Priming the Pumps

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Some opponents of fiscal expansion have accused it of consisting of make-work projects of little social value. What does Garney story say about this view?
The case study discusses the importance of the fiscal stimulus for an industry in a time when economy is not running well. The metaphor used is ‘priming the pump’ states that before an old fashioned water pump can be utilized, it is necessary to add some water into it. Administration of Obama announced the Recovery Act of $7 billion for various drinking water and wastewater projects. Undoubtedly, the main beneficiary of the policy was the companies like Garney. For instance, it was a source of finance for about 9 water and sewerage related projects of the company that were on hold before due to unavailability of the funds. However, it must be kept into consideration that these projects were planned by the administration anyway and the role of the government as ‘priming the pump’ initiated the projects that will eventually prove to be a source of benefit for the general public in a form of better water and sewerage related facilities. Moreover, availability of funds generated additional income and work for people employed in that sector. This added effect would not have been possible from private sources due to bad economic conditions at that time. So, it can be said that though primary benefit of the stimulus rests within the few hands like major companies in the sector, it can have a trickledown effect on the general population and workers if, those funds are properly utilized.
 

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Based on this case, would you say that government spending was competing with the private sector for the scarce resources?
No, evidence for this proposition is not quite strong. On the contrary, government provided $7 billion to the water management sector in the form of Recovery Act, which was very few compared to the overall industry expenditure of $100 billion on their projects. This implied that still most of the funding was coming from the private sources. Even though, Garney was able to secure funds for nine of its projects under the government scheme, it accounted for only 10% of its total business. It had to secure 90% of its project funds from either the personal equity or the private sources. Moreover, when the performance of the company was evaluated, the statistics were less encouraging than the period two years ago, even in the presence of government stimulus. So, if the belief of the desirability of fiscal expansion is assumed, the sector was in a need of more governmental funding to improve its profitability. Therefore, the government funding is acting as an aid to the private sector rather than competition.
If a water and sewer project is something we want to do eventually, is the depth of recession a good or a bad time to undertake that project why?
The answer of the question depends upon the conditions and opportunities available. It can be seen that the government is more active in providing funds to sectors when the economy is running poorly. Provided that the conditions on government’s funds are more favorable for the company than the private funding that demand more return on their money, recession is surely a good time to start a project from the profitability point of view. However, on the other hand, the amount of the stimulus announced is insufficient to finance all of the projects and you still have to rely on the private sources as shown in the case of Garcy. So, it is possible a company is not able to secure any fund at all. If the recession is quite severe, the government is also likely to cut its funding further to the water management sector due to two reasons. Firstly, the deep recession demands an attention to all the sector and government have to diversify its stimulus for all sectors. Secondly, recession implies lack of income generation that will also hit the government revenue. Similarly, the situation can be even more complicated when a company has already started its project by partial funding from the government at the time of recession and it had to borrow from the private sources afterwards, which are seen to be stricter in terms and conditions in depression, to complete its projects. This kind of the scenario may hit profitability and continuity of the project very badly. So, a recession may or may not be a good time to start a new project in water management sector.

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