American Recovery and Reinvestment Act

Just before the United States of America went into the 2008 general elections, the American economy was thrown into a crisis following a panic that occurred in the capital markets and has persisted to be the world’s financial market crisis. The pre-election campaign of Barrack Obama went under the slogan of drastic changes in all spheres of the public, economic and political life of the country.

On the 24th of February, US President Barrack Obama spoke with his first appeal to Congress, and on the 17th of February, he signed the so-called “The American Recovery and Reinvestment Act”. This bill, as planned by the government, should stimulate the economic activity in the country, keep and create in total three and a half million workplaces.

The total cost of the Obama plan was estimated at $787 billion. The bill contains 90% of social policy in the bill, and only 10% of economic policy, which calls into a question its overall objective, i.e. the stimulation of economic growth. The ideological coloring of the plan expressed in a variety of expenses, caused by political, instead of economic feasibility, causes active aversion. This paper evaluates the plan along with presenting recommendation and strategy outline for the use of the funds in the Stimulus package which will most effectively address of stimulating the economy and creating jobs throughout the economy.

Despite that economic indicator being in mind when passing the act, the points of controversy could be understood. There is no unequivocal opinion concerning the expenses on the infrastructure. The matter is that, all infrastructural projects have a considerably big time lag after which they will start to influence the economy.

Numerous researches of the efficiency of the infrastructural projects made after the Second World War came to the conclusion, that the benefits from such programs at the best are insignificant, despite the spent huge financial resources. Hoover and Roosevelt spent arrogant programs in the field of infrastructure after the crash of the stock market in 1929. But in nine years the rate of unemployment in the United States was still more than 17 %. The expansion of infrastructural expenses can result and in immigration growth, not making a big influence on a rate of unemployment. In that sense, infrastructure projects are long term influences, whereas the social stimulators could be seen right after the implementation.

This point could be argued, demand fluctuations, could be considered as the basic source of unemployment. Stimulating the economy could be based on that money will be given first of all to the most requiring because they will spend them at once, i.e. will return it back, instead of hiding it in bank accounts. The rich will save. They are more inclined to accumulate the money, especially during difficult times for economy. The emphasis at such a time should not be dealing with the symptoms that are the economic indicators but rather with the sources of the problems and the organs involved that is the institutions.

Short terms solutions are good when the point there is a need to stabilize the situation, or as a political remark when the effect might take place long after the presidential term will end. Long-term solutions are more effective. Galbriath (2009) in the article “Act on a Larger scale”, provided his vision on the long term solutions that should be implemented where he states the following:

• Have support for the current operations of the state and the local government during the crisis. This should be open ended and include support for public capital investment.
• There need to be an increase in the social security benefits and a lowered age to qualify for Medicare. This combined would reduce the excessive fall in equity wealth of the elderly group and favor the poor.
• Give tax holidays to let the working families have a strong purchasing power. This should be intermediate such that if economic growth resumes then the tax cuts can be scaled back.
• The last from his recommendations is the development of an energy program that will tackle the climate crisis, reduce demand for oil and curb oil speculation as the economy recovers.

In regard of these points, it could be seen that two of them concern the purchasing ability mentioned earlier. In regards of the tax cuts, after signing of the stimulus bill, Barack Obama has declared, that he intends to reduce the deficit of the federal budget by 2012, i.e. by the end of his presidential term. The US president has suggested reducing the government expenditure from 26% to 22% of GDP. Nevertheless, reducing the budget deficit is expected mainly by increasing taxes. The increase of taxes in a recession is the first step in providing its prolongation. In that sense cutting taxes for a single layer, while increasing for the rest of the population will only stimulate the economy for a limited period.

A tax strategy should be put in place with an objective to stimulate growth through creation of new businesses. This should be in terms of improved after-tax returns for entrepreneurs who have boldly taken the risk to take business in such an economic climate. This also gives them an assurance. Such strategies should involve extension of the marginal rate reductions for 5 years or permanently forsake the reinstatement of estate tax after the year 2010 for it discourages old business owners from expanding. Finally, the high American corporate taxes should be cut for at least 10 years to boost international competitiveness Butler (2008) in “Foster growth, but keep spending in check”.

The recommendation should be given in regards of the development program, as the demand for energy will grow and will put the economy in dependence on foreign energy resources. In the energy sector, the plan partially includes the full transition to electro cars, and intermediately hybrid cars. Reconstructing the automobile industry and promoting the purchase of new engines by reducing the costs of transition will stimulate both the manufacturer, and the consumption of new technologies.

Solomon D. (2009) in an article called “Geithner banks on private cash “ reports that there is a way to remove the assets of investors who are trapped in the financial crisis and that is to work with the private sector. In this there is an acknowledgment that monetary or fiscal policy legislations cannot solve the crisis on their own. The risk must be shared with private sector. In this way the public ends up as the ultimate winners if these investments cash in positively.

Accordingly, it could be recommended to put more financing on housing, wherefrom the act it could be seen that housing’s financing is given less attention than for example broadband internet access. However, financial aid for the mortgage sector should be given not only in the form of tax cuts for private companies, but supporting the job market.

The devaluation of Fannie Mae and Freddie Mac is caused by the inability for paying the loans. Thus, by cutting taxes for individuals and financing the development of the private sector accompanied by raising employment will stabilize the situation of the mortgage market. In that matter Fannie Mae and Freddie Mac will restore the stock price of their assets, which will allow them to function and remove troubled loans and securities in their balance sheets to regain the confidence to start lending again.

Big plans are accompanied by big risks. Obama’s stake on that the economic situation will improve earlier, than polls will start to show the fall of national support of the plan. Summarizing the general characteristics of the stimulus plan, it can be seen that it is not so far from effective. Ensuring all financial institutions are properly regulated to avoid risks of further problems and directing the expenditure to priority areas. In that sense, Obama in his speech in Denver, and in other speeches repeatedly underlined, that the Plan of the stimulation of economy is only the first step.

References

1. Bernanke, Ben. “The Financial Crisis and Community Banking.” Independent Community Bankers of America’s National Convention, Arizona. 2009
2. Emmons, B. and Stackhouse, J. “The Credit Crunch Reflects Collapse of a “Shadow Banking System.” ”
3. Ewing, Jack. “Why Europe and the U.S. Disagree on Stimulus” Web.
4. Hoar, William P. “A Bad Deal Revisited — Obama and Fdr”. 2009. New American.
5. Revell, Janice “what you’ll get from the stimulus package.” 2009 .
6. Solomon, Deborah. “Geithner Banks on Private Cash.” 2009.
7. U.S. Monetary Policy: An Introduction. 2009. Web.