Against Ceteris Paribus Theories of International Relations, A Prelude

A quick hit from me, as I'm swamped with dissertation work and am also in grading purgatory. But this, via Tyler Cowen, is interesting:

Since 2008, in response to the economic downturn, most big European countries have cut defence spending by 10-15 per cent. The longer-term trends are even more striking. Britain’s Royal Air Force now has just a quarter of the number of combat aircraft it had in the 1970s. The Royal Navy has 19 destroyers and frigates, compared with 69 in 1977. The British army is scheduled to shrink to 82,000 soldiers, its smallest size since the Napoleonic wars. In 1990 Britain had 27 submarines (excluding those that carry ballistic missiles) and France had 17. The two countries now have seven and six respectively.

And yet Britain and France are commonly regarded as the only two European countries that still take defence seriously. The British point out that, even after the current round of cuts, the UK will have the fourth-largest military budget in the world. Britain is also, for the moment, one of only two European nations to meet the Nato target of devoting 2 per cent of gross domestic product to defence – the other is Greece.

The situation in most other European countries is worse – Spain devotes less than 1 per cent of GDP to military spending. And much European military spending goes on pensions or pay, not equipment. The Belgians distinguished themselves in the Libyan campaign of 2011. But about 75 per cent of Belgian military spending now goes on personnel – causing one critic to call the Belgian military “an unusually well-armed pension fund”.

Britain and France now have one aircraft carrier... combined (they share it). What this means is that the US now accounts for 50% of the world's naval power.

Why does this matter? For awhile I've been hoping to carve out time for a short article with the working title "Against Ceteris Paribus Theories of International Relations". It is intended as a retort to those who claim, based on stylized comparative statics, that US military spending is essentially wasted and therefore those funds should be re-directed either to shoring up the social welfare state or tax rebates. (As of now I'm planning on targeting John Quiggin particularly, who has made similar arguments to these in especially egregious form on numerous occasions, but the scope may broaden, narrow, or shift in some other direction at the point of writing.)

In other words, the article will argue that if the US significantly lowered its military spending the effect would be dynamic, not static: an increase in security dilemmas worldwide, which would be marked by a large and sustained increase in military spending in the non-US world. The net effect could very well be great global military spending; this would be something of a tragedy on its own, since most military spending does not go to uses which expand human dignity and well-being. But it could be worse if security dilemmas lead to arms races which spiral into conflict.

The core of the argument will be this: take away 50% of the world's naval power... do you think anything else might change? Put into the language of economics, some sectors of the economy are natural monopolies; it just wouldn't be efficient to have 100 different telephone companies putting up poles all over the place. Similarly, from the perspective of global welfare, it is probably more efficient for the US to spend disproportionately on its military. There are downsides to this, of course, similar to market monopolies. Nevertheless, the most efficient outcome is likely for the US to out-spend the rest of the world to such an extent that security dilemmas (and concomitant arms races and conflict) do not result, accepting the negatives that go along with this positive.

Anyway, that paper is roughly 20th in the queue so I'll probably never get around to it.

US-Saudi Arms Deal

It looks like my post early this morning about arms sales and economic-political decision making had some pretty fantastic timing. Al-Jazeera and The Guardian are reporting that President Obama is on the verge of authorizing a record $60 billion arms deal with Saudi Arabia in which the US will sell the Saudis "as many as 84 new F-15 fighters, upgrade 70 more, and [...] three types of helicopters - 70 Apaches, 72 Black Hawks and 36 Little Birds" as well as other sophisticated weapons systems.

There are some pretty interesting political questions and angles to this story. The first question: Why? The official explanation being bounced around by both administration officials and analysts is about countering growing Iranian influence in the region. This deal will modernize Saudi defense capabilities and advance short-range offensive capabilities. The administration is trying to use Saudi Arabia to balance Iranian power in the region (not necessarily a new idea). This deal will also deepen and further solidify US-Saudi Arabian cooperation in the Middle East for years to come, as the delivery of the entire package is expected to take roughly a quarter-century.

But why only F-15 aircraft? F-15's are one of the most successful fighter aircraft around (so they're dependable), but they aren't the most advanced nor newest toy on the market. They've been around since the early 1970's. Saudi Arabia has enough resources to splurge on top-caliber fighter aircraft and weapons systems, so money isn't particularly a constraint. Why not the F-22 or the F-35? It looks like Israeli influence played a strong role in preventing the transfer of newer long-distance aircraft with stealth technology to the Saudis as this would decrease Israeli primacy as far as weapons technology in the region. The Israelis also objected to including long-range capabilities on the F-15's that will be delivered as they sought to limit long-range strike capabilities by the Saudis, thus reducing the risk of a future Saudi air strike. Also, the Israelis have put in their own orders for the new stealthy F-35 which is another reason they don't want the US to also sell them to the Saudis.

What does the US get out of all this? Well, the administration will absolutely push the jobs angle pretty hard. During these slow economic times, with mid-term elections coming up in November and a 9.5% unemployment rate, the Obama administration will seek to sell this agreement to the American public by arguing that the deal will create about 75,000 jobs for Americans, although the majority of these jobs will be at companies like Boeing, GE, and Lockheed Martin. These companies don't typically hire construction workers, financial professionals, real estate agents or other employees from hard-hit sectors of the economy. These new jobs will go to highly skilled, college-educated workers, or the types of workers that already have good jobs in a sector with relatively low unemployment rates. Recent graduates in engineering, physics, project management and other aircraft-manufacturing related sectors will also benefit. Yes, there may be indirect employment gains in retail and other sectors as those 75,000 workers in those new jobs spend their salaries, but I wouldn't count on these new jobs to make much of an impact on aggregate demand or unemployment numbers. But that doesn't necessarily matter in the short run. In the eyes of the Obama administration, stronger military ties with Saudi Arabia, countering Iranian influence in the Middle East and the perception that new jobs for Americans are being created is enough of a reason to proceed with the agreement right now.

Arms Sales and Why Economic Decisions are Political

A report regarded as the most detailed evaluation of unclassified global arms transactions data released over the weekend by the Congressional Research Service found that the "Great Recession" has dramatically affected state-to-state arms transactions, with arms sales dropping to $57.5 billion in 2009, a drop of roughly 8.5% from 2008. (It looks like the actual report hasn't yet been released to the public, only to members of Congress, but here is an analysis of US arms sales from the CRS released last December and last September's CRS analysis of conventional arms sales to the developing world).

The United States remained well ahead of all other states with arms sales totaling $22.6 billion which comes out to about a 39% market share, but down from total sales of $38.1 billion in 2008. The report tells us that the largest arms selling states are the most powerful states, as is expected, with Russia, France, UK, Germany, Italy and China trailing the United States. The largest purchasers are middle income countries, with Brazil, Venezuela and Saudi Arabia as the three largest consumers, and Taiwan, the UAE, Iraq, Egypt, Vietnam, India and Kuwait following closely behind.

What effect do these arms sales have on the international arms market? Well, those countries that are purchasing new equipment surely aren't going to destroy their "dated" equipment but rather are going to transfer this old equipment legally or illegally down the income chain to less developed states. In one way, this is a good thing. These poorer countries are able to increase their capacity for self-defense and internal policing and these arms should help consolidate their monopoly on the use of force within their borders at a cheaper price than they otherwise would pay in a market where middle income countries weren't selling their old equipment. The int'l arms market expands, and prices on second-hand arms should decrease. These lower prices should allow states to allocate the savings from arms sales to providing services to their domestic populations.

But, what about the rest of the money that states use to purchase weapons and arms? Is this a productive use of state resources? What effect do these arms transactions have on economic growth, violence and development in these countries? Military/arms purchases tend to be non-productive in terms of direct effects on growth and development; they don't tend to add points to GDP. These purchases could be indirectly growth improving if they increase a state's capacity to ensure peace and stability, thus having a positive effect on investment and production for a variety of reasons (investors face less uncertainty, production and consumption aren't affected by armed conflict, etc.).

Many people argue that these funds should be invested in more efficient and productive sectors such as education, health, and infrastructure instead of on arms purchases and that they don't understand why countries waste money on arms. They argue that developing countries need to maximize growth and help their struggling and poor citizens. So the question is why aren't funds being allocated to their most efficient use? Shouldn't the market reward efficient and productive asset allocation? Why are states leaving percentage points of economic growth on the table and instead investing in arms purchases? Politics.

If there is one thing that this blog tries to make clear it's that politics matters, that politics affects decision-making and that you can't analyze economic transactions unless you bring the politics in. Politicians use arms sales to buy the support of their militaries by providing them with new equipment in order to ensure loyalty. Voters tend not to like it when they perceive their militaries to be ill-equipped, underfunded and not ready to defend their borders or counter an invading force, thus incentivizing politicians to spend on arms. Politicians and states use military spending as a signal to opposing states regarding their military intentions, capabilities and power. Politicians use arms to combat domestic insurgencies, uprisings and other domestic civil unrest. Politicians use arms sales to establish ties with powerful arms-selling states (who also have the world's largest domestic markets and influence in international financial organizations and other IGOs), and they hope that individual arms sales will be coupled with other aid, military ties or inducements in the future. These are all politically-based reasons for why states spend money on arms. Asset allocation in domestic economies is a political act, and that's why we don't always (rarely?) see efficient outcomes.