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October 02, 2008

Economic Power
Posted by Ilan Goldenberg

Matt Yglesias has a great piece today explaining the relationship between the Iraq War and the economic crisis and how the two interplay.  He also managed to find a video that explains the full economic costs of the war which is well worth a watch.  Matt writes:

When the public sector spends money on new rail lines or on educating children, that spending increases the stock of physical or human capital available to the country and allows us to do more in the future. When the private sector spends money on new tractors or office buildings, much the same happens. But the outputs created by military spending can't be used to make additional new goods and services. Instead of being used to generate additional wealthy, much military equipment is simply destroyed as a result of use (in the case of bullets and explosives this is, of course, the whole point), and many of the soldiers fighting the war end up dead or maimed.

I think that's mostly right.  Although there is one exception.  Military R&D spending can sometimes be leveraged into the private sector and can create long-term wealth.  The best example is the internet, which was originally started through investments and technology in the Defense Department.

There's also the question of long term vs. short term security tradeoffs.  The economy acts as the base of military power.  It can be transformed into immediate military power at any time but at a long-term cost of reducing your military power.  A country can invest in its economy in the short-term causing long-term economic growth, which creates a bigger base from which it can invest in military power.  Or, it can invest in military power in the short-term understanding that this will have a cost to it's economy and thus long-term military effectiveness. 

The problem right now with the Bush administration sreategy is that we are investing well over $500 billion per year in defense once you include Iraq and Afghanistan, while China, the country most likely to present a significant long-term strategic challenge to the U.S., invests only $60 billion.  That is a pretty dramatic handicap that we are creating  for ourselves, especially when most of the spending is for weapons programs that might be obselete by the time the Chinese really are ready to compete and the fact that we still hold a dramatic military advantage.

So, what does the right balance between near-term security and long-term economic power look like?  I support the Richard Betts approach

The correct way to hedge against the long-term China threat is by adopting a mobilization strategy: developing plans and organizing resources now so that military capabilities can be expanded quickly later if necessary. This means carefully designing a system of readiness to get ready -- emphasizing research and development, professional training, and organizational planning. Mobilization in high gear should be held off until genuine evidence indicates that U.S. military supremacy is starting to slip toward mere superiority. Deferring a surge in military production and expansion until then would avoid sinking trillions of dollars into weaponry that may be technologically obsolete before a threat actually materializes. (The United States waited too long -- until 1940 -- to mobilize against Nazi Germany and imperial Japan. But starting to mobilize in 1930 would have been no wiser; a crash program in aircraft production back then would have yielded thousands of ultimately useless biplanes.)

This seems utterly sensible.  Invest heavily in a surge capacity that focuses primarily on R&D investments, which have more spillover into the rest of the economy and maintain our long-term economic vitality.  It also has the convenience of not scaring the Chinese into an arms race and forms the basis for a national security strategy that we can actually afford. 


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