The EconomistAugust 4th 2018 United States 31
2 bigger budget deficits crowd out private-
sector investment.
In the long run Americaâs economic
potential depends on how many workers
it has and how productive they are. The
workforce is growing more slowly than in
the past partly because the large baby-
boom generation is retiring and partly be-
cause the surge of women into paid em-
ployment has run its course. Given how
disappointing productivity performance
has been in recent years it is unsurprising
that bodies like the CBOand the Federal
Reserve seem sceptical that the American
economy can sustain a real long-run
growth rate far above 2%.
The presidentâs economic team may
protest that his tax reforms should stoke in-
vestment raising Americaâs economic ca-
pacity. Business investment grew by an an-
nualised rate of 7.3% in the second quarter
of 2018. That is welcome but it cannot real-
ly be attributed to the tax package. About
half of the overall rise reflected a high oil
price stimulating investment in mining ex-
ploration shafts and wells. Alternatively
critics of the Federal Reserve gripe that its
gloomy forecasts have been self-fulfilling
and that Americaâs persistently disap-
pointing wage and productivity growth
over the past few years comes partly from
monetary policymakersâ unwillingness to
let the labour market roar.
If Mr Trump is wrong and the economy
cannot sustain a growth rate of 3% policies
to try to get it there may only stoke price in-
creases. The rate-setters at the Federal Re-
serve are keenly aware of this risk. On July
31st new figures revealed core inflation (ex-
cluding volatile food and energy prices) to
be 1.9% close to the 2% target. Although
they held interest rates steady when they
met on August 1st two more increases are
expected this year. Rate-setters fear that a
burst of inflation is too close for comfort
and that if they do not squeeze the econ-
omyâs brakes slowly now a more abrupt
stop might be required later. In doing so
they are making Mr Trumpâs hopes of 3%
growth harder to realise. To the president
this may seem cruel. But he is not alone in
the driverâs seat. 7
Good but hardly record-breaking
Source: Bureau of Economic Analysis
United States GDP % change
2000 02 04 06 08 10 12 14 16 18
10
5
0
5
10
+
on a year earlier â
on previous quarter
annualised
I
N SOME democracies politicians must
be cajoled into spending money on ar-
mour and missiles rather than schools and
hospitals. Not in America. The $716bn de-
fence bill for 2019 now passing through
Congress provides for an even faster arms
build-up of ships and submarines in par-
ticular than President Donald Trumpâs ad-
ministration proposed.
The House and Senate vied with each
other to pile on procurements before com-
promising on a plan that accelerates the
pace of submarine-building (raising from
ten to 12 the numberof attack submarines
to be ordered by 2023) and adds a third air-
craft-carrier to the two requested by the
White House. Two extra combat ships of a
smaller type were thrown in too.
This contest to procure more hulls re-
flects something more than machismo or
political posturing. Since the final weeks of
the Obama administration the navy has
been committed to rebuilding its strength
to 355 ships from about 280 now. Ameri-
can defence planners speak bluntly about
the main reason for this relentless con-
struction. The cause is the re-emergence of
what James Mattis the defence secretary
calls âgreat-power competitionâ.
Russia and China sometimes acting in
concert are challenging the mastery of the
worldâs oceans which the American navy
with its ten aircraft-carriers has taken for
granted since the end of the cold war. Ad-
miral John Richardson the chief of naval
operations expressed current thinking
when he told a congressional panel in
March that Chinaâs rise and a resurgent
Russia meant âAmerica no longer enjoys a
monopoly in sea power or sea controlâ.
Neither country can begin to match the
American fleet ship for ship. But both are
investing in technologies from hypersonic
missiles to undersea drones that could
threaten Americaâs dominance. When
President Vladimir Putin boasted in March
about Russiaâs deadly new weapons he
showed a video ofthe hypersonic Kinzhal
missile knocking out a cluster of ships.
Bluster perhapsâbut the intention was
clear. China claims to have developed a
uniquely stealthy submarine.
Although Americaâs politicians and
military leaders concur that a rapid
build-up is needed they do not quite agree
on how it should be achieved. Whereas
legislators emphasise new boats some na-
val planners argue that the 355-ship target
could be hit sooner if more money were
spent on refitting old vessels. Bolting new
weaponry such as laser guns onto old
hulls will be tricky given the colossal
amount of electric power that the latest
weapons will gobble up. But Russia is try-
ing to show that smart new missiles can be
put on old tubs.
For American admirals tightening up
operational procedures on vessels now in
their prime is another priority following a
bad run of fatal accidents and collisions
last year. For them âreadiness is as impor-
tant as new hullsâ says Nick Childs an an-
alyst with the International Institute for
Strategic Studies.
In about a decade Americaâs fleet of at-
tack submarines will shrink reflecting de-
cisions taken in calmer times. Even if new
boats are built as fast as possible the num-
ber will fall from 52 now to around 42 by
- Bryan Clark a naval specialist with
the Centre for Strategic and Budgetary As-
sessments an influential think-tank be-
lieves Congress is right to hurry along with
submarine building. He sees no need to ac-
celerate surface-ship construction at least
until a new frigate has been designed. In
this case America could be throwing too
much money into the sea. 7
Defence spending
Pushing the boat
out
Politicians are vying with each other to
spend more on defence equipment