National Security

Lies, Damned Lies, and Defense-Job Statistics

No, cutting Pentagon spending will not destroy local economies.

In the closing days of the U.S. election season, the airwaves are full of dire warnings about the massive job losses that will supposedly occur if the Pentagon's budget declines significantly in coming years (it hasn't, yet). A series of ads by Karl Rove's Crossroads GPS is typical of the genre. In New Mexico, for example, where Rep. Martin Heinrich is trying to succeed retiring Sen. Jeff Bingaman, one GPS ad explains, "Heinrich voted for deep, automatic cuts that could cost New Mexico 20,000 jobs." Similar ads are running in Virginia. The unsubtle message: No sitting member of Congress deserves to be returned to office or elevated to a higher office if he or she voted for legislation that would actually cut spending.

But an equally effective series of ads might have talked about the jobs that would be created when government spends less and taxes are cut. The Pentagon might be a jobs program, but it isn't a very efficient one. It creates the kinds of jobs that politicians like to claim credit for, but military spending doesn't produce more growth in the economy or generate more innovation than a comparable level of spending by private individuals, businesses, and entrepreneurs.

First, some context. Overall U.S. military spending is likely to decline modestly, but most of these savings derive from the end of the Iraq war and the drawdown in Afghanistan. The Pentagon's base budget (excluding the costs of the wars) remains near historical highs in real, inflation-adjusted dollars and is currently projected to keep pace with inflation, at least into the early 2020s.

Such facts haven't stopped Crossroads and others from asserting that hundreds of billions of dollars have been cut, with hundreds of billions more looming under last year's Budget Control Act. The claim that such cuts, were they to occur, would threaten U.S. national security, is debatable. But most of the focus has been on the tens or hundreds of thousands of people who will be thrown out of work if the cuts go forward.

The source of these statistics? The Aerospace Industries Association (AIA), the trade group representing the interests of some of the United States' largest defense contractors.

The AIA has sponsored several studies on the economic effects of sequestration, and all have concluded -- unsurprisingly -- that they would be catastrophic. One study by George Mason University's Stephen Fuller predicted that a reduction of $45 billion in Defense Department procurement spending would result in the loss of 1,006,315 full-time, year-round equivalent jobs. A subsequent paper, published this July, concluded that the automatic cuts to both defense and non-defense spending would eliminate 2.14 million jobs.

A number of scholars have challenged Fuller's conclusions. The Mercatus Center's Veronique de Rugy faulted the report as "packed full of mistakes, arbitrarily high multipliers … and obscure methodology and exaggerations." The Brookings Institution's Peter Singer noted that no more than 3.53 million jobs -- direct, indirect, and induced -- are sustained by the defense industry, so it is barely credible that a 10 percent reduction in Pentagon spending would result in the loss of one-third of all defense-related jobs.

More to the point, the Defense Department's "role isn't to sustain defense contractors' profits independently of the security they are actually meant to provide," de Rugy wrote at National Review's The Corner, a conservative blog. "Private-sector profit margins or even private-contractor job losses shouldn't prevent sensible reductions in federal spending."

Economist Benjamin Zycher produced perhaps the most thorough assessment of Fuller's study (and others like it) and showed how they grossly exaggerate the harmful economic effects of spending cuts and largely ignore the benefits. "[T]he defense sector is too small a part of the economy," Zycher notes, "for changes in defense spending to have large aggregate effects on GDP." And, historically, defense spending has not had that effect. There is no correlation between defense spending and GDP growth, and Zycher concludes, therefore, that cuts would have very little long-term impact in the future.

Like de Rugy, Zycher argues that it is appropriate for resources to shift out of the military sector and into private sector as wars end and threats diminish. The United States cut spending after the Korean War, after the Vietnam War, and after the Cold War, and these reductions did not throw the national economy into a tailspin, though some individuals and firms did have to seek out other opportunities.

Government spending takes money out of the private sector in the form of taxes or debt (which is simply taxes on future generations) and redeploys that money in the public sector. Granted, the Pentagon represents a special part of the public sector, one that, ideally, creates a genuine public good-- safety. But much of what Americans spend on their military doesn't actually defend them -- it goes to defending people in other countries who have chosen not to defend themselves. Americans are growing increasingly aware of the unfairness of the current system, and they're tired of it.

But the claims that Pentagon spending has uniquely salutary economic effects -- or, conversely, that cuts will have disproportionately harmful ones -- suffer from a basic conceptual error: They ignore the opportunity costs. Simply put, Pentagon spending cuts can be expected -- all other factors being equal -- to generate greater economic activity elsewhere.

The reason why was captured by French philosopher Frédéric Bastiat in 1848. The bad economist, Bastiat explained, focuses only on those economic activities that are plainly visible; a good economist, by contrast, takes account of both the seen and the unseen. It is not enough, for example, to focus on the economic activity that occurs when a careless child breaks a window. True, the glazier gets to sell the shopkeeper a new one, but the shopkeeper had the benefit of a fine window before it was broken. Paying for the repair (the seen) necessarily prevents him from spending that same money elsewhere, thus denying the shoemaker or the butcher of a sale (the unseen) and denying the shopkeeper the benefit of a new pair of shoes or a healthy meal.

The discussion that has taken place during the closing days of the U.S. election season about possible military spending cuts has been predictably narrow. Politicians in Washington focus on the jobs they supposedly create when they spend the people's money, and too little attention has been paid to the unseen benefits that would accrue if the resources that are currently spent on the military were released into the private sector. Put another way, there has been too much focus on the visible effects of ships and planes that are built, and not nearly enough on the houses, schools, and businesses that never are.

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Democracy Lab

Breaking the Grip of the Oligarchs

How a tragic twist of fate is fueling a revolt against Armenia’s overweening tycoons.

On a summer evening in late June, three military doctors ventured into a lavish restaurant on the outskirts of Yerevan, Armenia's capital, to have dinner. With its marbled beige floors and crystal chandeliers, the restaurant, known as Harsnakar, is a favorite for weddings, anniversaries, and friendly get-togethers.

But things didn't go according to plan for 35-year-old Major Vahe Avetyan, one of the army doctors accompanying his colleagues on a night out. The man allegedly got into an argument over inappropriate dress code with security staff from the restaurant, which is owned by Ruben Hayrapetyan (pictured above), a business tycoon and then-member of parliament. Avetyan was brutally beaten and hospitalized with severe head injuries. Soon, grim photos of the doctor emerged on social networks. Bandaged and unconscious, he lay on a bed in the same hospital where he had worked, in critical condition. Twelve days later, he died.

The public outrage was unprecedented. It isn't uncommon for the employees of business tycoons to engage in violence. But this was the first time that someone like Avetyan -- a married father of two whose job involved caring for Armenia's highly respected armed forces -- had inadvertently felt their wrath, and paid for it with his life.

The death of Avetyan at the hands of bodyguards employed by Hayrapetyan has become a catalyzing event. Shocked Armenians mobilized in large numbers throughout the summer. The frustrations with a culture of bodyguards whose brutish behavior had become notoriously violent over the years spilled onto the streets and social networks. Legislation to regulate the private use of bodyguards has been introduced in parliament: The draft law stipulates that private security personnel will be required to don uniforms, to apply for weapons permits, and to register their weapons with law enforcement.

The ongoing trial of those involved in Avetyan's murder has opened a window onto the excesses of a tiny ruling class that until now has felt largely untouched by the law. Since the collapse of the Soviet Union in 1991, Armenians -- like many other inhabitants of the old USSR -- have watched as the lion's share of the country's wealth has fallen under the control of a privileged elite. The leading Armenian oligarchs, a group numbering around 40, dominate industries ranging from banking to mining, and that economic edge has translated into privileged political status as well. Just as in Russia and Ukraine, tycoons here have parlayed their wealth into public office -- to an extent that it's often hard to tell where business ends and politics begins.

Though political apathy is widespread in Armenia, the Avetyan case has fueled resentment and anger towards the men who have accumulated vast wealth and influence while much of the country's population remains in dire poverty. But now, thanks to the criminal case surrounding the death of the army doctor, something seems to be changing. After months of public pressure, Hayrapetyan finally submitted his resignation from the legislature in early September, ending his foray into politics. Six of his bodyguards have been arrested in connection with the murder.

After two postponements, the trial formally got underway last month. The defendants, who initially faced lesser charges, have been formally accused on three counts of assault that could result in lengthier prison sentences than the five to ten years of imprisonment they previously faced. Hayrapetyan, known by the nickname "Nemets Rubo," has repeatedly denied responsibility for the actions of his employees. Calls for Hayrapetyan to face trial in the case have gone nowhere.

Armenia's search for stability and democracy since the collapse of the Soviet Union has been difficult. The country achieved its independence just three years after a 1988 earthquake that left upwards of 25,000 dead. No sooner had Armenians embarked upon statehood than they found themselves locked in a debilitating war with neighboring Azerbaijan over the Nagorno-Karabakh region. That war resulted in the closing of the country's borders with Azerbaijan and Turkey, cutting Armenia off from normal trade. These straitened circumstances brought hardship to most Armenians, but to those sufficiently ruthless and well-connected to take advantage, the war economy meant a path toward instant riches. It was then that many of today's tycoons began to build their fortunes.

The culture of oligarch immunity is certainly nothing new. The Avetyan murder has struck a sensitive chord owing to its chilling resemblance to the 2001 incident in which a bodyguard of then-President Robert Kocharyan attacked and killed a man in a bathroom for making a disrespectful remark to the leader. But even then, most Armenians -- whether too apathetic, too scared, or too willing to emigrate -- refrained from mounting an open challenge to the tycoon establishment.

Now, in dramatic contrast, broad swathes of society have shown the will to stand up and resist. In the months following Avetyan's murder, the anti-oligarch protests began to attract attendance from regular citizens who are rarely seen at demonstrations. A candlelight vigil honoring the late doctor saw over 600 people surround the restaurant, which has come to symbolize the broad web of impunity shared by Armenia's tycoons. Police cordoned off the restaurant and clashed with protestors, breaking up demonstrations by force. "I only had one bruise, but some people were beaten," said Tsovinar Nazaryan, an activist and journalist who attended the rally.

But the demonstrators kept coming back. They marched to the Prosecutor's General Office after Avetyan's funeral, chanting "Nemets is a murderer" and "I am Vahe Avetyan." Then a montage of video clips from two press conferences Hayrapetyan gave last year surfaced on YouTube (with English subtitles), showing the tycoon threatening reporters, claiming responsibility for beatings, and confessing to tampering with ballots in an election. "I wouldn't advise people to try to punish me," he says at one point in the video. "Whoever tried it, something terrible happened to them."

Anti-oligarch activism spread outside the country's borders, where the far-flung Armenian diaspora held protests in front of consulates. Online petitions were organized. Street art around the capital demanded that Hayrapetyan be tried in court.

"Many people are sick and tired of their power," said activist Nazaryan. "You can see how violent they are, in their business, in their everyday actions. They're violent to our journalists. They're really dangerous. They don't care. They know they won't be punished, and this is the problem."

This latest series of events represents the first small challenges to the seemingly impregnable edifice of oligarch power that has dominated this country since the collapse of the USSR. Functioning like early twentieth-century robber barons, Armenia's tycoons prefer to be called "businessmen" (though most Armenians tend to refer to them with cartoonish nicknames). The oligarchs drive fleets of flashy vehicles; their Hummers and Rolls Royce's are fitted with custom license plate numbers to simultaneously identify their families and close associates and deter harassment from traffic police.

Their ostentatious mansions multiply, and their business assets grow as they hold the Armenian economy hostage by eliminating competitive markets for everything from mineral water and asphalt to soft drinks. The economic elite flex their power in the political sphere despite a constitutional ban on members of parliament being involved in owning or running businesses. The political parties that have dominated recent elections in the country are closely associated with leading oligarchs who enjoy parliamentary immunity and remain virtually untouchable. According to a recent report by the International Crisis Group, for example, the ruling Republican Party had two dozen wealthy businessmen elected to the ranks of parliament in 2007. The same report notes that oligarchs routinely use their charitable foundations to sponsor concerts or hand out free potatoes in order to secure voter support, though the businessmen deny using charity for the purposes of political leverage.

Take Samvel "Lfik Samo" Aleksanyan, a millionaire with strong ties to the government. A 2003 U.S. State Department cable referred to him as a "semi-criminal" oligarch who "maintains an army of bodyguards" and controls the import of sugar, wheat, and butter into the country.

Dubbed "the Sugar Baron" in local media, Aleksanyan's domination of the industry and ownership in a chain of supermarkets has created the conditions for a series of sugar crises in which prices unpredictably skyrocket. Aleksanyan recently bought and partially destroyed the famed, almost century-old bazaar-style indoor market and national treasure, "Pak Shuka," amid widespread speculation that he intends to turn it into part of his supermarket empire.

Other oligarchs play prominent roles in the lucrative mining industry. Armenia is rich in molybdenum and gold, and that has led to considerable competition among the oligarchs to grab their shares of the resulting profits. National Assembly Chairman Hovik Abrahamyan and member of parliament Tigran Arzakantsyan are both shareholders in one leading mining company. One of the most prominent tycoons linked with mining is former Minister of Environmental Protection Vardan Ayvazyan, who was in charge of regulating large parts of the industry during his stint in government. In September, a U.S. court ordered Ayvazyan to pay $37.5 million in damages to a U.S. mining company that accuses him of corruption relating to his own business interest in the sector. (Ayvazyan has denied all the allegations and rejects the American court's jurisdiction over him.)

Oligarchs are also accused of tampering with elections. Armenian elections have long been plagued by irregularities, reportedly ranging from intimidation to ballot stuffing. Garo Yegnukian, an executive board member at Policy Forum Armenia, a U.S.-based think tank, says that oligarchs play an outsized role in elections: "They're the ones who distribute election bribes, who intimidate, who break people's knees, if they have to."

A U.S. embassy cable leaked in 2009 described business elites as "deeply intertwined with political power and vice versa," each having an incentive to preserve the status quo out of the fear that a regime change could mean an economic redistribution at the "expense of today's oligarchs."

Reports have linked oligarchs to assaults and murders. But their activities have other pernicious effects as well.

The International Crisis Group report pinpointed oligarch benefits from tax and customs advantages as a reason why the government collects only about 19.3 percent of GDP in taxes, compared to a 40 percent average in the European Union. A 2007 International Monetary Fund study reflected this, arguing that despite double digit growth since the beginning of the millennium, Armenia's tax to GDP ratio remains very low.

Prime Minister Tigran Sarsgyan who has previously criticized several ministries within the government for corruption, recently announced that he will head an anti-corruption council, and extended a rare invitation to opposition parties to participate.

"We are not satisfied with the state of the fight against corruption," Sargsyan said, according to local press reports. But graft in Armenia doesn't seem to have seen any significant decline. Over the last five years, Armenia has sharply fallen on Transparency International's Corruption Index for Armenia by 30 places, from a ranking of 99 in 2007 to 129 in 2011.

Analysts predict that the path to economic success in Armenia means eliminating monopolies and minimizing the interference of oligarchs in policymaking; poverty and a high emigration rate (some 70,000 people leave the country every year) compound the problem. As the fallout from the death of an innocent army doctor continues, the Armenian government faces critical choices when it comes to its future and how it chooses to act, if at all, toward those enjoying immunity from the law. But it's clear that, even in the best of cases, reducing the power of the country's tycoons will be a long and arduous process.

Photo by PanARMENIAN Photo/Tigran Mehrabyan