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The Surprising Threat to the American Economy

Unemployment hits new lows and stocks hit new highs. So why aren’t Americans opening their wallets?

By Kopin Tan               

Student debt may or may not be a ticking time bomb like subprime mortgages. It isn’t securitized and sold, but its pervasive spread saps spending. William Potter/Shutterstock            

As a nation, we ask a lot of our consumers, whose spending supports two-thirds of Earth’s biggest economy. In tough times, such as after the 9/11 attacks, we urged consumers to shop and eat out as a sort of civic duty. Today, we export American-style consumption to the world, with shopping malls in communist China, and McDonald’s feeding more than two million customers a day in the Middle East.

These ought to be boom times for the U.S. consumer, what with U.S. unemployment plumbing a 16-year low of 4.3%, wages ticking up, and the stock market hitting record highs. Yet Americans aren’t spending with quite the same gusto expected of consumerism’s standard bearer. Real U.S. personal spending is growing at about 2.6% year over year, when it should be closer to 4%, given the much-ballyhooed global recovery. Year-over-year growth in U.S. retail sales peaked at 8.3% in mid-2011 and has since slowed to 4.5%. Consensus expectations for U.S. consumers to shop more and more to extend our 95-month-long expansion may be doomed to disappoint.

The market can smell the apathy. Consumer-discretionary stocks are up 13% this year, second only to the mighty tech sector, yet most of the recent gains have come from just four subsectors—namely internet and direct-marketing retail, restaurants, cable, and home-improvement retail, notes Ned Davis Research. In fact, 70% of the sector’s 2017 returns have come from just four stocks: Amazon.com (ticker: AMZN), McDonald’s (MCD), Comcast (CMCSA), and Home Depot (HD). The rest, from autos to footwear stocks, are struggling, although bricks-and-mortar retailers’ woes are compounded by the existential despair caused by online competition.

No, consumer spending won’t fall off a cliff, or down the mall escalator, and speculation about consumers’ demise has tended to prove premature. Thanks to the levitating stock market and recovering home prices, household net worth is 37% higher than it was at the housing-bubble peak—and with 30% of our net worth now tied to stocks and mutual funds, let’s hope the market continues to behave. 
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So what’s curbing consumers’ enthusiasm? For a start, our consumption boom of the past few decades was fueled by a massive credit expansion, but that may have taken us as far as we can go. Total household debt in the last quarter reached a record $12.73 trillion, surpassing the $12.68 trillion that Americans owed at the height of the housing bubble. Borrowing costs are still historically low—the 30-year mortgage rate is near 3.9%, and mortgage debt-service payments recently were just 4.4% of disposable income, the lowest in decades.

But with the Federal Reserve raising interest rates, consumers, starting with marginal borrowers, are feeling the squeeze. And credit-card companies, including Capital One Financial (COF) and Discover Financial Services (DFS), are reporting rising charge-offs.

It doesn’t help that loan growth is starting to slow. Is it due to the uncertain timing of tax cuts and regulatory reforms, or just the natural exhaustion of economic growth that has been pulled forward, leaving little pent-up demand? Or are companies tapping the capital markets instead of banks? “I’ll answer: all of the above,” says Peter Boockvar, chief market analyst of the Lindsey Group.
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THIS COULDN’T COME AT A LESS CONVENIENT TIME. Our economy is increasingly dependent on debt, and it now requires more and more credit to eke out the same percentage point of economic growth. It’s telling that year-over-year growth in personal spending on goods routinely surpassed 11% during the economic expansions of the 1960s and 1970s. But by the 1990s, that figure never got above 9%, and during the 2002-07 expansion it peaked at just 7.7%. In the current expansion, spending growth on goods got as high as 5.9% in early 2015. It was recently at 3.6%.

Our attitude toward spending and debt has changed, as well, and the bursting of the housing bubble has deflated our love of conspicuous consumption. Families are saving more, despite being penalized for saving by zero interest rates. It makes sense that the U.S. savings rate has historically moved in lockstep with interest rates, but since the financial crisis, savings have increased, even as rates have declined. It’s no coincidence that the aftermath of the crisis spawned today’s trend toward responsible consumption and, with it, bull markets in locally sourced kale, cage-free eggs, and Earth-friendly fabrics; it’s almost as if we need to feel virtuous before we can open our hemp wallets.

Household wealth data also mask the income inequality that is becoming a political hot-button issue. The world’s four biggest central banks may have expanded their collective balance sheets to a whopping $18.4 trillion, but the trillions they’ve pumped into the markets did not flow equally to all. Just 20% of the income growth during the early 1950s expansion went to the top 10% richest households, but by the current expansion their share grew to 80%, according to Pavlina Tcherneva, of the Levy Economics Institute at Bard College. Today, 76% of family wealth in America is held by the top 10% of wealthy families, and just 1% is in the hands of the bottom 50%, notes Conrad Hackett, of the Pew Research Center.

The inequality is especially acute among millennials, who are often maligned as entitled, but who—let’s be fair—came of age after 9/11 and started work during one of the worst recessions.

The percentage of 18-to-34-year-olds still living with their parents has increased to about 32% from 27% over the past decade, and the average debt a graduating college senior is saddled with swelled to $35,000 in 2015 from less than $10,000 in 1993, notes CLSA strategist Matthew Sigel. Sure, mortgage rates are cheap, and home prices have bounced back since the crisis. But with U.S. homeownership down to 63% from its recent peak of 69%, and with rents rising, many millennials aren’t enjoying the fruits of the economic recovery.
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Student debt is a particularly big albatross. Thanks to soaring tuition costs, it now makes up 11% of total household debt, versus 5% in 2008, and the burden increasingly is borne by millions of parents who have borrowed to help pay for their children’s education. A third of new student loans made recently are considered subprime, and 11% of student loans have gone 90 days or more without payment. Student debt may or may not be a ticking time bomb like subprime mortgages. It isn’t securitized and sold throughout the financial system quite like mortgage debt was, but its pervasive spread saps spending.

THERE’S A REASON “MATERIAL GIRL” EVOKES SUCH NOSTALGIA today: It’s because we’re no longer living in the same material world. Think of the U.S. as a big company—let’s call it America Inc.—with more than 100 million full-time workers, $18 trillion in sales, and $20 trillion in debt. The challenge it faces of middling growth is further compounded by escalating expenses. A detailed 2016 study by Gallup senior economist Jonathan Rothwell found that since 2007, real U.S. gross domestic product per capita has grown by just 1%, but our expenses have only gotten bigger. In particular, the share of national spending eaten up by three items—health care, housing, and education—has ballooned from 25% in 1980 to more than 36% by 2015.

It’d be one thing if consumers were getting more bang for those bucks, but Rothwell found, for instance, that literacy among 17-year-old Americans peaked in the early 1970s, and that math scores haven’t really improved much since 1986. Meanwhile, health care eats up 16.9% of our GDP, versus 8.8% for the average rich country in the Organization for Economic Cooperation and Development. No country comes even close to what Americans spend on health care each year, yet the U.S. ranks 36th in the world on life expectancy at birth.

For some time now, Stephanie Pomboy of MacroMavens has highlighted the accumulating stress on consumers. “People who save are those who have the wherewithal to save,” she says, “while poorer consumers are borrowing out of distress to fund purchases normally paid for by income.”

The fact that delinquency rates are starting to turn higher “across all segments of the consumer space, despite near record-low interest rates, is a powerful indictment of the strong consumer narrative so widely embraced,” Pomboy says. How can folks have trouble paying their debts with unemployment at 4.3%, mortgage payments low, and net worth at record highs? “One shudders to imagine what delinquencies would look like if rates actually did move up, or—heaven forbid—stocks went down,” she adds.

Of course, a big tax cut this year could help, but a spending spree isn’t guaranteed. After all, we had “a tax cut of historical proportions” when gasoline prices fell from $3.69 a gallon to about $1.76 from mid-2014 to early 2016, which was akin to a $200 billion personal tax cut, notes David Rosenberg, Gluskin Sheff’s chief economist and strategist. But consumers merely responded by raising their savings rate to 6% from 5.8%.

OVER THIS PAST WEEK, the conference board’s survey showed further moderation in, among other things, the share of respondents who plan to buy a home or a major appliance, and auto buying plans retreated to a 10-month low. “I would say that frugality is back in style,” Rosenberg writes, “But it really never did totally go away this cycle, did it?”

Perhaps that’s why stock investors increasingly are flocking to multinational companies with big foreign operations. In May, the 50 Standard & Poor’s 500 stocks with the most overseas revenue gained 4.4%, while the 50 with the most domestic sales fell 0.9%, says Bespoke Investment Group.

A stock market trading at all-time highs carries with it the burden of great expectations, but investors might be looking to the burgeoning middle class overseas to pick up the spending slack and goose the global economy. American consumers have done their fair share, and they deserve a break. 



Trump’s Rogue America

Joseph E. Stiglitz
. Trump climate announcement


NEW YORK – Donald Trump has thrown a hand grenade into the global economic architecture that was so painstakingly constructed in the years after World War II’s end. The attempted destruction of this rules-based system of global governance – now manifested in Trump’s withdrawal of the United States from the 2015 Paris climate agreement – is just the latest aspect of the US president’s assault on our basic system of values and institutions.
 
The world is only slowly coming fully to terms with the malevolence of the Trump administration’s agenda. He and his cronies have attacked the US press – a vital institution for preserving Americans’ freedoms, rights, and democracy – as an “enemy of the people.” They have attempted to undermine the foundations of our knowledge and beliefs – our epistemology – by labeling as “fake” anything that challenges their aims and arguments, even rejecting science itself. Trump’s sham justifications for spurning the Paris climate agreement is only the most recent evidence of this.
 
For millennia before the middle of the eighteenth century, standards of living stagnated. It was the Enlightenment, with its embrace of reasoned discourse and scientific inquiry, that underpinned the enormous increases in standards of living in the subsequent two and a half centuries.
 
With the Enlightenment also came a commitment to discover and address our prejudices. As the idea of human equality – and its corollary, basic individual rights for all – quickly spread, societies began struggling to eliminate discrimination on the basis of race, gender, and, eventually, other aspects of human identity, including disability and sexual orientation.
 
Trump seeks to reverse all of that. His rejection of science, in particular climate science, threatens technological progress. And his bigotry toward women, Hispanics, and Muslims (except those, like the rulers of Gulf oil sheikhdoms, from whom he and his family can profit), threatens the functioning of American society and its economy, by undermining people’s trust that the system is fair to all.
 
As a populist, Trump has exploited the justifiable economic discontent that has become so widespread in recent years, as many Americans have become downwardly mobile amid soaring inequality. But his true objective – to enrich himself and other gilded rent-seekers at the expense of those who supported him – is revealed by his tax and health-care plans.
 
Trump’s proposed tax reforms, so far as one can see, outdo George W. Bush's in their regressivity (the share of the benefits that go to those at the top of the income distribution).
 
And, in a country where life expectancy is already declining, his health-care overhaul would leave 23 million more Americans without health insurance.
 
While Trump and his cabinet may know how to make business deals, they haven’t the slightest idea how the economic system as a whole works. If the administration’s macroeconomic policies are implemented, they will result in a larger trade deficit and a further decline in manufacturing.
 
America will suffer under Trump. Its global leadership role was being destroyed, even before Trump broke faith with over 190 countries by withdrawing from the Paris accord. At this point, rebuilding that leadership will demand a truly heroic effort. We share a common planet, and the world has learned the hard way that we have to get along and work together. We have learned, too, that cooperation can benefit all.
 
So what should the world do with a babyish bully in the sandbox, who wants everything for himself and won’t be reasoned with? How can the world manage a “rogue” US?
 
Germany’s Chancellor Angela Merkel gave the right answer when, after meeting with Trump and other G7 leaders last month, she said that Europe could no longer “fully count on others,” and would have to “fight for our own future ourselves.” This is the time for Europe to pull together, recommit itself to the values of the Enlightenment, and stand up to the US, as France’s new president, Emmanuel Macron, did so eloquently with a handshake that stymied Trump’s puerile alpha-male approach to asserting power.
 
Europe can’t rely on a Trump-led US for its defense. But, at the same time, it should recognize that the Cold War is over – however unwilling America’s industrial-military complex is to acknowledge it. While fighting terrorism is important and costly, building aircraft carriers and super fighter planes is not the answer. Europe needs to decide for itself how much to spend, rather than submit to the dictates of military interests that demand 2% of GDP. Political stability may be more surely gained by Europe’s recommitment to its social-democratic economic model.
 
We now also know that the world cannot count on the US in addressing the existential threat posed by climate change. Europe and China did the right thing in deepening their commitment to a green future – right for the planet, and right for the economy. Just as investment in technology and education gave Germany a distinct advantage in advanced manufacturing over a US hamstrung by Republican ideology, so, too, Europe and Asia will achieve an almost insurmountable advantage over the US in the green technologies of the future.
 
But the rest of the world cannot let a rogue US destroy the planet. Nor can it let a rogue US take advantage of it with unenlightened – indeed anti-Enlightenment – “America first” policies.
 
If Trump wants to withdraw the US from the Paris climate agreement, the rest of the world should impose a carbon-adjustment tax on US exports that do not comply with global standards.
 
The good news is that the majority of Americans are not with Trump. Most Americans still believe in Enlightenment values, accept the reality of global warming, and are willing to take action. But, as far as Trump is concerned, it should already be clear that reasoned debate will not work. It is time for action.
 
 


Business needs to show there is more to the US than Donald Trump
   
The world will watch to see if words and deeds prove an irrevocable change in approach

by: Lawrence Summers




In economics as in life things often take longer to happen than you think they will and then happen faster than you thought they could. So it may turn out with the catastrophic international economic policies of President Donald Trump. It is possible that the past week will be remembered as a hinge in history — a moment when the US and world started moving on a path away from the peace, prosperity and stability that have defined the past 75 years.

For all that has gone wrong in the past 75 years, they have witnessed more human betterment than at any time in human history. The rate of fatalities in war has steadily declined even as growing integration has driven global growth and improvement in life expectancy and living standards.

Progress is too slow and not well enough shared but Americans have never lived so well. This has been driven by remarkable developments in human thought especially in science and technology and a relatively stable global order that has been underwritten by the US.

Will these trends continue? Optimists have suggested that despite the revanchist and often anti-rationalist rhetoric of his campaign, Mr Trump has in the international sphere surrounded himself with rational establishment advisers and has either retreated or been stymied by Congress on proposals like launching trade wars or building walls.

Until last week, they had a reasonable argument. No longer. We may have our first post-rational president. Mr Trump has rejected the view of modern science on global climate change, has embraced economic forecasts and trade theories outside the range of reputable opinion, and relied on the idea of alternative facts rather than evidence-based truth.

Even for Conservative statesmen like Ronald Reagan, George W Bush and Henry Kissinger the idea of a community of nations has been a commonplace. Now HR McMaster, national security adviser, and Gary Cohn, director of the national economic council, who have been held out as the president’s most rational globally minded advisers have now taken to the Wall Street Journal to proclaim that “the world is not a global community”.

They advance a theory of international relations not unlike the one that animated the British and French at Versailles. The objective of international negotiation is not to establish a stable peaceful system or to seek co-operation or to advance universal values through compromise but to strike better deals in “an arena where nations, non-governmental organisations, and businesses compete for advantage”.

In service of this theory, the president last week renounced any claim to American moral leadership by failing to convincingly reaffirm traditional US security commitments to Nato and abandoning participation in the Paris global climate agreement. The latter is probably our most consequential error since the Iraq War and may well be felt over an even longer term.

There will be consequences to all of this as there were to the pursuit of short term advantage rather than systemic stability at Versailles. One does not need to subscribe to pessimistic versions of Graham Allison’s Thucydides Trap about the perils associated with a rising power to worry about Chinese efforts to fill the vacuum left by the US.

How, after the events of the last week, can America’s adversaries and allies alike not follow Angela Merkel, German chancellor, in concluding that the US is now far less predictable and reliable? How can the responses be other than destabilising?

It is essential that leaders in American society signal clearly their disapproval of the course the administration is taking. History will judge poorly business leaders who retain their positions on Trump administration advisory boards in the hope of being in a position to cut favourable deals. Elon Musk of Tesla and Robert Iger of Disney have taken the right and principled stand by resigning their presidential appointments. More should follow.

What is to be done? The US president is not America. The world will be watching to see whether President Trump’s words and deeds represent an irrevocable turn in America’s approach to the world or whether they represent a temporary aberration.

The more that leading figures in American society can signal their continuing commitment to reason, to common purpose with other nations, and to addressing global challenges the more the damage can be contained. And of course the Congress has a central role to play in preventing dangerous and destabilising steps.


The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary


The Devil in the Details of a Korean War



Summary      
If the devil is in the details, then war is particularly devilish because, for all its cruel drama, it’s a study in the mundane. Understanding war requires an understanding of things like supply lines, logistics, transportation, provisions, military hardware, command and control structures, and the like. Even the best and bravest soldiers in the world will have a hard time winning a war if they don’t have food or ammunition or reliable communication or any other instrument of war.

It is with that in mind that we assess North Korea. As Pyongyang, Washington and other regional players prepare for the prospect of war, North Korea’s nuclear program and ballistic missile capabilities have received undue amounts of attention. Important though they may be, they have less bearing on how the war will be fought than does North Korea’s conventional military. It boasts a large arsenal of weapons, and a lot of soldiers available to man them, but it is old and decrepit, outmatched in nearly every respect by that of its enemies. In fact, North Korea’s inability to keep up militarily with South Korea and the United States is what prompted the pursuit of a nuclear deterrent in the first place.

We’ve written about what a first strike would look like in the event nuclear deterrence didn’t do what it was supposed to: deter an attack. This deep dive, in some respects, is an extension of that analysis. It will focus on North Korea’s military hardware, the size of its armed forces, the way it is structured and commanded, and what kind of war all these things will entail.

Introduction

The next Korean war will be informed by the first, which started in 1950 and technically never ended. That war, however, was fought in a very different world. The Cold War had just begun, and Stalin encouraged Kim Il Sung to proceed with his invasion of the South. It was a low-cost maneuver for the Soviet Union to expand its sphere of influence, and North Korea didn’t believe that South Korea was important enough to the United States for Washington to intervene. It was a miscalculation by both; the United States, still formalizing its policy of containment, was unwilling to let the Soviets dominate the Korean Peninsula.

It would not be the only miscalculation made in the war. After Gen. Douglas MacArthur landed at Incheon, he pushed north toward China instead of establishing a defensive line at the neck of the peninsula, threatening China in the process.

Washington also misunderstood China’s willingness to join the fray. It had, after all, just undergone a communist revolution of its own and was trying to manage domestic unrest. But join the war Beijing did, and for reasons consistent with its geopolitical imperatives: It wanted to prevent its own encirclement, much as it had done for millennia. It was not about to let a U.S. contingent amass on its border. China caught the United States off guard when it crossed the Yalu River in October 1950, and in doing so transformed the war from a war of mobility to one of stalemate.

Both sides learned valuable lessons. North Korea came to believe that the United States was a dangerous, irrational actor whose international moves could not be predicted. The United States learned that there are lines on the Korean Peninsula that cannot be crossed because they invite Chinese involvement. Neither side is likely to make the same mistakes again.

Forcing a Hand

A war with North Korea would consist of two battles with distinct objectives. The first would be to eliminate Pyongyang’s nuclear capabilities. It would be the primary objective and indeed the justification for an attack. With no nuclear threat, there is no engagement.

The second objective would be to protect South Korea from North Korean retaliation. No one really knows the true status of Pyongyang’s nuclear program, but suppose for a moment it has a deliverable nuclear weapon. Striking a U.S. asset or ally with one would force Washington’s hand into retaliating in kind, thus wiping out the North Korean regime. Its leaders will therefore rely on their large arsenal of conventional weapons – namely artillery. The artillery batteries, many of which are located near the demilitarized zone, can severely damage heavily populated areas in and around Seoul. The U.S. and its allies must plan accordingly.

Either way, the United States would have to somehow assess the damage it has inflicted on North Korean nuclear facilities. Washington surely has a good sense of what North Korea has, but its intelligence is inherently imperfect. If even one facility were left somewhat intact, the United States would have started perhaps the largest military conflict in a generation without achieving its primary objective. It cannot rely on air and satellite imagery alone to assess the damage, so either it or South Korea would have to deploy special operations forces to inspect suspected locations. All the while, North Korea would be retaliating.

Artillery

The primary instrument of its retaliation would be its large, diverse collection of artillery. Most was acquired from the Soviet Union during the Cold War, though some of it was designed and produced in North Korea. The problem is that much of this equipment is outdated.

As it developed its nuclear program, North Korea allocated more resources to ballistic missile technology than it did to its conventional weapons, leaving them to fall into disrepair. That they are poorly maintained and infrequently upgraded, however, doesn’t mean they’re not functional; they can still inflict a tremendous amount of damage.

And the damage would come from a variety of weapons. Data on North Korea’s military capabilities are obviously hard to come by. (In fact, all figures henceforth should be understood as estimates.) Still, according to the International Institute for Strategic Studies, North Korea has approximately 21,000 artillery pieces. This includes a mix of self-propelled and towed field guns, multiple rocket launchers, and mortars.

Self-Propelled and Towed Guns

In 2016, North Korea had approximately 8,500 self-propelled and towed artillery pieces (the former does not require a vehicle to transport it, the latter does). This includes guns and howitzers, which differ in their trajectory, caliber and angle of fire, but for the sake of this analysis “guns” will refer to both. The ages of the guns likewise vary, though self-propelled guns tend to be newer than towed guns, some of which predate World War II. Its newest self-propelled guns are from the 1990s.
 



 
Generally, newer artillery with larger calibers can fire their munitions farther. The 122 mm towed guns, which are a smaller caliber, have a maximum firing range of about 6-10 miles (10-15 kilometers). Larger caliber self-propelled guns such as the 170 mm M-1989s can fire up to 25 miles, placing Seoul squarely within range of those positioned on the demilitarized zone. North Korea also has 130 mm and 152 mm self-propelled and towed guns, the ranges of which vary and can be extended using rocket-assisted munitions.

There are downsides to bigger, longer-range guns, of course. They have a slower rate of fire and take longer to reload. Some of North Korea’s smaller guns can fire as many as 8-10 rounds per minute, whereas its large guns may fire only 1-2 rounds per minute. Either way, they enable the military to maintain a constant barrage on South Korea.

Multiple Rocket Launchers

Another type of conventional artillery in North Korea’s arsenal is the multiple rocket launcher. MRLs fire rockets rather than tube artillery shells. They have a greater range but are slower to load and less accurate. The International Institute for Strategic Studies estimates that North Korea possesses 5,100 MRL pieces ranging from 107 mm to 300 mm.

The 300 mm MRL system warrants special note. First tested in March 2016, it is North Korea’s newest and largest-caliber platform. (For the military junkies, it resembles China’s SY-300, Russia’s BM-30 and Pakistan’s Hatf-9 Nasr platforms.) IISS notes that North Korea has “some” 300 mm MRLs but does not provide a quantity. 38 North, an organization that analyzes North Korea, believes the military has 18-36 of these. Their true maximum range is disputed; it is believed that a rocket traveled nearly 95 miles during the March 2016 test, though the South Korean Defense Ministry placed it closer to 110 miles.

       (click to enlarge)

 
Some suspect that the 300 mm MRL platform is capable of carrying a nuclear weapon; Pakistan claims that it deploys small nuclear weapons on its slightly larger Hatf-9 Nasr MRL, according to 38 North. North Korea would, of course, first have to miniaturize a weapon small enough to fit it, and there is no evidence yet to suggest it can do so. 


 
Still, MRLs are a useful addition to North Korea’s artillery catalogue, though they don’t provide the same cadence of attack as do artillery guns. And in any case, the military has fewer rockets, so it would therefore exhaust them more quickly.

Mortars

North Korea is believed to possess 7,500 mortar pieces of 82 mm, 120 mm and 160 mm calibers. Mortars are small and mobile enough to be carried in support of infantry. Since they are meant to be used much closer to enemy infantry positions, they have a much higher trajectory than artillery guns, and therefore a much shorter effective range. They can’t reach Seoul, but they would be used against advancing infantry.

Command and Flexibility

The utility of North Korean artillery depends on two related issues: the ongoing availability of ammunition and leaders’ ability to effectively issue orders. Formally, North Korea’s military command structure borrows much from the Soviet model; that is, it is highly centralized and depends heavily on orders issued directly by the supreme leader. If artillery teams cannot receive orders, they naturally become less effective.

A study by Andrew Scobell and John M. Sanford of the U.S. Army War College titled “North Korea’s Military Threat: Pyongyang’s Conventional Forces, Weapons of Mass Destruction, and Ballistic Missiles” describes the command structure as a “highly inflexible Soviet-style military doctrine which emphasizes decisions being made at the top and carefully scripted war plans (which no one outside of North Korea has seen), discouraging operational flexibility and initiative.” This suggests that North Korean war plans – plans that will almost certainly need to change, as is the case in every war – will be slow to adapt to developments on the battlefield. In a paper called “Party-Military Relations in North Korea and the Security Situation on the Korean Peninsula,” Robert Collins, a U.S. Army veteran and North Korea observer, elaborates on the implications of this highly centralized command structure: “[It] … leaves very little, if any, flexibility for the unit commander. The issue is that on the battlefield, the [North Korean army] commander will lack the initiative to adjust to battlefield conditions due to inflexibility based on orders that are subject to political approval, not subject to situational assessments.”

The problem with studies such as these is that they run the risk of underestimation. The North Koreans know that the United States has studied their military structure and that, therefore, one of Washington’s first moves would be to cut lines of communication. If it cut those lines, and if Pyongyang failed to delegate some aspects of command to those in the field, North Korea would almost certainly lose the war quickly. It’s reasonable to believe, then, that the North Koreans have a plan that accounts of this possibility.

This line of reasoning is corroborated by the existence of distributed artillery ammunition stores. While North Korea has major national-level storage facilities, it also has a number of unit-level storage depots, according to a 2000 report by the secretary of defense to the U.S. Congress. Many of these are hardened artillery sites, or HARTs, which are located at multiple spots along the DMZ. A report by the Nautilus Institute for Security & Sustainability, a defense analysis firm, describes the HARTs as heavily fortified, in the interior of caves or tunnels, with spaces that are large enough to hold artillery and ammunition. The report is notably dated – it’s from the 1980s – but that only reinforces the point: The military, already protected by the terrain, has had decades to entrench itself, overcome disruptions to lines of communication and supply, and disperse its ammunition depots. The existence of these stores suggests that isolated emplacements are expected to continue to fight. 


In gaming out a war, we need to consider the possibility that the southern emplacements are a bluff and that the regime would never delegate command for fear of rebellion. This is something that U.S. intelligence suspects. And in this scenario, command would remain centralized.

In the Air

The nature of the North Korean command structure, and the extent to which artillery punctuates the countryside, requires U.S. air power to fully neutralize. And the United States has a lot of aircraft close to theater. The B-1, B-2 and B-52 strategic bombers, for example, are located in Guam and would be deployed to take out North Korean target sites. But a bombing campaign would expose them to attack either from the North Korean air force or North Korean surface-to-air missiles.




 
North Korea’s air force is lackluster. It’s most modern plane is the Soviet-designed MiG-29, which was designed in the 1970s and introduced in the early 1980s. Many of its planes are even older. The U.S. aircraft carriers deployed to the region could, in theory, intercept North Korean aircraft, but if Pyongyang is relying on its planes, it’s already lost the war, since it would mean its SAMs were largely destroyed.

Indeed, SAMs, and anti-aircraft artillery, are the way in which the military compensates for its air force’s obsolescence. The country has a variety of these kinds of installations throughout the country. Some examples of them include:

  • SA-4: A mobile system designed to target high-flying bombers. The SA-4 has a range of about 34 miles and can reportedly reach altitudes of around 80,000 feet.
  • SA-5: A medium- to high-altitude system with a relatively long minimum range of about 37 miles. This limits the system to engagements against relatively large, lumbering targets at ranges up to 155 miles. 
  • SA-17 Gadfly: This system has four missiles laid abreast of each other on the launcher. The SA-17 reportedly has a range of about 19 miles and an altitude of 46,000 feet. Both the missile launcher and its radar system are mobile.


 
None of these individual systems would stop the U.S. Air Force. But together they create a web of good defensive capability. Their value stems from their abundance and their arrangement, a configuration the United States has yet to face. It is, therefore, not something to be taken likely. The SAM systems may not be particularly sophisticated, but scrappy and plentiful can win battles too.

Given their range and altitude, these three SAM systems are more likely to threaten U.S. strategic bombers. But North Korea has other SAMs in its arsenal. In fact, it is suspected of having a SAM battery comparable to Russia’s S-300 – a similar apparatus was seen during a 2010 military parade. The S-300 is a long-range SAM developed in the Soviet Union in 1979, but it has continually been modified and upgraded and is still used by Russia today. Depending on the specific model, the S-300 can have a range up to 190 miles.

One way to eliminate North Korea’s air defenses would be with a Suppression of Enemy Air Defenses attack. This would be carried out by aircraft equipped with radar-targeting missiles. The United States had three squadrons of F-16s configured for this kind of attack in South Korea even before it deployed a fourth in February. North Korea would have to decide whether it wanted to use its radar to detect enemy aircraft and thus reveal itself to radar-targeting systems, or turn its radar off and hope for the best.

In addition to SAM systems, North Korea is also believed to have 11,000 anti-aircraft guns, the calibers of which range from 14.5 mm to 100 mm. These are rapid-fire machine or heavy guns that often fire an explosive charge to increase the chance of damaging aircraft as they fly by. As with artillery, firing rates decrease as caliber increases. The 14.5 mm guns – the ZPU-1, ZPU-2 and ZPU-4 – can fire approximately 450-600 rounds per minute. The 100 mm KS-19, however, can fire only about 15 rounds per minute. Anti-aircraft guns are less effective at targeting and bringing down aircraft than are missile installations.


 
Of course, the United States could also suppress North Korean artillery with stealth bombers, which can, in theory, evade the military’s air defense systems. There is some speculation that these bombers would be in danger – Russia claims that some of its later-model S-300s are designed specifically to detect stealth planes, and over the weekend North Korea tested an anti-aircraft missile the government claims can shoot down stealth fighters. It’s very unlikely, however, that its SAMs are as advanced as Russia’s – even if the Russian claim were true – and the weekend test proves only that North Korea is acting provocatively, not that its air defense systems are so far ahead of where most experts believe they are. In fact, there are few instances of stealth fighters being shot down. In 1999, an F-117, a stealth attack bomber, was shot down over Serbia. Using modified Soviet radar systems, the Yugoslav air defense systems were able to spot the aircraft.

South Korea in the Meantime

South Korea, meanwhile, will take massive amounts of casualties as the United States tries to neutralize North Korean artillery. If air power cannot suppress the barrage or the air defenses, the government in Seoul will be in a difficult situation: It will have to decide whether it will take out artillery positions the only reliable way it can – through an infantry assault.

This is a highly unpalatable solution. It would be slow and violent, with infantry moving position by position, supported by mechanized cavalry needed to penetrate the caves and mountains the soldiers alone cannot. And all the while, Seoul would continue to be battered by artillery.

If it comes to this, the United States could use something in its arsenal that would neutralize all of North Korea’s artillery: tactical nuclear weapons. Washington would inform Pyongyang of its intention to use them, forcing North Korean leaders to make a tough decision of their own: If the U.S. had already knocked out North Korea’s nuclear facilities (Pyongyang’s primary deterrent) and threatened to take out its artillery (Pyongyang’s secondary deterrent) with tactical nukes, the Kim Jong Un regime would have to weigh the costs of sacrificing its only remaining means of survival. If the government’s objective is to survive, it seems unlikely that it would be willing to forfeit its only remaining source of leverage, so it would probably capitulate to its enemies before it surrendered its artillery.

In the Sea

North Korea knows that time isn’t on its side. Its oil reserves will quickly dwindle, leaving its vehicles and naval vessels without fuel. Some estimate that North Korea’s oil reserves would last a few weeks; others estimate closer to two months. But all the oil in the world won’t change the fact that its means of waging war are, in any case, limited.

And so North Korea could deploy just two strategies. The first and more likely is that it will hold down in a defensive position and use the threat of its artillery to exact concessions from the United States. North Korea’s army boasts 1 million soldiers. (That number climbs to about 6 million if its Red Guard – a force consisting of untrained peasants that could nevertheless be mobilized and provide some degree of resistance – is included.) The United States and South Korea have no desire to fight that many people, or the artillery batteries they helm. The risk to this strategy is that North Korea will simply run out of oil and ammunition. Still, the government would probably stop firing and try to negotiate a settlement. After all, it loses all its leverage once its ammunition runs out.

The U.S. and South Korea could, notably, try to break the stalemate by launching an amphibious assault, but doing so would incur many casualties on land and on sea. North Korea’s navy may be old and inferior, but it could lay mines that would damage U.S. vessels even after it was destroyed. Submarines, difficult as they are to detect, could also threaten U.S. aircraft carriers. The U.S. and South Korea would win the naval contest, of course, but not without cost.

The second and far less likely strategy would be a North Korean assault on the South. The DMZ is too heavily fortified to do so by land, so it would do so by sea, opening up a second front behind enemy lines with amphibious landings using its sizable special operations forces. North Korea is estimated to have 10 landing ships and about 260 landing craft that can each carry 35-50 troops ashore. According to Scobell and Sanford’s U.S. Army War College paper, North Korea can transport as many as 15,000 troops at sea at a given time, though the military would likely use smaller groups to avoid detection. The principle behind the strategy is to occupy as much of the Korean Peninsula as possible to maximize its leverage in peace negotiations. But as with the rest of the North Korean military, the equipment that would be used for such an assault is unlikely to make the strategy a success. And even if it did land its troops successfully, North Korea would still have to face South Korean and U.S. soldiers.
Conclusion

North Korea would be hard-pressed to win this war, if in fact it breaks out. The U.S. and South Korean militaries are strong and sophisticated, and they would likely be joined by international allies – as evidenced by the arrival of French and British naval deployments in the Pacific for joint military exercises. The North Korean military may have more bodies, but that will take it only so far. And the fact that it has few natural resources, not to mention few partners willing to trade with it in the event of a war, puts victory even further from Pyongyang’s grasp. The best that North Korea can hope for is a peace agreement that allows the regime to survive.

Still, North Korea won’t go down without a fight. The very legitimacy of the Kim regime is built on its perception of defender of the realm. If it fails to respond to an attack, it would be putting itself at risk of internal rebellion. So while it may lose the war, the chances are good that the conflict will spill over to the South, implicate a lot of countries, and inflict a lot of damage.

And this is due to the composition of the North Korean military, the analysis of which has enabled us to predict how a potential war would be fought. But war is unpredictable. Leaders can attempt to game out every possible scenario in war, but once it begins, there are so many variables that new scenarios have to be constantly examined. There are aspects to this war, then, that we have not even addressed. What if China enters the conflict? What if Japan closes off its airspace to U.S. aircraft? What if there is a coup in Pyongyang that overtakes the Kim regime? All of these are extremely unlikely to happen but need to be considered nonetheless.

On May 28, U.S. Secretary of Defense James Mattis said a war with North Korea would be catastrophic, a statement many have interpreted as an excuse not to fight. This is the wrong interpretation. Washington believes a nuclear North Korea is a direct threat to its national interests, and it does not make the kinds of preparations it has made if it isn’t serious about following through. Both sides are finding it more difficult to back down.