THE IMPACT OF DEFENSE EXPENDITURES IN THE US AND THE USSR (S-2698)

Created: 4/12/1968

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The attached tyugaraalaa Is responsive to Sfisator Sjcdncton's retnnatpril-It fang been coordlnctod.

Pie Impact, of Defense Expenditures In the U3 and

07 defense end space expenditures* have been about the same share of gross national product <CWP) in the US end tbe USSR. Thisoercent, bas been tolerable in both countries but tbe impact of the defense costs and the allocation of the remaining resources hove been significantly different in the two countries.

Consumption (or personal outlays for goods and services plus government expenditures for health and education) in the USSR67 was aboutercent of CMP cccujared withercent in the US, when meoaurea In domestic prices. Soviet consumershole receivedhird as each in real terms as US consumers, callor capita basic, aboutercenttsuch.

Ibe Soviet pattern of priorities is very clear. Except in periods of war or Intense defensenvestment is tho favored sector end bos been steadily growing asshare of Soviet

* his memorandum are defined topurchase, of goods and services for tbe militaryexpenditures on atomic energy development, and outlays^technology. Defense exclude, .tockpilingmUitary aid, veterans benefits and interest on the ll tne latter categories of expenditures wereub outlaysraction of GNP would beof the USSR, ia large part because the USSR he's, ina large shore of Its national

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'<3ia floj of araal ontrrsafcani. io3a to uncut 3Atha of that to, {assured iarriecs, aad lnvuatsmt in industrycrcsr thenenio cnsalvo Infusion of InJoottjaiit Into thsfE can not. produced'a eienifictntly eirericr rt.t?vth whichey Ganlfcetation of rvdetin Soviet inefficiency. Ia0 tho Scrrtet GiT?ercent par yearhat of tte USercent; for icdustricl growth tho cca-pariomercentercent.

Tta relative priorira abova crcn com dr=zuticclly ln tlw follovins tshls, which corcro perccntcss cdlccatioa of durcoloj in vc two countries In

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Ihe Soviet consumer'o desire for automobiles and household appliances, in the style and abundance of Western Europe,ong way from fulfillment.

While defense nominallyhare of resources no larger in the USSR than In the US, It doesarger share of the durables, that ls, the machinery and equipment. Further, this defense equipment is the most advanced, and highest quality machinery available ln tba USSH. The design and manufacture of weapons absorb the best of the scientists, engineers, managers, and skilled workers, in short tho personnel with the innovative talent that Soviet industry so obviously lacks. This lack ic reflected in the declining growth in output per ruble of net loves Went.

The loot two yearo haveery large incrouse in defense spending in the US. In the USSR the Increase is smaller but still substantial, froa aboutillion rubles5 to aboutillion 8 the Increase is slowing down in tho US andso be slowing somewhat ln the USSR. In both countries the increase in defense has reduced or slowed down Investment. In the USSR this bus taken the form of reduced rates of growth for Investment in both agriculture and industry. The slowdown in industrial investment Is penalize-the nuch-noedod modernization of industrial plant and equipment. Buoyed by two good years in agriculture the Soviet leadership io cutting bock its ambitious plans for increasing the park of tractors, cooblnes, and other equipment In agriculture.

This policy has the appearance of gambling on the weather, auu is likely to be reversed in the first year of bad weedier.

In the US, investment (especially housing construetior), ff7 with rising defense expenditures. Consumptionto rise butlower pace. While theosts nave struined government finances and have aggravated an already serious balance of payoents deficit, the impact on ohe allocation of resources has been moderate. Defense plus space, at aroundercent, io about the same shore of GNP ao5 and much lesj than in tho Korean War period. Health and education expenditures have held steady recently atercent of GNP, which is larger than5 Investment appears to be recoveringnd no serious bottlenecks in capacity are likely to inhibit aof rapid growth.

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