The US is The Big Loser of The Financial Arms Race – Why Not Trade for Peace Rather Than Go Bankrupt for War?

Yesterday, Russian President Vladimir Putin unveiled new weapons that will challenge the US position in the current global arms race, which in many respects has already exceeded that of the Cold War. While many point to the fact that the US spends far more in Dollars than any other country in the world in respect of its armed forces, these statistics only tell part of the story.

In 2016, the US spent $611.2 billion on defence while the number two spender in US Dollar terms, China spent a mere $215.7 billion. Coming in at number three was Russia at a staggeringly low $69.2 billion. But just as everything from cigarettes to shoes costs different amounts in different countries when exchange rates are adjusted, so too do weapons.

The cost of producing anything in the US is generally more expensive than the labour rates and the cost of raw materials in either China or Russia. When one accounts for the fact that the US government obviously deals in Dollars and that its domestic arms makers who are paid handsomely by their friends in Washington’s military-industrial complex, receive their payment in Dollars, one realises that an overvalued Dollar might actually be pricing the US out of the international arms race for the simple reason that other countries can produce equally good or in the case of Russia and China, often better weapons than the US. Because of the international nature of the arms race, it bears close scrutiny to see not just which countries can create the most ‘bangs’ with their weapons, but which ones are getting the most proverbial bang for their literal buck.

To understand the real nature of the arms race and how it relates to sovereign wealth, one must examine not the Dollar amount spent on national defence, but on the percentage of GDP spent on defence.

In 2016, the US spent 3.3% of its GDP on national defence. This is far more than China that spent merely 1.9. By contrast, Russia spent 5.3%. While this could be rationalised by the fact that Russia’s economy is less diverse than that of China and the US, another statistic reveals this explanation to be unsatisfactory.

In 2007, Russia spent only 3.4% of its GDP on national defence, while today that figure is far higher. By contrast, in 2007 China’s rate was exactly the same as it was in 2016 while the US rate was in fact slightly higher in 2007 at 3.8%.

This means that while Russia is spending more per capita on defence than it did over a decade ago, it is still able to produce some of the world’s most advanced weapons at a fraction of the overall cost that the US can muster. Furthermore, while Russia has raised the stakes in the arms race in terms of its percentage of spending and its technological improvements, this has not had a negative effect on the living standards of the Russian people. According to the CIA’s own World Fact Book, there are more people living under the poverty line in the US than in Russia. Also, Russian health care is free while in the US health care is notoriously expensive.

While overall government spending in Russia is far lower than the US, even if Russia were to expand its defence budget to even greater numbers, it would still cost Russia vastly less dollar for dollar than the amount the US is going to have to spend to keep up with the arms race.

Poor economic management in the Soviet Union’s last years under the leadership of Gorbachev and his henchman Alexander Yakovlev is widely believed to have “bankrupted” the country. While the Russian economy of today remains stable, Putin’s country will likely have no such problems in maintaining or modestly expanding its defence budget. For the US, keeping up will mean having to print more and more money, thereby raising the infamous deficit ceiling even higher, much to the chagrin of fiscal conservatives like Ron Paul.

The US government has estimated that this year’s deficit will be $833 billion, compared with last year’s figure of $665 billion. It is further estimated that the 2018 US budget deficit will be 4.2% of GDP. While the US budget deficit continues to grow in terms of real dollars and percentage of GDP, Russia’s budget deficit is falling. Russia’s budget deficit fell to a total of $4.59 billion in September of 2017, while the overall percentage of GDP that the Russian budget deficit amounted to as of early 2017 was only 1%.

As it is objectively acknowledged that Russia’s weapons are world class, the US cannot employ the argument that when it comes to Russian weapons ‘you get what you pay for’. In real dollar terms, one gets much more than one pays for in respect of Russian and also Chinese weapons. Even if Russia was foolish enough to abandon its fiscal conservatism and spend itself into oblivion to produce more weapons, Russia would still be in better financial shape than the US in terms of out of control budgets. The fact of the matter is that even with Russia’s existing modest spending, it is able to not only match but in many cases beat the US in terms of weapons capability, not least due to Russia’s new missile systems which are designed to circumvent the costly US missile defence systems.

This is all happening while Russia is able to increase the percentage it spends on weapons without incurring the kind of deficit percentage levels of the US. As weapons sales are a major way to bring new foreign capital into a domestic defence industry, here too Russia wins because Russian weapons are far cheaper to purchase in the open marketplace vis-a-vis US weapons, thus making them a better value. This has been proved true even for NATO states like Turkey, which is attempting to finalise a purchase of Russia’s S-400 missile defence system. Crucially, Ankara claimed it was motivated by a combination of both low cost and high quality regarding the S-400s. As the US wasn’t willing to offer Turkey a substantial discount, the choice was made by Ankara based on economic realities.

If the US were to spend half of the amount it spends on defence and invest it into boosting the civilian industrial sector while working with a more modest defence budget, the US would ultimately be able to grow its economy, reduce the international pressures of an arms race, save money in the short term and almost certainly make money in the medium and long term. Instead, the US has opted to spend itself into oblivion, all for the sake of pushing the world closer to a war that no side could actually win.

Russia, like China, is not only winning the arms race in terms of overall scale, but the Sino-Russian de-facto alliance is winning the financial arms race as well. The fact of the matter is, if Russia or China decided to destroy the world, they could do so for a lot less money than the US.

Would it therefore not be more advisable for the US to try and trade its way to peace rather than spend its way to war? This is the question that any responsible journalist or US politician should be asking today.

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