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STUDIES IN
INTELLIGENCE
A collection ol ort-clos on the historical, operational, doctrinal, and theoretical aspects ol intelligence.
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RudimfUaty methodology for studying th* ffltctl of military programs on the Soviet economy.
GUNS OR BUTTER PROBLEMS OF THE COLD WAR George Ecklund
oman commander in. took the men and materials to throwortress wall orew catapult, no one balanced this against civilian use of the resources. Defense was paramount But no organization man in Washington or Moscow today would think oftrategic weapon system without inquiring, among other things, into Its impact on the economy. In thi nuclear age both weapons and organizatioQ have become so complex, even in peacetime, that men must now study carefully tbe economic result of every major armaments decision. The questions asked may range from tbe Industrial Implications, here and in the USSR, of disarmament proposals oo the one hand to the effects for the Russian consumer if Moscow matchesWashington decision to install an expensive aim-missile system on tbe other. This article wiU explore the cootnbutioo of economic analysis in studying the impact of alternative; military programs and will point out some of tbe intelligence problems involved In doing il on the USSR.
Economists recognize thatlobal context the majorrelative to disarmament or increased armament are not economicounterpoise to the adversary in military strength and political initiatives will continue to be the overriding objective over the next decade. The economic problems will Increase in Importance only if the pobtical and military problems come nearer to solution. But analysis of the economic Impact of alternative defense budgets may help us understand the implications of military and political developments as they occur.
It Is the cost of modern armaxnents and tbe stretch-out Inof new military hardware that make it nooessary to consider the economic impact of defense. The world now spends5 bil-boo annually on tbe war industry, roughly as much as the entire income of the poorer half of mankind. The United Statesttla morehird of tbe total, the USSRhird, and the
SEi
or Butter
rest of theittJe lesshird. There are many competing demands for the resources represented by this money, for example increases in personal consumption, more mvestment to accelerate economic growth, war on poverty, expansion of higher education, more aid to developing countries. Moreover, decisions on arms spending made today cannot easily be changed tomorrow by bearing the swords into plowshares. The Pentagon's shopping list has few items in common with thend military hardware ordered two or ^three years^ That isew military order, usually expensive anrThighly specialized, will affect other claimants to the nations output for several years to come.
What is needed for studying the economic Impact of defenseechnique that will translate military spending into civilian spending and vice-versa, so as to forecast the effect on the structure and growth of all civilian sectors as the resources available to them are increased or decreased. One must take intohe quality as well as the quantity of resources left for the civilian economyl mustered back to an Iowa farm wfl] not contribute as much toprogress as an engineer released from the Redstone arsenal tohe regional impact of defense spending, particularly with respect to small cities where the phasing outeapons system may close an assembly plant, forhe speed of military, civilian conversions, which may aggravate the frictions developed in switching resources from production of household appliances, say. to marinehe differences in national abilities to adjust, recognizingaut and muscle-bound economy like the USSR's will not as readily absorb increased defense outlays as one with some unused resources and the tremendous flexibility of the American, Economists have not yet developed standard techniques with which to attack this many-faceted task, indeed have dooe very littlework on it
A Hypothetical Case: The Problems
Military planning today requires some notion of the possible size and structure of the enemy's forces ten years from now and of its economic capability to support them. Suppose one were speculating about the size of Soviet defense outlaysecessarily making assumptions about many things such as technologicaland the shifting winds of coexistence. With the USSR's
Owns or Butter
current defense spending atUusible range of alternative budgets over the next decade might beowillionighillion (reflecting,reatin the magnitude and jophiiHcarMn of strategicith this frame of reference established, the economic impact problems begin.
First, wouldillion difference between the high and the low, if Moscow chose the latter,illion worth of Russian consumption, jrjoreign aid, or Investment, in economic grovvth?ecessarily? IF might yield more (or less) than^Sw blTUoVmconsumption, less (or more)illion in new investment, or some indeterrninatc addition to foreign aid. One of the riddles that research oil the Soviet economy has not yet solved andevote more attention to is the "exchange rate" between military and other spending.
This problemundamental difference between the US. aod Soviet economics. In the Unitedollar whether spent on military RAcD or new bousing, and our price system reflects the spending of economic resourcesay that accords with our national and individual desires. Through the price system people vote for the goods they want, and investors plan their output in line with these pricevery efficient arrangement. But in theuble isuble, because prices are set by Moscow without reference to consumerf more resources are needed for military RotD, the Soviet price system does not determine which sector of the civilian economy will give up these resources. The decision is part of the economic plan, and the resulting shift inmay be quite inefficient. Thus it is difficult to determineuble taken from housing willuble of.
Second, would Soviet CNP grow at the same rate under the high and the low military budgets? That depends on the quantity and quality of men and materials left for the dvilian sector aod on how Moscow divides them between Investment and consumption. The quantity problem by itself is easilyup all the men and the metal and the electronics gear ticketed for defense, and those resources are lost to the civilian economy. The quality problem is morekinds of men aod metal preempted by defense will afleet the rate of technological development and hence the rate of growth in the dvilian economy.
A high defense budget that concentrated specialized resourcesresearch, development, production, and space activitiesseriously with the mtrcduction of new techniques inFor example,isproportionate share ofand engineers are shunted to defense for severalin developing new chemical processes and automationgreatly retarded. Economists would say that growth inproductivity of tabor and capital, measured
because of pressing military needs.
A question quite apart from the character of tbe military bite on resources Is how Moscow will use those that are left, whether to increase (or decrease) the rate of growth of GNP by raising (orinvestment. Butuble to investment willuble, more or less, from corunimphon.
A QuantitaXioe Method
The concept of factor productivity Is useful tn expressing more specifically the Impact on the Soviet economy ofillionillion defense budgets. Historically, during the long, factor productivity in the USSR increasedatennually; but, when defense expenditures grew slowly, this rate was acceleratedtile morend then, when defense expenditures were stepped up, it fell tohis Is the empirical basis for the following hypothesis: high defense exnen&tures preempt critical resources such as RotD andlowdown in the growth of factor productivity. In ourexample the growth lo factor productivity might be% with the high defense budget and% with the low.
The higher rate, of course,aster growth of GNP. But several other factors enter into tbe projections of GNP under the two defense budgets:
Moscow's decision whether to put primary emphasis in tbe civilian economy on investment or on personal consumption; Ifis planned tonnually, the capital stock (plant and equipment) will grow faster than if it ujcreasesnd the faster capital stock grows tbe faster GNP will grow;
The annual growth In the labor force; this Is related to tbe growth In adult population and is estimated
he relative shares of labor and capital In CNP; it Is estimated that the return to labor in the form of wages and other payments amounts tof CNP. and the return to capital.
We are now ready to summariseable the possible impactighow defense budget on Soviet consumption and economic growthecade.
Table 1
^e^Mro^
4X1
3
5.0
ComMilitary Budget:
CNP
Comuraptfao1.0
New FUed Investment . . .
Murtary EipfodJturta
CaseMilitary Budgeti
ConrumpHoa . 5^
New Filed yn
Military 5
The general formula is:
CNP growthsctor productivity growthlabor growthabori share ofcapital growthcapital's stare of CNP)
Substituting figures for the hid. mtllUry budget and priorityconomic growth:
CNP)
ji%
ounded tothe CNP growth ratea have been determined,can be protected, of ^e
eipenditurea and tnveronent, as given, can (ben be subducted from CNP to derive the only
From this quantification of economic Impact it can be seen that the high defenseot compatibleremium on economic growth: it would result in an annual decline% In personal corisumprioh {aboutn per capitahich would be anathema
sec
or Buffer
lo the Soviet leaden and their constituents. If Moscow chose the high mUitary budgetecade. It would probably have to be contentather low) of growth In CNP, and even then personal consumption would Increase moreannually in aggregate, orerIt has during tbe pastears. If. on the other band, Moscow considered the tow military budget adequatet couldubstantialnd the large ta crease ofn personal consumptionabout^'per capitaX or aatern&verfit cou^optf growth in)ore modest increase in
A puzzling question still remains. Would tbe high military budget put too much strain oo the Soviet economy? The new leadership is already stretching resources to the limit in its grandiose plans for expanding agriculture, boosting consumer welfare, keeping abreast of the United States in space, and maintaining the imageynamic economy. If Moscowillion annually for defense5 it Is certain that something else In the economy would have to give Could the USSR really affordigh level of military spending? This question economic analysis cannot answer; it can say how much must be sacrificediven level of defense, but not whether the sacrifice will be made.ation can beto give up for defense dependsost of sociological factors, including the nature and seriousness of the threat, the charisma of the leadership, and the cohesiveness of the people. Itroblem for the combined talents of poll Ileal scientists, sociologists, economists, and other kinds of experts.
The Disarmament Problem
Although disarmament talks have made no dramatic progress, it is wise to think of economic impact along with the disarmament itself. Some of the many forms that as agreement might take are general and complete disarmament, baiting the production of nuclear weapons and deliveryan on research, development, and testing of new weapons, reduction in conventional forces, and annual percentage
rnphastvd that (hex figures an purely hypothetical, serving only to fuustrate tbe methodology.
reduction in over-all defense spending. All of these programs would release men and resources to the civilian economy, but some would be more usefularticular economy than others. Forountryabor shortage might be attracted by the prospecteduction in conventional forces that would release manpower,echnology-poor one mightan on new weapons development in order to free scientists and engineers for industrial research. It would be useful for disaiiruiment negotiatori to Imow which .possible proposals would be^most attractive' to theorrurrunist China, because of ecoootruc impact
The impact of disarmament might be likened to thathift in popularity from vacations at the beach to private swimming pools in the back yard. Demand for services at Ocean City would go down, whereas demand for cement, excavating equipment, and local labor would go up. There wouldimilar shift of men and resources if the Pentagon were to slash its orders for aircraft and the Interior Department let contracts for large new darns.odem,economy there are dozens of industries that would be involved in the switch from planes to dams. While some industries push the finished planes off their assembly lioes, others produce only the engines or the tires or tlie radar systems, and still others make only the metal or only the sulphuric acid that helps make the metal Some sell primarily to other industries; some sell most of their output to final consumers- How will each of these Interrelated industries be affected if military aircraft production is bannedisarmament agreement? Would the subsequent shifts in resources affect economic growth and personal consumption? These are the key impact questions.
One way of getting at the answers Is through input-outputechnique for tracing the complex adjustments that occuration's industrial machine as demand for final products ts cut back or increased at one point orarge 'flow table" is prepared, in which each major industry ts listed onceow and onceolumn. The row shows howells its products to all the industries listed tn the columns, and to final consumers in an extra column. The column shows howuys from all thelisted in the rows, and from the labor market in an extra row. The table thus shows, for example, the total sales of aluminum to the aircraft industry aod as pots and pans to households.
l/jtng Ihe Table
ighly simplified example of the basic flow table in input-outputsable one would have at leastolumns arid rows; in practice it would be likely to have several hundred.
Table 2
HYPOTHETICAL INPUT-OUTPUT TABLE miUkxu oft
TOTiTl
m-.'i rvacnAjEa Pcacausauav Total arSnrax atCoAs. Pvaum Covsvscsm Outtvt
Stla of
Sales el Ceal -
$Jm of Ubor -
It ii apparent from ihr table that toillion of (ted for use by final consumers the Meet aod ml industry used up MO million of tteel. In othert takes steal lo make steel and coal, and tt taken coal and deal to produce coaL If consumer demand far Keel aad coal mould tecmaa byaanasa each, theirehnb)uetell ua bow much additional Meet, coaL aad labor wiB be needed to sstUfy both the increase In coeuumerail-Hon each) and the additional uter-tndnstry purcbasea (Ithu procedure is approximately as followii Tha flow table li uied tnoefficientabia which shows the Inputs of ileal, coaL and labor required per dollar of steel and coal output. Wa aowomputer to Invert tha coefficient matrts andy tha column showing the tocreasca In commee demand Tbe resulting prodort ts the total increase, of tteel. coal, aad labor Deeded.low tablendustries rather thanad tf woalculation asidttpllcationivision. Inversion of the corroi poo ding coefficient matrii require*alculations.
If the Pentagon were to cancel its contracts forl, an economistet of Input-output tablesigital computer could estimate the resulting changes in every Industry affected There wouldecrease in demand for steel, which in turn would require less sulphuric add, less iron, less limestone, and less coal. There wouldeduced demand for synthetic fibres and plastics from the chemical industry. The tire industry would demand less rubber and less nylon and rayon. Employment would be cut at General Dynamics and at some of its subcontractors and suppliers. These areew of tbe ramifications fromingle cut inof military aircraft. The input-output tablesool for tracing
JET
lhe highly intricate chain reaction through ihe Industrial structure and measuring the resulting demands, direct and indirect, on each of the industries.
Aircraft productionomparatively trivial example, Ceneral and complete disarmament wouldubstantial impact, releasingillion in resources annually to both Ihe Soviet and. economy. Input-output tables would show tbe kinds and amounts of material and the quantity^of labor that would beAeed fot^use in civilian industry, This information, together with regional economic data, would form tbe basis for planning the alternative uses. In the USSR the government would make all the decisions as to whatgo where and when. But in tbe United States planners In private industry would bid for the released materials and labor, basing their bids on their estimates of consumer demand; (he government would slep in onlyeographic region or an industry neededhelp to adjust to the new conditions.
Another use for Ihe input-output tablet would be to evaluate the impactarge increase in rnilitary expenditures. They would show the additional effort required by each industry, would point lo the kinds of civilian activities lhat might be cut back, and would help identify bottlenecks.
To construct an input-output table for the USSR wouldreat deal more data than it presently available to Westernbut fortunately tbe USSR has become interested enough in this technique to develop some large-scale tables of its own. Parts of the tables for the9 were publishedussian books and journals have referred to nine national and nineteen regional input-output tables that have been constructed or are in preparation. Soviet writers use input-output data widely in their unclassified papers, implying that the tables are circulated in the USSR and that economists are free to use their statistics in detail. Moscow may In time release some of Ihe more extensive tables for other years.
It is dear that Soviet in put-output tables would be more useful to economic planners in Moscow thannteliigence analysts inThe planners have to solve the problems, whereas analysts only identify them. Nevertheless, the wealth of information thai emanates from an input-output table would help tbe analyst measure the strains in the Soviet economy caused by increased defenseor evaluate tbe impact of resources released through disarmament.
Other Economic Impact Questions
The ready transferability of men and factories from the military to the civilian sector has received relatively little attention. In the event of general disarmament, what amounts and kinds of the material and human inputs to defense could be used in the civilianfter modification orot atumber of excellent studies of this problem have been made in theut the few ^Soviet cccmomists^whoJen on problems of disarmament substantially understate the difficulties that would likely be encountered In thehe costs of transfer would be less in tbe United States than in the USSR, because our market mechanism will more quickly and efficiently switch resources to products the consumers want. Conversion probably would cause more problems for lhe Soviet economy and require greater effort than is now recognized in Moscow, and some of our economic Intelligence efforts should be directed to the specifics of the consequent dislocations and effects on the development of tbe economy.
Educational progress has been an important factor, though difficult to quantify, in the rapid economic growth of the USSR With the increasing complexity of modernreater share of the highly trained scientists and engineers In the USSR are now used in defense, and the implications of this for the future development and growth of civilian Industry are uncertain. In order to refine his Impact studies, the economist needs more information on educational achievement in the USSR, includingecade ahead,etter understanding of tbe contribution that education makes to economic growth.
Economists often say that defenseuite separate sector of the economy that drains resources away from other uses. Although prima facie true, this assertion mayossible feedback from defense to the civilian economy. To what extent, if any, does technological know-how developed specifically for defense benefit the civilian economy? In the United States, military-space technology is often diffused into lhe dvilianhousandth-inch aluminum-
' BcnMtand the Tba Economist
InteUigeoo* Unit, The Economic Egeeu of
* I. S. Clagolcv. VUyaiiye rozoruthmhfo na rkonomiiu (The Economic Impact of Disarm. S. Clagolev,konomkhetliye problem^ raxoru-lAcntytt (Economic Problems of
coatedeveloped for the ECHO satellite is now usedeflective insulator for very low temperature vessels; superiorrolls have been made from the polyiulfide rubber developed for east solid ptopelbuitsj sintered aluminum oxide ceramic developed for rocket nozzles, is now used in industry for special check valves and resistor cores. Little is known about interchange of technology in the Soviet economy between the military and civilian sectors;s probably not as widespread as here. Itn ^important matter toowever, because the extent to which military RorD filters into the civilian sector will affect his estimate of factorand future growth of Soviet industry.
Original document.
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