The Kremlin Keynesians

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For the past 10 years, I have heard numerous arguments why the government should be making huge investments into the country's military industrial complex and why this should be a top national priority.

The first argument has been that our armed forces should be equipped with only domestically produced weapons that will be unmatched by anything produced in the West.

The second reason to have the government fund a large military industrial complex is to drive scientific and technical progress and provide the country with innovative technologies.

The third -- and most ambitious -- argument for a large defense industry was articulated by Vladislav Putilin, deputy head of the government's military industrial commission: "Considering the country's difficult economic situation, the state's defense orders are seen as a way to aid the real economy and overcome the problems we are all facing." Apparently, Putilin was taking a page from U.S. President Franklin D. Roosevelt's playbook when he pulled the U.S. economy out of the Great Depression. It is well known that the United States became a leader of world production only after it focused on manufacturing military equipment during World War II.

Since the global demand for raw materials is in deep decline, Moscow is hoping that the military industrial complex will become the main buyer of the country's steel, energy and building materials. According to this argument, huge defense contracts will enable the state to hire a large number of people at factories all across Russia in many different sectors. Once employment is increased in these sectors, the people's buying power and demand for consumer goods will also increase. Of course, to make sure consumers buy Russian-made products, the state will have to slap high tariffs on imports.

According to a strict interpretation of Keynesian economics, that approach is not without merit. The problem is that, whereas it might have made sense in the United States, it won't be effective in Russia.

Consider the military industrial complex that is supposed to become an engine of economic growth for the country. When oil and gas prices were sky-high, government authorities did almost nothing to restructure and modernize defense production facilities. The result is that the equipment in those plants is now obsolete. Moreover, the average age of workers in military factories exceeds 55, and younger replacements have not been trained adequately. Incidentally, one reason the Navy's new Bulava missile failed five of its 10 test flights in late December is because of the incompetence and negligence of factory workers and engineers during the production of the missile.

The main problem is that the authorities want to use its significant monetary resources to stimulate the defense industry in a typical Soviet fashion. That is, in the absence of clear priorities, they will inject huge sums of money into the country's top military enterprises. But it is obvious that they are not prepared to significantly increase production and will simply choke on the large number of new orders -- even with money and materials readily available.

It is even more doubtful that increased military spending will have a trickle-down effect for civilian sectors. Over the past eight years, Russians have grown accustomed to buying quality consumer goods from abroad that surpass anything turned out by domestic factories. During the oil boom, very little was done to invest in improving the quality of the country's manufactured goods in the real economy.

One reason that the state's diversification efforts failed is that rampant corruption made government investment pointless. Roosevelt's mobilization of the U.S. economy relied on a few dozen government officials. These top bureaucrats were called "tsars" -- the aluminum tsar, the rubber tsar and so on. There is one important reason that explains why these tsars were able to successfully carry out their programs: They did not steal the funds allocated to their programs.

Unfortunately, finding two or three dozen honest tsars among Russia's bureaucrats would be a difficult task. Thus, trying to climb out of the deep economic crisis by throwing billions of rubles at the military industrial complex is doomed to fail.

Alexander Golts is deputy editor of the online newspaper Yezhednevny Zhurnal.