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Estimated Impact of the American Recovery and Reinvestment Act; Employment and Economic Output from October 2011 Through December 2011
Topic Started: Feb 23 2012, 06:56 PM (114 Views)
Stoney
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In contrast to its positive near-term macroeconomic effects, ARRA will reduce output slightly in the long run, CBO estimates—by between zero and 0.2 percent after 2016. But CBO expects that the legislation will have no long-term effects on employment because the U.S. economy will have a high rate of use of its labor resources in the long run.

ARRA’s long-run impact on the economy stems primarily from the resulting increase in government debt. To the extent that people hold their wealth in government securities rather than in a form that can be used to financeprivate investment, the increased debt tends to reduce the stock of productive private capital. In the long run, each dollar of additional debt crowds out about a third of a dollar’s worth of private domestic capital, CBO estimates.
(The remainder of the rise in debt is offset by increases in private saving and inflows of foreign capital.) Because of uncertainty about the degree of crowding out, however, CBO’s range of estimates of ARRA’s long-run effects reflects the possibility that the extent of crowding out could be more or less than one-third of the added debt.

Over the long term, the output of the economy depends on the stock of productive capital, the supply of labor, and productivity. The less productive capital there is as a result of lower private investment, the smaller will be the nation’s output over the long run.

The effect of the crowding out of some private investment under ARRA will be offset somewhat by other factors. Some of ARRA’s provisions, including its funding for roads and highways, may add to the economy’s potential output in much the same way that private capital investment does. Others, including its funding of education, may raise long-term productivity by enhancing people’s skills. Still other provisions create incentives for increased private investment. According to CBO’s estimates, the provisions that potentially add to long-term output account for between one-fifth and one-quarter of
ARRA’s budgetary cost.

ARRA’s long-run effect on output also depends on whether it permanently changed people’s saving or their ability or willingness to work. For example, to the extent that ARRA reduced long-term unemployment during the 2009–2011 period, it might improve participation in the labor force, employment, and productivity in later years. However, CBO’s estimates of the long-term effects of ARRA do not incorporate any effects of that sort.


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