What America needs

An Interview with Allen Sinai

«The United States needs a ‘Marshall Plan’ financed by America but this time for its own benefit»

Zakim Bunker Hill Bridge, Boston

«The United States needs a ‘Marshall Plan’ financed by America but this time for its own benefit.» These are the words of Allen Sinai, one of the most influential economists in the country who has served as an adviser to former presidents and the Federal Reserve. Sinai, 70, is now head of Decision Economics, a think tank that he founded in New York.

«According to a report by the American Society of Civil Engineers, what America needs is a huge investment of $3.6 trillion (nearly a fifth of the U.S. gross domestic product), obviously spread out across a number of years to solve the ‘significant backlog of overdue maintenance across our  infrastructure networks, a pressing need for modernization of plants (and) urgent renewal’.»

And this could be the ideal time considering the recovery of the American economy…

«The U.S. economy is growing at an accelerated rate. The second quarter saw annualized growth of 2.3% against 0.6% for the first quarter and the third quarter has been confirmed to be at a good rate of growth. Unemployment (5.3% in July) is coming close to what the Fed defines as a level of ‘full employment’, retail sales are recovering and consumer sentiment is at its highest in years. So, in America, the so-called ‘fundamentals’ of the economy are healthy. Even industrial production is running at acceptable levels and the low cost of energy has set off a new industrial revolution. However violent it was, I don’t think the Chinese shock can stop all of this.

Of course, the Fed is marching at a different pace than what had been originally planned for interest rates but you have to understand (Fed Chair) Janet Yellen’s concerns. It’s not by chance that she cancelled her appointment at (the annual summit of monetary policymakers at) Jackson Hole at the end of August to avoid embarrassing debates. It is perfectly understandable that it is best to postpone since inflation has yet to reach expected levels. Let’s not forget that the Fed - in contrast with the European Central Bank - has the double mandate of maintaining monetary stability and supporting employment. In other words, it would never adopt, like what has happened in Europe, any measure that could harm the real economy and the government’s policy choices. It must also be added that the Fed has never really been able to absolve itself of
this double mandate, which is to guarantee an orderly monetary flow and keep unemployment as low as possible. Yellen is particularly sensitive to this second point so it’s not to be excluded that she’s the first to succeed in doing it.»

Apart from the role of the state and the Fed, is there always the possibility that the private sector invests in infrastructure?

«Yes but these public-private partnerships are not always easy to put into practice, especially when it comes to investments that offer a yield that is either uncertain or delayed for a long time. What’s paradoxical is that pension funds, insurance funds and asset managers in America have $30 trillion to put to work and they are often looking for valid investments. And what’s more absurd is that many of these funds are already investing in public works - but they’re doing it in Canada, the United Kingdom, the Netherlands and Australia and not in America.

This is the best time to invest because interest rates are very low (the Federal Reserve is looking at the possibility of raising rates for the first time in years), the dollar is reaffirming its role as the world’s reserve currency and the economy is undergoing a recovery. But it’s a recovery that isn’t as dynamic as the one in the 1990s and the first years of the following decade. I don’t think it’s too far-fetched to say that, without any stimulus for infrastructure, this fragile recovery could turn quickly into a new phase of stagnation, if not a recession. What’s most irritating is that in the various financial plans drafted and implemented to pull America out of the last financial crisis - that of 2008 and 2009 that caused Lehman Brothers to go bust and that spread to Europe but has since been definitely forgotten, at least by us anyway - there was a big part of public investment that was destined for infrastructure.»

How much money are we talking about?

«I’m talking about something of the order of $800 billion to $1 trillion. But this chunk of money went to rescue banks, insurers and the car industry (including Chrysler, which was then bought by Fiat). Only a small amount went to building infrastructure, which should have been the primary goal. That’s because it’s this kind of work that creates more jobs.»

Returning to the American economy and the opportunities for growth and development even in the infrastructure sector, your forecasts for the medium-term are favorable?

«Essentially, yes. We should see a robust American recovery at least for a while yet. Of course, the stock market could fall in a marked way because it comes after six years of uninterrupted growth - the longest cycle in history. Like I said, there are a number of favorable indicators, but also some signs to keep an eye on internally, not taking into account the possibility that there is a sudden shock like the one from China.
Having said all of that, there’s something that keeps me thinking today, and that’s how software purchases and other equipment by individuals and companies are not very convincing. What I’m trying to say is that it doesn’t seem that we’re on a path towards solid growth. And this could eventually harm growth. But this ‘alternative macro risk scenario’ is fairly improbable. For now, we are focusing on valuing the positive elements of the actual positive phase.»

«AMERICA NEEDS $3.6 TRILLION WORTH OF INVESTMENTS IN THE COMING YEARS»

«WITHOUT ANY STIMULUS FOR INFRASTRUCTURE, THIS FRAGILE RECOVERY COULD TURN QUICKLY INTO A NEW PHASE OF STAGNATION»

«IT’S THE BEST TIME TO INVEST BECAUSE INTEREST RATES ARE VERY LOW»