This is historical material “frozen in time”. The website is no longer updated and links to external websites and some internal pages may not work.

Search form

Reality Check: The Continuing Effects of the Recovery Act

Christina Romer, Chair of the Council of Economic Advisers, straightens out some misinterpretations of her recent testimony.

Reality Check

As a teacher, I should have realized that many people have trouble with the distinction between growth rates and levels. As noted in a new article by the Christian Science Monitor, I made the uncontroversial statement in testimony yesterday that fiscal stimulus has its greatest effect on economic growth over the period where it is ramping up most quickly. This statement seems to have caused some confusion and misunderstanding.

When we go from no stimulus to substantial tax cuts, increases in government spending, and aid to state governments, this has a large effect on the growth rate of real GDP – just as when you press hard on your car’s accelerator and go from 0 to 60, you have a great change in your speed. This sense of acceleration is exactly what we have been experiencing since the start of the year. Fiscal stimulus has been steadily increasing, raising GDP growth by between 2 and 3 percentage points in the second quarter and between 3 and 4 percentage points in the third quarter. Because GDP was falling rapidly before the stimulus, the contribution of the Recovery Act to growth has changed what would have been a continued rapid decline in GDP to only a modest decline in the second quarter, and changed what probably would have been a further decline into what is now widely expected to be a moderate increase in the third quarter. We expect that stimulus will continue to have a positive effect on growth in the fourth quarter of 2009 and well into 2010, though, by design, not by as much as it did in the second and third quarters of 2009. As a result, we expect the largest effect of the stimulus on the levels of GDP and employment to occur well after the largest effects on growth rates.

At some point, the stimulus plateaus at a high level. That is important too. Such continued stimulus may not add much to growth, but it is keeping the levels of GDP and employment much higher than they otherwise would have been – just as keeping pressure on the accelerator keeps the car going at 60 mph.

If you take your foot off the gas, the car goes from 60 back down to a slow crawl – a serious case of deceleration. Taking stimulus off in an economy where private demand has not adequately recovered could lead to negative GDP growth and a fall in the level of both GDP and employment. This is something I think we can all agree would be detrimental to the U.S. economy and American families.

Christina Romer is Chair of the Council of Economic Advisers