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Tuesday, May 04, 2010

The real cost of oversized military

Baby Buddha by jurvetson from flickr (CC-BY)

In one of my previous posts I pointed to the elephant in the room - Greek economic problems are largely due to its oversized military - this confused people a lot.

Let's do some calculation, pulling all assumptions out of Google. These numbers are actually very noisy year to year, but let's just take some long term average.
  • Annual economic per capita growth 2.1% - this is world average since 1950
  • Annual population growth - 0% - most developed countries we speak about here have little in terms of population growth
  • Annual economic growth - 2.1% (by two above) - this number might seem low, but that's the facts, and there's not much we can do about it
  • Starting debt level - 50% GDP - fairly typical for a developed country
  • Interest on debt is 3% above inflation. This I base on historical rates of series I federal bonds before the recession, and adjust it a bit because most countries are less safe than States, so would need to pay somewhat more.
  • Baseline size of military is 1.7% GDP - EU average
  • Budget has 1% surplus before paying interest.
  • This results is interest payment of 3% (interest on debt) * 50% (debt to GDP) = 1.5% GDP.
  • This leads to deficit of 0.5% GDP.
  • Because economy keeps growing - 0.505 / 1.021 = 0.4946 - so debt level will very slowly fall as percentage of GDP even as total debt keeps rising.
  • Over 50 years, debt will fall to just 16.3%
This is all very reasonable. Now let's assume this country decided to have Greek style ridiculously oversized military - 4.3% of GDP. This is extra 2.6% spending. What happens in 50 years? Their debt grows to  175.5%.

Assuming anybody was still stupid enough to lend them money at the same rates, oversized military costs them 2.6% GDP (original spending) + 4.78% due to excess interest relative to baseline scenario. Imperialism costs far more than it seems to - and it has been a very long time since anyone made big money on empire building - usually the only benefactors are bankers and arm manufacturers in countries not engaged in hostilities.

A few inb4s:
  • This reasoning applies only to excess military spending.
  • Normal civilian government spending is typically useful, and if government slashed spending on healthcare, education, pensions, disability insurance etc., people would simply buy more or less as much of such services on private market.
  • Even worse - if government slashed spending on research, basic infrastructure and so on, where benefits are diffuse, it would be very likely that nobody would pick up the tab, and it would hurt the economy significantly.
  • Yes, there is some outright waste in civilian government spending, but similar waste exists in private sector as well.
  • Baseline scenario already includes EU average military spending - and even if you argue that optimal level of military spending is higher than 0% (something I won't be arguing one way or the other now) - I cannot imagine in what kind of bizarro world EU average is far below the point of rapidly diminishing returns.
I'm not done yet. Let's assume interest rates are not constant, but vary depending on country's prospects. So at 0% debt you only need to pay 1%, then it grows linearly to 3% at 50% (like in scenario), and so on. There is some evidence this growth might be ever faster than linear, but let's stick to that.
  • In 50 years of baseline scenario debt diminishes to 6.35% and nobody cares any more.
  • In imperialistic scenario, debt after 10 years is only 73.43% (as opposed to 70.89% with constant interest rates) - it doesn't make a big difference yet.
  • In 20 years debt reaches 110.62% as opposed to 93.7% - it start to get ugly.
  • In 30 years debt increases to 189.96%, as opposed to 118.61%, but the glorious Greek empire keeps borowing.
  • In 40 years debt reaches 531.73%, as opposed to 145.79%, and the interest rates are completely ridiculous over 22% per year.
  • When the imperial scenario ends in 50 years, debt stands at 738747192.9% GDP, interest rates are almost 5% a day, and everybody is looking for the new suckers into this Ponzi scheme.
Of course Greece had to either collapse or change its ways long before that happened.

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