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How Much Consumption Responds to Government Stimulus

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How Much Consumption Responds to Government Stimulus

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The fiscal stimulus of 2009–2012 had some surprising impacts on the overall US economy.

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Policy makers can wield multiple types of government stimulus: tax cuts, transfer payments and direct spending into the economy. However, some programs drive greater economic activity than others. Economists Marios Karabarbounis, Marianna Kudlyak and M. Saif Mehkari assess the specific efficacy of direct spending via federal contracts under the 2009 American Recovery and Reinvestment Act. getAbstract recommends this eye-opening report to economists, policy experts and anyone interested in the effects of government spending on the economy.

Summary

According to economic models, direct government spending into an economy creates a multiplier effect, boosting consumer activity and spurring GDP growth. In an attempt to temper the pernicious effects of the Great Recession, the federal government’s American Recovery and Reinvestment Act (ARRA) deployed $787 billion in fiscal stimulus from 2009 to 2012. The legislation relied on a mix of “tax benefits, social entitlements and federal contracts” as the proposed remedy. Officials earmarked $228 billion for projects in “education, transportation...

About the Authors

Marios Karabarbounis is an economist at the Richmond Federal Reserve. Marianna Kudlyak is a research adviser at the San Francisco Fed. M. Saif Mehkari is an associate professor of economics at the University of Richmond.

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