Investing Knowledge

This article comes from our parent site fool.com. Although it refers to the US economy, we believe it is also relevant to a UK audience. After all, where the US leads, everyone else usually follows, as we found out during the sub-prime crisis.

Let me put this simply: I'm bullish on America.

I hardly think I'm walking out on much of a limb there -- after all, the US has not only an incredibly hardworking labour force, but an extremely ingenious one. It's home to some of the most advanced technology in the world, and historically the people have had an undying "can-do" attitude that's helped the country through major wars and major economic disasters.

While that gives me confidence that the US will push through this nasty economic episode, there is a big, glaring roadblock that I see between recovery and future growth. And it pains me to say that the roadblock is the United States government.

The ingredients are there

Simplifying just a bit, economic capacity stems from a country's labour force, capital stock (as in machines), natural resources, and technology. Having a lot of each can be a good thing, but more crucial is having each in the correct proportions to get the most out of the combined resources.

The US lays claim to technology leaders like Intel (NASDAQ: INTC - news) and Microsoft (NASDAQ: MSFT - news) , leading industrial equipment manufacturers like Caterpillar (NYSE: CAT - news) , and notable natural resources such as the largest proven coal reserves in the world.

Sure, China and India may have much larger labour forces, but the US makes up for that by having a highly skilled group. And the country may have a seemingly insatiable thirst for oil, but it's even made the most of that by being the home of globetrotting oil and gas supermajors like ExxonMobil and ConocoPhillips.

In short, there are the ingredients to fuel a healthy economic recovery.

But it depends on how you use them

The thing about ingredients is that they're often only as good as your ability to use them properly. Throw together some flour, eggs, cocoa powder, and a few other things, and you can make a pretty tasty chocolate cake. But add some Italian dressing to the recipe or use 10 times the recommended amount of sugar and you'll turn something delicious into something downright gross.

The same holds true for economic ingredients -- used properly, they can lead to growth and prosperity; hampered and misdirected, they can lead to stagnation and underemployment. Historically, the U.S. has made the most of its economic spice rack by allowing the free markets to direct how these resources should be allocated.

In times of economic distress, the government has been known to use taxpayer money to attempt to jump-start economic activity. In theory, this can be a good play that greases the economic wheels and gets business and consumers to start spending again.

What not to do

However, Uncle Sam walks a fine line because there are a great many ways that this largesse can be misused and lead to nothing more than economic confusion. The current "cash for clunkers" program is a perfect example of how government "help" can go badly astray.

It may seem like a good thing that the program will give a near-term economic bump by helping car-makers like Ford and car-dealers like AutoNation (NYSE: AN - news) . However, the new cars being bought will, in many cases, simply reduce demand for new cars in years to come. The program will also no doubt encourage many Americans to take on yet more of the consumer debt that helped get us into this mess in the first place.

Plus, not only are we not likely to see much of a lasting economic impact from these car sales, but pumping money into the car industry will direct labour and equipment to that sector of the economy when it could almost certainly be more useful elsewhere.

Clunk it if you got it

I can't blame folks for taking advantage of the cash for clunkers program; after all, it's free money. It's my money and all other taxpayers money too, but it's free for the taking nonetheless.

Programs like this will perform like economic crack -- a high that wears off quickly and leaves the users desperate for more. So as bullish as I am on Americans and the resources in the US, I'm concerned about what kind of recovery we'll end up seeing if the government insists on wasting money this way.

> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson, who does not have an interest in any of the companies mentioned in this article.