Asymmetrical Information - Megan McArdle

01.10.13

How Much Can We Cut Defense?

We spend more than many other nations combined. How far can we cut back?

I'm prone to like defense cuts as a solution to budget problems.  For one thing, we spend immensely more than any other country on our military.  For another, while blowing things up and killing people may be necessary, it is not a happy use of our money.  So I am especially anxious to root out wasteful spending in this area.  

Nonetheless, I'm a little bit wary of graphs like this one:  

It's from Matt Yglesias, who writes: "I don't know that any of that's true, but it certainly seems like a smart plan to me. As conservatives generally point out whenever the context isn't military spending, it's very damaging to human welfare to have the government tax productive labor in order to spend money on something useless. So given that population aging is certain to lead to growing pressures on the federal budget, it's important to make up as much of the financing gap as possible by cutting spending elsewhere rather than with new taxes. And per the great Peterson Foundation chart above, the U.S. military budget is really large. Obviously, you don't want to cut the military all the way to the bone lest you invite an invasion from Mexico or Canada. But we're not even close to being overwhelmed by Canadian arms. And it's striking that if you look at non-U.S. defense spending, a majority of it appears to be by U.S. treaty allies—NATO members, Japan, Australia, South Korea, etc.—so we really do seem very safe."

Not that I disagree with the fundamental premise: our defense budget is large, and can probably be cut back a lot.  I mean, we could save a huge amount of money just by cutting back to the spending levels of . . . the United States, ca 2007.

Source: Office of Management and Budget ()


But I would like to see someone specify how far we could cut.  Should we be spending the same amount as China?  Twice as much? Would that be a stable equilibrium, or would we be encouraging the emergence of global competitors who would then force us to spend more again?  

When I think about this, I think of Google.  It's safe to say that Google spends more than anyone else on the development of web services, including improving stuff that they aleady spend more on than anyone else, and do better than anyone else, like . . . web search.  You could argue that they should stop, because it's a waste of money: they've already got the top ranked search engine, and webmail program.  Why continue to spend money making those things better when they've already got such a dominant position?  

And to some extent, I am sure that this is right.  Google could spend less on development, and still maintain its position as top dog.  Web search is characterized by enormous network effects: Google searches are so useful precisely because everyone else is using Google.  That lets them gather loads of information about what links are the most useful responses to a given search--and thereby improve search for all of you.  That's a big barrier to potential competitors.

But it seems important to know how much less they could spend--particularly in the context of a budget discussion, where we're proposing cuts.  

I don't think that many strategic advisors would recommend Google cut back its spending to the level of its next biggest competitor.  The reason is obvious: Google's continued spending keeps competitors out of the market.  If they cut back that far, there's a real risk that someone more nimble will come along and start cutting into your market.  Every user that Google loses to a competitor makes their services just slightly less outstanding.  

On a similar note, you can argue that the reason that other countries spend comparatively little on their militaries is that there is no point.  America spends so much money that there is no hope of anyone else building competitive capacity (at least, not since the Soviet Union collapsed).  So no one even tries.  Even countries like Russia and China seem focused on building capacity as regional powers, not viable competitors to the US.  This is good for us, obviously, but arguably it's also good for billions of other people who aren't embroiled in wars (or occupied by a foriegn power), because there's so little potential gain to the countries that might start them*.

So the real risk to a decline in US defense spending is not that Canadians load up their ice guns and start across the border; it's that other countries leap into the arms race, and the world abruptly becomes more unstable, with more, not less, global spending on weapons.   

How much could use spending drop before Russia and China, and many other nations, decide that it might be worth their while to invest in a bigger military?  I have no idea.  I'd certainly like to believe that the answer is "a lot".  Or even better, to believe that we've entered an era where this sort of thinking is obsolete: where multilateral institutions mean it's not really worth anyone's while to prepare to invade their neighbors.  

But I'm skeptical of the latter.  And I simply have no idea about the former.  I'd like to see folks take a stab at answering that question, rather than just pointing out that we're probably a long way from Alamo II.   


* Note that I'm talking about our military power, not our military actions: you can think that it's good for the US to have a big, badass military that makes it unwise to attempt to take over Taiwan, or the Straits of Hormuz--and still bad for the US to invade Iraq.  Or you can disagree with the whole premise, of course--I'd certainly be interested to see a coherent argument that the world would be better off with China or Russia as the dominant military power(s).