Leadership: Russia Goes For The Gold

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November 24, 2009: After going back and forth on defense budget increases in the last year, Russia announced that they will be spending over $50 billion in the next year. This will include nearly $34 billion for procurement of weapons and equipment from Russian firms. This says two things. First, Russia believes the worldwide economic recession is over, at least in Russia. Second, Russia considers survival, and growth, of their defense industries a high priority goal. The reason for this is that their defense industries, which were world class at the end of the Cold War (in 1991), have since slipped because of over a decade of sharply reduced (over 80 percent) sales. Most of the sales decline came from a similar cut in Russian defense economy, and the loss of sales to East European nations (whose defense spending was controlled by Russia until the East European communist governments were overthrown in 1989). The Russian economy collapsed in 1991 because of decades of inefficient central control, and overspending on military. Russia had started an arms race with the West in the 1960s, and refused to give this up until it was too late.

There is some doubt that the Russian defense industry will be able to meet the new demand, unless they divert equipment from export customers. In any event, export customers are getting harder to come by, and the government is under great pressure to come up with additional money for replacing or refurbishing its aging (Cold War era) weapons and equipment before this 1980s era stuff becomes totally useless. By increasing purchases from Russian defense industries, research on new weapons can continue, and these companies can obtain export sales and remain profitable and self-sustaining.

Meanwhile, the really big defense spender continues to be America. Unlike Russia, the United States can afford massive defense spending. For example, U.S. military operations in Iraq, Afghanistan and elsewhere have, since September 11, 2001, cost about a trillion dollars. That seems like a lot, and it is. But it's not a lot like it used to be. For example, World War II cost the U.S., at the time (in 2009 dollars) over four trillion dollars. That amounted to over 33 percent of U.S. GDP (at the time). The current war on terror is costing about one percent of GDP. So while war may appear to be getting more expensive, relative to the amount of money available, it's actually getting cheaper.

The initial cost of World War II, and most wars that came after it, will eventually double because of the cost of taking care of the veterans. There were over a million casualties in World War II, many of them serious, with long range effects. The long range health problems were not anticipated, nor were the more expensive treatments. You have to pay. The vets are owned a debt that cannot be avoided.

As a percentage of GDP, military spending continues a decline that has been going on since the 1960s (when, because of the $686 billion cost of the Vietnam war, defense spending was 10.7 percent of GDP). That went down to 5.9 percent of GDP in the 1970s and, despite a much heralded defense buildup in the 1980s, still declined in the 1980s (to 5.8 percent.) With the end of the Cold War, spending dropped sharply again in the 1990s, to 4.1 percent. For the first decade of the 21st century, defense spending is expected to average 3.5 percent of GDP. This is about what Russia is now spending. Most of the current defense budget is being spent on personnel (payroll and benefits), and buying new equipment to replace the Cold War era stuff that is wearing out and to pay for operations in Iraq and Afghanistan.

This trend is all because of the industrial revolution of the 19th century, which created a lot more money, much of which nations promptly squandered on wars they could not have afforded earlier. The American Revolution, for example, cost the United States less than $2 billion. The main reason for the low cost, compared to later wars, was that there simply was not a lot of wealth (money or goods) to scrounge up for the war.

The United States has always been enthusiastic about spending enormous amounts on weapons, ammunition, supplies and equipment for the troops, with the idea of keeping U.S. casualties down while still winning the war. Thus during World War II, U.S. combat deaths were 300,000 (plus 100,000 non-combat dead). The Soviet Union, on the other end of this scale, lost 10.7 million dead in combat (including 4.4 million captured and missing), and nearly 20 million civilians killed as well. Of all the major combatants in World War II, the U.S. had the lowest casualty rate (about 2 percent of its troops). Russia lost about 15 percent of its entire population during the war.

The U.S. kept its losses down partly because of the amount of money spent per person in the military (over $250,000). The current casualty rate is a third of what it was during World War II, and the amount spent per person has more than tripled (exact comparison is tricky, as all military expenses were counted during World War II, while the current war is being fought with only a small portion of American military might, and the navy and air force continue to take care of many non-war-on-terror responsibilities.) While the dollar cost of war is good for a hot headline on a slow news day, the fact that the money saved lots of American lives, never seems to make it to the front page.

All dollar figures mentioned above are in terms of 2009 (inflation adjusted) dollars.

 


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