EFTA00606051.pdf

E: J AN 01.27.2017 ECONOMICS: US PERSPECTIVES NATIONAL DEFENSE: IS ANOTHER SPENDING BOOM ON THE HORIZON? + Joseph G. Carson, US Economist and Director—Global Economic Research, President Trump has promised to increase defense spending—and there's support from key members of Congress. If a large multiyear Display 1 plan is approved, it would represent a sharp reversal from what has Defense Spending Comes in Big Waves been the weakest trend in defense spending in the past 5O years. Nominal Defense Spending And the timing and scale would have important implications for the Reagan 80 outlook on growth and inflation. 70 gulklup 60 Vietnam Iraq SO War War National Defense —The Trump Plan For example, Senator John McCain, who 40 President Trump has promised to deliver chairs the Senate Armed Services 30 an ambitious program to rebuild the US Committee, recently released a white 20 military. It would include modernizing paper on defense spending, Restoring 10 0 Inner? US nuclear weapons systems, investing American Power. McCain argues that the 110) more in cybersecurity, enlarging the navy's US has underinvested in the military for 1201 fleet and increasing the number of fighter several years, and that it is now vital for EA 72 81 90 98 07 16 aircraft for the air force. Trump's plan also the US to substantially increase funding for includes additional military personnel—well the Pentagon. His plan calls for a $640 Through September 20.2016 reartear movng rgerage over 100,000, according to some billion defense budget for fiscal year 2018, Str-rce Bureau of Economc Ana,O4 and liner Anaryks estimates. which is $58 billion above the current budget baseline. Moreover, the McCain The details of Trump's first Pentagon defense plan urges an additional $430 occurred in the mid-1960s, during budget will form part of the overall budget billion in military spending over the next President Lyndon Johnson's term, and ran he'll submit to Congress in late February or five fiscal years. for five years. That was tied to the military early March. The actual funding request for engagement in Southeast Asia. the current fiscal year (which ends Defense Spending Patterns Are Unlike September 30) must be completed by April Other Federal Programs The second large defense-spending boom 30—that's when the current legislation History shows that defense spending occurred during the first four years of the funding the military budget is set to expire. programs are unusual in that they're neither Reagan presidency. This buildup was part cyclical nor countercyclical. Most often they of Reagan's political and military strategy More important, Trump's blueprint for the are based on military and political strate- to rebuild the military apparatus after what Pentagon budget could set the baseline gies as well as ongoing readiness to he saw as years of neglect. for defense spending for at least the next respond to or engage in global encounters. four years. It's also worth noting that The third major increase started during the Trump's military expenditures could be at Based on historical gross domestic first term of President George W. Bush. the low end of what some in Congress are product (GDP) data, there have been three This one was linked to events surrounding proposing. large defense-spending programs in the 9/11 and the following events in the past 50 years (Display 1). The first buildup Middle East. 1 EFTA00606051 From a political and military standpoint the In contrast, the US economy in the mid- spending program to add to growth and Trump defense plan parallels the goals and 1960s was already in its fifth year of put upward pressure on labor costs and objectives of President Reagan's military expansion, the jobless rate of 4.5% was inflation in the coming years. Keep in mind push. And with McCain's more aggressive relatively low and inflation was tame that we're coming off the weakest five-year plan aligned on the same premise of (roughly 1.5%). Nonetheless, the extra defense spending trend in the past 50 modernizing and improving the readiness defense spending boosted domestic years, so Trump's defense spending need of the US military, Trump will likely have the demand growth and added significant not match any of the prior three to have a backing of this influential member of the pressure to labor costs, materials and major impact Republican congressional leadership. supplies, and product prices. So much so Stay tuned for the unveiling of Trump's that the acceleration in consumer price Today's Economic Backdrop — budget and pay close attention to the inflation (from 1% in 1961 to near 6% in Similar to the 1960s defense spending request. A large 1970) from the start to the end of that The economic and financial implications of multi-year program would definitely lift business cycle was one of the largest of a large, multiyear defense-spending plan inflationary pressures. While we wouldn't any economic growth cycle during the must be weighed against the economic expect an acceleration like that in the postwar period. environment at the time of implementation. 1960s, a sustained rise of 100 to 200 And from a historical context, today's Today's economic backdrop looks similar in basis points in general inflation would still conditions have more similarities to the many ways. The economy has been in seem reasonable—and far above what the economic setting of the mid-1960s than recovery for seven years, the jobless rate is Federal Reserve and financial markets are during the defense buildups of the early in the mid-4% range and inflation is stable currently expecting.. 1980s or early 2000s, which were either (at around 2%). 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