Was the American Recovery and Reinvestment Act an Economic Stimulus?

Abstract

The American Recovery and Reinvestment Act (ARRA) of 2009 envisaged a fiscal stimulus of approximately $800 billion, the largest in American history. Chodorow-Reich et al. (2012a) show that the state fiscal relief that was part of this stimulus increases employment. The other objective of ARRA was to “promote economic recovery”. We therefore examine its effect on states’ economic growth. Since the stimulus each state received is endogenous to a state’s economic environment, ordinary least squares underestimates the effect. This endogeneity problem is addressed by using a state’s pre-recession Medicaid spending level to instrument for the ARRA fiscal relief each state receives. We find that the ARRA state fiscal relief has indeed had a positive effect on gross state products.