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Friday, September 15, 2006

Skeptical Optimist Watch: Wake-up Call

I'm starting a new category of post which I'll affectionately call "The Skeptical Optimist Watch." I find the Skeptical Optimist blog, run by Steve Conover, one of the most frustrating I've ever encountered for two reasons: (1) I reach many of the same conclusions as he does but I believe some of his logic is deeply flawed (my logic, of course, is always perfect); and (2) he doesn't support a comment forum where I can point out those flaws (in all fairness, the few times I've emailed him, he's been quite responsive, but it's not the same as having a comment forum). The only reason I follow his site at all is that I know many of the readers of this site read it.

Today, I'll start with his post Wake-up call to Concord: It’s not about the money. The Concord Group is for limiting spending and government deficits. As I've written before, my belief is that the current federal government deficit of a bit over 2% of GDP is both sustainable and desirable and Steve Conover seems to agree with that. The first statement of his that gives me pause is:
My career in corporate finance taught me that if a given investment meets or beats the risk/reward criteria (“what we get for the money”), it should be funded—period.

I think that the concept of equating corporate and government finance is flawed for a variety of reasons. A critical portion of the above sentence is "risk/reward criteria." I'm one of the management/founders in a small business and I have a variety of pending investments that meet or beat my risk/reward criteria. Yet they're not funded. Why? Because those with funds are not willing to lend me money to fund those projects. Why? Because lending me that money doesn't meet their risk/reward criteria.

The first point is that there are important checks and balances in the corporate world that help ensure that money is efficiently allocated while balancing risk and reward for all of the stakeholders. For the most part, that's either missing or much more indirect at the level of the federal government. Whose risk/reward criteria are we using at the federal level? A bunch of older congressmen who are interested in being re-elected at any cost and who will die before the impact of their poor investment decisions affects us all?

The second point is that the results are much more measurable in the corporate world. You know, the old "bottom line". After being funded, did the investment increase profitability? Again, this is often much harder to measure at the federal level. It's hard to know the effect of large, national projects because there's nothing to compare it to - there's generally no control group. Did those education dollars really provide a good return on investment? Did the extra money spent on defense really help? Who knows?

The third point is that Conover is a little too confident in (not Skeptical enough of?) his own analysis. I think the combination of folks like the Concord Group and Conover and everybody else ends up arriving at a reasonable balance. Part of that balance includes the dialog between Conover and the Concord Group so I have no interest at all in stifling that debate. I just want to point out some problems in his argument.

The other excerpt from Conover's post is this:
I am a Peacenik—correction, a PeaceThruStrengthNik—and I am willing to continue purchasing Treasury bonds to help fund the necessary national security investments.

I would claim this concept doesn't quite work either. To actually have a strong military, you need to fight wars. I think an illuminating metaphor is the concept of buying weights in order to be strong. Buying the weights isn't enough. You actually have to use them to get strong. Buying military equipment isn't enough. You actually have to fight wars to have a strong military. I'm completely convinced that our military is hugely stronger because of its experiences in Afghanistan and Iraq. But once you support the fighting wars, you're not any sort of Peacknik. You're a hawk, though there's not necessarily anything wrong with that in my opinion.

9 comments:

Steve said...

Thanks for linking to my article, Bret. Although comments are usually off because I have no time to babysit (and edit out) the cranks, private email is freely available.

Regarding peace-thru-strength: I believed Reagan proved you can have a strong military without fighting wars; in fact, Reagan proved a strong military's purpose is to prevent war, which is exactly what happened. It was one of the best investments ever made in our nation's history.

Bret said...

Steve wrote: "Reagan proved you can have a strong military without fighting wars..."

How can you prove the military was strong if it didn't fight any wars? One can hypothesize that it was strong, but I don't see how it was proven.

I agree that Reagan, by building up a plausibly strong military, probably hastened the collapse of the Soviet Union. However, I think the Soviet Union, due to inherently falling behind in technology because of the restrictions imposed on communication freedom in order to impose a totalitarian state, was on its way to collapse anyway.

If the collapse was 20 years earlier than it would otherwise have been, then building up the military was probably a pretty good investment. If the collapse was 2 months earlier due to Reagan's buildup, then no, it probably wasn't such a hot investment.

Oroborous said...

The USSR wasn't that far behind the West in technological advancement, and they sometimes led the West - their tanks, the MiG, the AK assault rifle, and their space-launch boosters come to mind. In fact, their entire space programme was ahead of the West's from 1950 to 1968.

Despite being oppressive and less flexible than America, what evidence is there that the Soviet Union would have fallen in the 20th century, absent the Reagan build-up, especially the SDI ?

While it would eventually have failed, it worked well enough to get by, and if the Kremlin had been content to be a clear second to America, they'd still be around.

Steve said...

I hope you're not taking the position that it's impossible to know whether a military is strong unless it's tested by war.

Besides, "national security" is achieved not just by miltary strength. It results from the combination of four factors: intelligence, diplomacy, military force *potential*, and the will to use that force if necessary.

Lastly, anyone who thinks Reagan was not the driving influence behind ending the Cold War and the collapse of the Soviet Union is in disagreement with Mikhail Gorbachev.
http://www.optimist123.com/optimist/2005/03/face_it_ed_its_.html

Susan's Husband said...

The USSR was always far behind the West technologically. You list a few vanity and military projects, most of which date to WWII or earlier. In fact, these projects (by comparing prior and successive efforts) how they were all either flukes or the result of massive overinvestment.

Oroborous said...

OK, but "behind" doesn't mean "nonviable". The real world isn't a contest where only the fastest or best win.

It's mostly pass/fail, like evolution, and the USSR was in the "pass" category, until the U.S. changed the environment.

Which is my main point: If the U.S. had not lured the Soviet Union into competing at a frantic pace, which is a movement that I associate with Reagan, then the USSR would have continued, lurching and inelegant, but "passing".

A rotten tree can be toppled with a push, but if not pushed, it can stand for decades.

Bret said...

Steve wrote: "Lastly, anyone who thinks Reagan was not the driving influence behind ending the Cold War and the collapse of the Soviet Union is in disagreement with Mikhail Gorbachev."

Are you referring to this quote by Gorbachev?
"He [Reagan] was an authentic person and a great person. If someone else had been in his place, I don't know if what happened would have happened."

It seems to me that Gorbachev is saying exactly what I said (that Reagan "probably hastened the collapse of the Soviet Union" but who knows by how much?). Reagan was likely a driving influence, but we can't know for a fact that he was the driving influence. Gorbachev certainly did not say in that quote that what happened would not have happened if it weren't for Reagan.

Steve also wrote: "I hope you're not taking the position that it's impossible to know whether a military is strong unless it's tested by war."

Since one can certainly define strong (which is a fuzzy logic amd/or comparative sort of word) such that you can determine whether an military organization qualifies as strong, I'll retract my question asking about proof of strength. I think I was going after some other point, but clearly didn't succeed.

Bret said...

Oroborous wrote: "OK, but "behind" doesn't mean "nonviable"."

The USSR might have been in the "pass" category but the trajectory was toward the fail category, whether or not we accelerated the arms race in my opinion.

Ultimately, any sort of arms race is economic. If the USSR was keeping up with (or even staying ahead of) us militarily, it was because they were spending an ever larger portion of their GDP on weapons. Since there are no reliable statistics from the USSR from that period, it's hard to know how large of a percentage of GDP they were directing to their military, but I read an estimate once that it was roughly doubling every decade, whereas the US had a roughly constant percentage of GDP devoted to the military. Assuming that's more or less true, then the USSR was guarenteed to fall behind and collapse eventually. Could have it stood for decades? Sure, 20 years is easily believable to me. But so is two months. The USSR knew it was heading for a cliff even if the west did not, as far as I can tell.

Hey Skipper said...

I believed Reagan proved you can have a strong military without fighting wars; in fact, Reagan proved a strong military's purpose is to prevent war, which is exactly what happened. It was one of the best investments ever made in our nation's history.

So what was that Libya thing all about, if not fighting? Not to mention Grenada ...