Economy

The State of the Global Economy: A look into the American Recovery and Reinvestment PlanAug 09

recovery

The State of the Economy: A look into the American Recovery and Reinvestment Plan

Prepared by: Alex Johnston and Donald Ball

Obama’s new stimulus plan holds great promise to reinvigorate the economy, but at what cost? The Global Catalyst Group dissects some of the proposed funding measures in his plan. Two main questions are answered:

  • Which funding proposals are most likely create the greatest return for the American people and why?
  • Which funding proposals are most likely create more problems than they solve and more importantly, how could they be improved?

An effective proposal results in both long and short term returns as well as the creation of not only new jobs, but new industries, and increased competitiveness rather than complacency; this all while minimizing any of the five major traps associated with fiscal stimulus:

The major traps of using fiscal policy (direct government stimulus) are:

  • It expands the responsibilities of government into areas that could be more efficiently handled by the private sector,
  • It provides additional services that voters become dependent on and increasingly unwilling to part with (these are known as entitlements (ie: medicare or social security),
  • It increases government bureaucracies, which historically are very difficult to dismantle,
  • It drives government into a destabilizing deficit cycle which can lead to currency collapse,
  • It can give inferior industries or technologies an unnatural competitive edge that then become hard to wean off government support (ie: ethanol or the highly subsidized American steel industry)

The following material was discussed to support our conversation:

The American Recovery and Reinvestment Plan:

http://online.wsj.com/public/resources/documents/AmericanReinvestment2009115.pdf

Members selected one proposal in the plan to share with the group that they determined to be an effective fiscal policy and select a second proposal that they suspected will be ineffective.

For the effective proposal, the Global Catalyst Group sought to answer:

  • What are the key success factors to the proposal (think return on investment, future growth, and industry spillover effects)?
  • Why does this proposal create the greatest return for the American people?
  • Can the proposal’s method or approach serve as a larger model for fiscal policy?

For the ineffective proposal, the Global Catalyst Group sought to answer:

  • What components of the proposal lead to an ineffective allocation of American dollars?
  • What would you specifically change about the proposal to make it an effective stimulus?

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