How Quickly Does Fiscal Policy Get Implemented?

There are recent calls for fiscal policy intervention to mitigate the economic impact of the COVID-19 virus outbreak. It is worth recognizing that fiscal and other stabilization policies exhibit “long and variable lags,” as noted by Nobel-prize winning economist Milton Friedman.Friedman, Milton. A Program for Monetary Stability. 1960, Fordham University Press: New York. These lags involve moving from (i) the initial proposals to conduct a stimulus policy to (ii) the time the policy is actually implemented and then to (iii) the time that it affects the economy.Friedman, Milton. A Program for Monetary Stability. 1960, Fordham University Press: New York. The American Recovery and Reinvestment Act of 2009 (hereafter, the Recovery Act) provides a concrete illustration of the challenges that political leaders and policymakers face in moving fiscal policy quickly through the above three stages. 

Responding to the 2007-09 Recession

The impetus for the Recovery Act was the 2007-09 recession, which began in December 2007 according to the National Bureau of Economic Research.See the NBER’s page “US Business Cycle Expansions and Contractions.” The first net job losses occurred in February 2008, and net job losses of more than 100,000 began two months later.

Barack Obama’s election in November 2008 put him in position to pursue a campaign promise: a large fiscal stimulus plan. There were approximately 10 weeks between the first-term election of Barack Obama—as well as Democrats securing large majorities in both the House and Senate—and the presidential inauguration.

This provided the president time to put together his economic team before his oath of office.Grabell, Michael. Money Well Spent: The Truth Behind the Trillion-Dollar Stimulus, the Biggest Economic Recovery Plan in History. 2012, PublicAffairs Books: New York. During these months, his advisers constructed a stimulus plan that, with some modifications, eventually became the Recovery Act.

Mapping the Recovery Act Timeline

In the timeline below, I “start the clock” with Week 0 on Jan. 6, 2009, which is the day that the 111th Congress was sworn in.One could start the clock earlier, however, since fiscal policy planning had already been underway. The initial stimulus bill was introduced in late January 2009 in the House. The president signed the Recovery Act legislation on Feb. 17, or about six weeks after the new Congress was sworn in.

One of the major components of the Recovery Act was the “Making Work Pay” tax relief program, with a total budget impact of $116.2 billion. For most American workers subject to tax withholding, these tax credits appeared through an automatic reduction in their withholding, resulting in an increase in take-home pay. Week 10 was when these workers started seeing the increase.

Another substantial tax relief component of the Recovery Act was the $14.2 billion program to make one-time $250 payments to Social Security recipients. These checks began arriving in recipients’ mailboxes in Week 17 (May 2009).

The Recovery Act also contained $147.7 billion in appropriations to be administered by the Department of Health and Human Services (HHS). Of this, $61.1 billion was provided for grants to state governments to help offset states’ Medicaid costs, and $25.3 billion had been spent by July 31, 2009 (Week 29). Of the remaining $84.6 billion HHS dollars, less than 1% ($515 million) had been outlaid by Week 29.

Speed of Infusing Stimulus

The Recovery Act consisted of dozens of components, and I will not go through the implementation times for most of them. These examples are meant to give a sense of how long it took for fiscal policy to move through the first two stages described earlier.

No doubt, some of these programs infused money more quickly, such as fiscal stabilization dollars to state governments including the Medicaid grants described above.Some of the transfers from the federal government to state governments moving quickly did not necessarily pass through rapidly from state governments to their final intended recipients. Other dollars outflowed more slowly. For example, the final entry on the timeline shows that only about 56% of the $48.1 billion in Recovery Act transportation dollars had been outlaid by Week 112.

Although there are important differences between the 2007-09 recession and the current situation, similar implementation challenges are likely to be present if the federal government undertakes a large fiscal policy intervention.

Notes and References

¹ Friedman, Milton. A Program for Monetary Stability. 1960, Fordham University Press: New York.

² See the NBER’s page “US Business Cycle Expansions and Contractions.”

³ Grabell, Michael. Money Well Spent: The Truth Behind the Trillion-Dollar Stimulus, the Biggest Economic Recovery Plan in History. 2012, PublicAffairs Books: New York.

⁴ One could start the clock earlier, however, since fiscal policy planning had already been underway.

⁵ Some of the transfers from the federal government to state governments moving quickly did not necessarily pass through rapidly from state governments to their final intended recipients.

⁶ “H.R. 1, American Recovery and Reinvestment Act of 2009.” Congressional Budget Office, Feb. 13, 2009.

⁷ According to the Congressional Budget Office, the final budget impact of the Recovery Act was $815 billion.

⁸ See the Internal Revenue Service’s webpage “The Making Work Pay Tax Credit.”
Malkin, Whitney. “Paychecks to increase thanks to federal stimulus package.” The Register-Guard, March 10, 2009.

⁹ See the Social Security Administration’s webpage “Program Operations Manual System.”

¹⁰ See the archived HHS webpage discussing the Recovery Act.

¹¹ See my statement published in the 2014 report “Transportation Investments in Response to Economic Downturns.”

Additional Resources

• On the Economy: How Big Was Recovery Act Spending?
• On the Economy: Does Government Spending Stimulate the Economy?