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2 THE BEAR'S
LAIR Winning the
next cold war By Martin
Hutchinson
matter of urgency to
de-fund the lobbying belt around Washington (let
alone that around Brussels), strip down the
military procurement process, and compete on a
level playing field against a lower-cost, more
efficient adversary.
One source of Russian
efficiency has been competition. Putin's people
understand far better than the old Soviet
bureaucracy how incentives and competition can be
used to spur innovation. While
defense production has
remained in the state sector, competition among
different agencies has deliberately been fostered,
with substantial bonus payments to the management
and staff of agencies that prove successful in an
endeavor. Thus aircraft development, for example,
occurs in both the Sukhoi and Mikoyan agencies.
This produces a system considerably more efficient
than the US defense procurement system, where the
companies are largely private but competition
among them is determined by who hires the
best-connected lobbyists.
Outside the
defense sector, a new cold war will bring
challenges in energy. With Venezuela and Iran as
allies, Russia will control a high proportion of
the world's oil supplies. Whereas today the Arab
Middle East controls the majority of the world's
oil output, Venezuela's Orinoco tar sands make it
a much more important oil source over a 10-year
time frame, and Iran too will benefit from Russian
technology and oil-industry know-how. The Soviet
Union brought very little to its clients in terms
of technological capability in fields outside
defense. However, Russia used the period of
openness to Western influences well, modernizing
its oil sector and bringing its technology up to
cutting-edge levels. It is now unlikely that
Russia will fall back, since competitive forces
have been maintained. Russia will use the energy
supplies to which it has preferential access to
influence policy in such oil-thirsty countries as
China, and to browbeat customers in strategically
important but politically feeble places such as
the EU.
Globalization will go partly into
reverse. Something like the old CoCom convention,
which prevented sales of high-technology equipment
to the Soviet bloc, will need to be reinvented -
its feeble successor, the Wassenaar Arrangement,
has Russia as a member. High-tech investment will
be diverted to a large extent toward devising
defense mechanisms against possible cyber-attacks.
Barriers will be erected against takeovers by
Russian state-controlled behemoths. Indeed, such
barriers could reasonably be erected against all
takeovers by state-controlled companies, although
this would be a little unfair to the admirable
Temasek Holdings of Singapore (which in any case
is more like an exceptionally well-run and benign
conglomerate than a state). Trade will become
somewhat less free, although the protectionist
impulses thrown up by cold-war suspicion may be
somewhat balanced by a geostrategic need to play
nice with Third World countries wishing to export
to the US and western Europe. Gross world product
growth will be lower than it might otherwise be,
and more of it will be concentrated in
unproductive defense and security sectors.
The one positive effect of a new cold war
might be in weeding out public-sector waste in the
US and western Europe. Russian public spending is
only 21% of gross domestic product, below the US
level and far below levels in the EU. The country
runs a large budget surplus, and its finances are
further buttressed by soaring receipts from the
13% "flat tax" that Putin introduced when he came
to office in 2001. While Russia has huge
corruption and an overstuffed military, it wastes
much less than the West in unproductive social
spending, wasteful subsidies to agriculture, and
politically directed "pork-barrel" projects. To
accommodate higher defense spending without
plunging its economies into recession, it is
likely that the West will have to adopt a Russian
- and in this respect, more capitalist - approach
to its taxation system and public-spending
priorities.
Is there any way to prevent
the escalation of this debilitating competition?
Well yes, there is. The whole point of being
capitalist is that one has good access to capital
and uses it wisely. Russia, when given access to
capital, tends to waste it, stashing it away in
Swiss bank accounts and spending it on soccer
clubs and call girls. However, since 1995, Western
central banks have used their almost unlimited
ability to create money to make capital extremely
cheap, in fact almost worthless as demonstrated by
the huge number of insane dotcoms, vulgar
oversized housing developments, and megalomaniac
empire-building takeover artists it has funded.
In recent years, this has also allowed the
world economy to grow at a higher rate than is
sustainable, raising the prices of energy,
commodities and shipping ad infinitum. In other
words, we have negated our advantage in capital
availability and artificially enhanced Russia's
advantage in energy and natural resources.
The solution is thus quite simple - a
prolonged period of much higher real interest
rates, which will raise the value of capital. That
will enhance our relative economic advantage and
depress the price of oil and other commodities,
thus forcing Russia and its satraps Venezuela and
Iran into bankruptcy. A similar period of tight
money and low commodity prices was instrumental in
defeating the Soviet Union in the late 1980s -
there is indeed a good case to be made that Paul
Volcker did more to win the Cold War than Ronald
Reagan. The process can be repeated now.
There are other ways of winning wars
beyond mere armaments.
Martin
Hutchinson is the author of Great
Conservatives (Academica Press, 2005) - details
can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-07 David W Tice & Associates.)
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