Street meltdown.

When Senate Democrats took up their $140 billion measure, they said they
expected it to pass because it included provisions both parties favor, like the $40
billion extension of unemployment pay along with billions of dollars in business
and personal tax breaks. Democrats were also looking for lobbying help from
governors who supported the inclusion of $24 billion sought by states for help
with health care costs — one element of the Senate bill that drove the cost higher
than the price tag in the House.
But the bill bogged down as it faced fierce Republican opposition and one
Democrat, Senator Bill Nelson of Nebraska, joined them in blocking a vote. With
the economic recovery looking shaky, it appeared that both parties were staking
out ground for the fall election -- Democrats as supporters of government action
to get hiring started again, and Republicans as opponents of what they called out
of control spending.