Sunday, February 15, 2009

US fiscal stimulus underway - ARRA is passed

The US Congress, after bitter partisan wranglings and in voting along clear Party lines, finally passed the $787 bn fiscal stimulus bill, christened the American Recovery and Reinvestment Act (ARRA) 2009. It includes $500 billion in spending programs - $192 bn for direct aid and $308 bn on discretionary spending - and $287 billion in tax relief and is the most expansive unleashing of the government’s fiscal firepower in the face of a recession since World War II. The CBO estimates that more than 74% of the money will be spent within the next 18 months and is expected to save or create 3.5 m jobs. The Bill snapshot is in the graphic below

The Bill comes after a long drawn out two-level voting process, spread over two weeks, in both the Senate and the House. In the first round, the US Senate had passed the $838 bn ARRA 2009 Bill with the DeMint Amendment to the $819 bn proposal passed earlier by the House of Representatives. NYT had this comparison of the stimulus plans passed by the House and Senate in the first round.

The Bill underwent important revisions from its original form, including reduction of $25 billion from a proposed state fiscal stabilization fund, elimination of a $16 billion line item for school construction and sharply cuts in spending to provide health insurance for the unemployed. Economists like Paul Krugman have criticised the Senate amendments for removing precisely those proposals which would have had the most immediate and largest impact and for being too inadequate, given the large projected shortfall in output.

Spending proposals

It contains more than $120 billion in public infrastructure projects for transportation, energy, mass transit, high speed rail, public housing and technology, and $87 billion to help states meet rising Medicaid costs, $78 bn for jobless people, $20 bn on health care, and an extra $20 billion for food stamps over several years. Programs to promote energy efficiency and renewable energy sources receive more than $45 billion in new spending and tax breaks.

About 500,000 part-time, low-income and female workers who have lost their jobs and who already receive unemployment benefits will get some additional money in their checks. The measure adds $25 a week to every unemployment check, and continues extended benefits for the long-term unemployed through 2009, at a combined cost of $9 billion. The Bill seeks to expand the coverage of those eligible for unemployment insurance as the department of Labor estimates that during normal times only 36% of people who are out of work actually collect this benefit, restricted as they are by narrow qualification norms of respective states (most states do not grant benefits to people who are looking only for part-time work those who lost jobs voluntarily for "compelling family reasons"). The stimulus bill seeks to incentivize the states that broaden their qualification requirements by giving them more money.

Tax proposals

The final bill proposes giving away tax credits for the middle class 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, $70 billion tax break to spare millions of middle-income Americans from paying the alternative minimum tax in 2009, and tax incentives for buyers of homes and cars. The details of the tax breaks are available here.

The tax credits will be delivered as "refundable tax credits" to those with incomes below $500,000. This proposal would offer credits that can leave people with extra money even if they didn’t earn enough to owe federal income taxes. About 57 million Americans have no tax liability and would benefit substantially from this. About 80% of all taxpayers would receive a tax cut under the final Bill, while 10% would see their taxes go up.

Executive compensation restrictions

In a last minute addition, and in the face of strong opposition from the Obama administration advisors, the Senate Democrats inserted a provision that would prohibit cash bonuses and almost all other incentive compensation for the five most senior officers and the 20 highest-paid executives at large companies that receive money under the Treasury’s Troubled Asset Relief Program (TARP). It also bars the 25 top executives from receiving bonuses exceeding one-third of their annual cash compensation, and any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full.

This would apply not just a bank’s top management, but also star traders, investment bankers, fund managers and commission-based sales representatives. These restrictions on executive compensation goes beyond those outlined in the FSP Plan presented by Treasury Secretary Tim Geithner, and will apply to any company that either has received money or will receive money in the future under the Treasury’s financial rescue program.

An analysis of what is in the bill for ordinary citizens is available here.

Update 1
Greg Mankiw draws attention to the CBOs estimate of the impact of ARRA on the economy.

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