America has fallen on tough economic times. This economic downturn arose from several different missteps taken recklessly in several different key economic areas. First, the real estate market collapsed after subprime mortgages, a form of predatory lending, created an enormous spike in failed payments and in the end, foreclosures. This set a spiral in motion, with banks defaulting on their loans as payments were simply not being paid back. With the banks beginning to fail, Wall Street soon was in freefall.
The banking crisis simultaneously exacerbated economic conditions elsewhere as credit became unavailable; banks were unable to make loans to industries hoping to invest in future expansions. Without credit, that investment dried up, and without investment, companies began to see their profits contract, setting a series of layoffs in motion. Laid off workers, for their part, lost consumer confidence and rolled back their spending habits, only entrenching the profitability woes of other businesses. In short, the economic collapse has been feeding off itself.
Newly-elected President Barack Obama is hoping to stem the tide of economic disaster and instead re-establish the prosperity of the American economy. To do so, he has proposed, and recently succeeded in passing, an economic stimulus package of nearly $800 billion in government spending. This stimulus package is ambitious, but it is important to understand how the money will be spent. In this essay, I will explain the stimulus package in depth and explain how that infusion of capital can shore up the American economy and turn economic collapse into economic growth.
The funds in the stimulus package are broken down into eight major categories by the Obama administration, but can be collapsed into really four main categories. First, roughly $288 billion of the stimulus plan is allocated to tax relief. Second, $144 billion of the gargantuan package is devoted to providing relief to state and local governments who are themselves strapped for cash. Third, $154 billion is devoted to infrastructure, scientific programs, and energy policy. Fourth, and finally, $193 billion is allocated to social spending, including health care, protecting society’s most vulnerable, and education/job training.
Together, the total bill stands as a financial behemoth, with a total price tag of $789 billion (Recovery. gov, 2009). The first major wing of spending comes in the form of tax cuts, to the tune of $288 billion. This is the largest single portion of the American Recovery and Reinvestment Act of 2009 (ARRA) as the stimulus plan is officially known. President Obama has consistently stressed that tax cuts are important, but that they are not the panacea that many Republicans claim. The theory behind tax cuts is simple. If American citizens receive a tax break, they will have more money.
Ideally, they will choose to spend that newfound money, and in doing so will drive up the profits of businesses. This upward spiral has been driving the American economy for decades, as consumers spend liberally and businesses reap the rewards. Once consumers are spending more, businesses can spend more on investment, create new jobs, and generally begin the process of economic expansion. One of the largest tax cuts in the plan, specifically, is a worker tax credit of $400 per worker, or $800 per couple (Recovery. gov, 2009). These cuts will be seen almost immediately, as works will start seeing fewer dollars withheld from their paychecks.
On top of this direct tax relief, the plan allocates substantial sums to child tax credits, giving low-income parents a financial break that they desperately need. On a different note, but equally important, are the tax cuts for new home buyers, which are intended to give the real estate market a boost and compensate for the damage done by home foreclosures. There are additional tax cuts in the bills, but none as substantial as the aforementioned. Cumulatively, the Obama administration hopes that the tax cuts will be sufficiently large to jump start consumer spending and begin refueling the sputtering economy (Recovery. gov, 2009).