The United States has approximately $150 trillion of total consolidated private and public assets and $100 trillion total net wealth (assets minus liabilities). The $1.5 trillion monetary stimulus portion is about 1% of our asset base, so for context, it is far from being financially ruinous. We are a very wealthy nation with vast financial and intellectual capabilities.
The Federal Reserve action of lowering interest rates and driving the 10-year treasury yield into negative real yield territory causes concern that it will eventually produce inflation. But maybe not. The Great Recession of 2008 and 2009 contain interesting and important economic history lessons regarding inflation. In response to this severe downturn, interest rates were reduced to near zero and the world was flooded for many years with US dollars, usually causing concern that inflation will ensue, yet inflation remained stubbornly low; as economic theory might have predicted, the classic scenario of too many dollars chasing too few goods did not unfold.
The world was simply too productive, spitting out goods and services at a rate unheard of just a few decades earlier, primarily due to new technologies in the fields of manufacturing, communications, transportation, and information systems. What ensued were too many dollars chasing too many goods, neutralizing the inflationary effect. By logical extension, deflation, to some extent, would have most likely occurred absent the monetary and fiscal stimulus. In short, inflation (or deflation) is the interplay between the money supply and productivity.
One of the best barometers and leading indicators of inflation is a basket of commodity prices which have, in real terms, generally been depressed over the past decade, not government statistics which are lagging indicators and can be improperly defined and collected, hence less reliable.
If this is truly a national emergency, a substantial fiscal stimulus is warranted, assuming it is applied properly. And that is a big assumption. Though large chunks of fiscal stimulus are designed to meet short-term needs, like a spike in immediate health care costs associated with the virus, and to soften a variety of financial hardships, there will be a significant set-aside for longer term projects to stimulate the economy in an attempt to avoid a recession.
Even prior to this national emergency, there was much debate regarding infrastructure projects to “rebuild our crumbling infrastructure.” The response should always be to build a business case, on a project-by-project basis, for public dissemination. With a conservative set of underlying assumptions, each project should estimate the discounted future cash flows to determine if it makes economic sense and, given that we have limited resources, compared to the net returns of other competing projects. There should always be (but probably are not) a backlog of these “shovel-ready” projects with well thought out and documented financial plans on the shelf at all times for just these kinds of emergencies.
Equally important, a rigorous post-audit process of public sector capital projects to measure what was projected in cost outflows and future beneficial inflows to the actual results, are required for accountability and full transparency on public record. Developing better forecasting skills and techniques is essential to enhance future efficiency in the allocation of limited capital. You get what you measure. And if you don’t measure it, you won’t get it.
Since interest rates are at historic lows, it makes sense to undertake valid infrastructure projects now versus later when both costs and interest rates may be at significantly higher levels. The reality is we probably have been significantly underinvesting in legitimate public infrastructure projects. The time is now when the economy desperately needs the appropriate stimulus.
Though often projects make sense and have public support, many people hesitate because it is subject to the wheeling-and-dealing of politicians, who have a dismal record of efficient execution. Coupled with this, are special interest constituencies which risk steering public funds to projects that have the most influential backers, not the highest return. Additionally, public sector projects have a storied history of massive cost overruns—poor planning, cronyism, corruption, and costly union preferences in certain jurisdictions. These factors serve to cast doubt and undermine public support for otherwise valid investment projects that benefit future economic growth and opportunity, as well as providing meaningful employment and additional economic growth in the short run.
Over a decade ago, we undertook infrastructure stimulus measures to confront another crisis, with less than stellar execution and results. Let’s get this one right by developing a new set of processes and procedures that will not only make this stimulus package much more effective, but will serve us well whenever a massive crisis arises requiring similar measures. If accomplished, it would represent a valuable silver lining to this crisis.
All eyes are on our political class to see if it is up to the task.
Richard Smith has a range of business experience from private development stage start-ups to $300-million public companies. As chief financial officer, he led a successful $132-million initial public offering (IPO) and many private placements to fund and capitalize high-growth companies. Currently, Smith is the Managing Director of an advisory firm specializing in analyzing economic and financial conditions and their impact on financial projections and operations. Smith received his MPhil from Cambridge University and is a certified public accountant (CPA).