American Recovery and Reinvestment Act of 2009

Danielle DiBella

Blog #2

American Recovery and Reinvestment Act of 2009

Between 2007 and 2009 the United States entered into a recession, which would later be known as The Great Recession. Many argue the main cause was the dramatic fall of the housing market when mortgage-backed securities lost significant value, causing the value of homes to decrease drastically. During this time, thousands of people lost their jobs and/or lost their homes due to foreclosure and RGDP fell about 4.3%. In 2009, the government created The American Recovery and Reinvestment Act of 2009 in order to stimulate the economy by encouraging people to either save or spend more money.

In the act there is mention of multiple stimuli intended to grow the economy including Earned Income Tax Credit, Making Work Pay Tax Credit, Health Coverage Tax Credits, Net Operating Loss Carryback for small businesses and Work Opportunity Tax Credit. Earned Income Tax Credit is a refundable credit intended to help people who work but earn modest incomes (ARRA), helping families with 3 or more children maintain a modest income in the difficult economic time. Making Work Pay Tax Credit meant that more working Americans took home more money by having fewer taxes taken out of their paycheck. Health Coverage Tax Credits meant that qualified health insurance premiums to pay 72.5% of medical bills, also, this credit made more people eligible (IRS). The Net Operating Loss Carryback was for small businesses so they could balance their losses by receiving refunds on taxes paid for up to five years ago (IRS) this inflow of extra money allows small businesses to re-invest their money into other businesses in their community or spend it on their own business. The Work Opportunity Tax credit gave businesses that hired veterans and younger, unskilled workers a tax break creating an incentive to hire people; this meant that more people would be getting a paycheck and in response, they would spend more money.

Theoretically, the policies would impact the economy in a positive way; stimulating economic growth by putting more money into the pockets of the American people with the idea that they will save it or spend it. In the short run, the tax credits increase the aggregate demand curve because consumption increases hence so does demand. Consumption increases regardless of the higher price level because people have more money. However, short run aggregate supply increases because less people have the money due to the increase in unemployment. In the long run, if unemployment continues to increase, the long run aggregate supply curve will shift left because there are less people to produce goods from the available resources. The policies are a form of government intervention and are intended to speed up the market’s self-correcting process and possibly even make the economy better than it was, but that’s the best-case scenario.

Citations:

"The American Recovery and Reinvestment Act of 2009: Information Center." The American Recovery and Reinvestment Act of 2009: Information Center. IRS, 13 Jan. 2016. Web. 27 Apr. 2016. <https://www.irs.gov/uac/The-American-Recovery-and-Reinvestment-Act-of-2009:-Information-Center>.

"ARRA and the Earned Income Tax Credit." ARRA and the Earned Income Tax Credit. IRS, 22 Feb. 2016. Web. 27 Apr. 2016. <https://www.irs.gov/uac/ARRA-and-the-Earned-Income-Tax-Credit>.