The Economist

The EconomistAugust 4th 2018 United States 31

2 bigger budget deficits crowd out private-
sector investment.
In the long run America’s 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 president’s economic team may
protest that his tax reforms should stoke in-
vestment raising America’s 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 America’s persistently disap-
pointing wage and productivity growth
over the past few years comes partly from
monetary policymakers’ 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-
omy’s brakes slowly now a more abrupt
stop might be required later. In doing so
they are making Mr Trump’s hopes of 3%
growth harder to realise. To the president
this may seem cruel. But he is not alone in
the driver’s 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 –

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 Trump’s 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 “great-power competition”.

Russia and China sometimes acting in

concert are challenging the mastery of the

world’s 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 China’s rise and a resurgent

Russia meant “America no longer enjoys a

monopoly in sea power or sea control”.

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 America’s dominance. When

President Vladimir Putin boasted in March

about Russia’s deadly new weapons he

showed a video ofthe hypersonic Kinzhal

missile knocking out a cluster of ships.

Bluster perhaps—but the intention was

clear. China claims to have developed a

uniquely stealthy submarine.

Although America’s 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 “readiness is as impor-

tant as new hulls” says Nick Childs an an-

alyst with the International Institute for

Strategic Studies.

In about a decade America’s 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

2028. 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