Chapter 15

Fiscal Policy: Balancing the Books — Perhaps


Stabilizing the economy with fiscal policy

Considering the multiplier

Understanding fiscal skeptics and fiscal activists

Evaluating the Obama stimulus

In February 2009, the then-very new President Obama signed the American Recovery and Reinvestment Act (ARRA). Better known as the Obama stimulus, this bill included a substantial rise in various government expenditures along with cuts in a number of personal and business taxes. The total cost to the Treasury was estimated to be roughly $800 billion. It was a bold use of fiscal policy to counter the recessionary pressures that had mounted in the wake of the 2007–08 financial crisis. In the year and a half preceding the legislation, real GDP had fallen by over 4 percent instead of growing at the 2.8 percent rate it had averaged since the end of 2001. It was now nearly 7 percent under potential, and there was widespread fear that the worst was not over.

If nothing else, the ARRA stimulated intensive debate. Its net effects on the economy have been argued ever since. In this chapter you’ll learn about the analyses behind this debate — the economic theories that support the stimulus and those that raise doubt about its effectiveness. We also talk a bit about the empirical evidence and why the data regarding the impact of the stimulus can be difficult to judge.

Stabilizing the Economy with Fiscal Policy

As discussed in Chapter 12 (check out the section “Impacting ...

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