The Taiwan Banker

Perhaps no country holds the economics profession in as high regard as the US. It is in this field where the world-class academics of the US have crossed over most profoundly into its public policy; some scholars (Milton Friedman comes to mind) have even managed to become folk heroes of sorts. Less known than the advice they give on big-ticket regulatory policies is their work in the military. During the Vietnam War, the Department of Defense established what would later become the Director of Cost Assessment and Program Evaluation (CAPE), a department of skilled analysts with a wide remit to make recommendations about weapons systems, force structures, staffing policies, and other topics requiring quantitative analysis. The Taiwan Banker recently spoke to John Whitley, who served as Acting Director of CAPE under presidents Trump and Biden – who also served as acting Secretary of the Army – about lessons that could be applied to Taiwan. The US approach to military administration approach contrasts somewhat with the Asian style. Although all analysis is guided by hard engineering and physics, it also emphasizes human factors, and provides analysts with frameworks which can be used to tell truth to power. The science of administration “The most important skill for our work is intermediate microeconomics,” said Whitley. Whitley himself as a PhD from the University of Chicago – the home of Friedman – but he has so far been the only economist head of CAPE from that alma mater. In any case, the practical problems he faces on a daily basis are far from the topics of academic scholarship. He points to opportunity costs, absolute versus comparative analysis, and marginal thinking as three of his most frequently used concepts. Regarding the latter, for instance, “there is not a week that goes by that I don’t see someone comparing two overall averages,” instead of the marginal cases, he says. “[Economists] know how to do resource allocation; that’s what we do,” said Whitley. It is hard to avoid quantitative approaches for an organization as large of the US military, which had a budget of US$ 877 million in 2022 and employed 1.3 million active-duty service members. Anyone familiar with US military thinking will have heard the term “jointness,” or cooperation between different units. Decisions on the battlefield can have deep roots in administrative processes, leading to concrete investments years or decades in the making. Moreover, in conventional conflicts with “near-peer adversaries” – the focus of US planning ever since its 2018 National Security Strategy – even marginal differences can reshape the battlefield. Individual performance is still important, of course, but alignment among the various elements of the military serves as a force multiplier. The foundation of jointness during the preparation stage is a set of shared assumptions regarding threats. Advocates of a particular weapon cannot simply request funding from the Secretary of Defense for that system, according to Whitley. Instead, CAPE starts with a particular capability gap and creates a range of options, before conducting analysis and presenting their recommendations to the Secretary of Defense. This approach helps avoid the problem of special interests within the bureaucracy. Public choice theory shows that such special interests can overwhelm the public interest if left unchecked. Economists have even helped guide strategic-level decisions in the past. As the US prepared for its D-Day invasion of Normandy in World War II, Whitley noted, domestic number-crunchers pushed back on the optimistic timetables originally offered, pointing out that the US would not have enough shipping and landing craft until mid-1944. Notably, the operation in Normandy is the closest historical analogue to a potential invasion of Taiwan, so this experience is worth understanding in full. The big questions Microeconomics is not the only field of social science which can be applied to make military administration more vigorous. Various alternative perspectives may even lead in conflicting directions at times. Political science is one. Signaling is defined coherently within game theory, but multi-round games make application of marginal analysis difficult. It is relatively straightforward to allocate resources between approaches like denial and protection supposing China has already decided to seize Taiwan. Grey-zone intimidation is more complex; the strength of responses could also potentially influence how likely China is to engage in more comprehensive actions. Military action against Taiwan will not necessarily be a single-round affair. One example Whitley gave of diametrically opposed conclusions between economics and political science involves European military spending. Economists point to the free-riding effect of US spending on Europe as a public good, and therefore tend to oppose more spending. Political scientists are however more likely to emphasize the role of alliances and encourage further spending. In addition, macroeconomics will also become more relevant as war increasingly involves civil-military fusion. Starting with capability gaps is possible when no such gaps constitute truly existential risks. What if the adversary hopes to weaponize financial weakness itself? In that situation, Whitley suggests a simpler benchmarking approach: the US spent an absolute high of 43% of GDP on defense during World War II, and 15% during the Korean War. These cases show that Taiwan is not anywhere close to maxing out its civil-military capacity. Moreover, as economic sanctions become an increasingly important tool of US statecraft, macroeconomic modeling will help policy makers understand their effects. Thus, vigorous thinking from a variety of perspectives is necessary to effectively guide decision making. A hidden force Most of the military’s uses for economists are however more internally-driven. The main subfields of microeconomics it uses are labor economics, health economics, and industrial organization. Labor economics can help guide decisions on workforce size and structure. Health economics likewise has a lot to do with personnel management, particularly when forces are deployed overseas. Finally, industrial organization – the field that describes market structure and competition – can help the military understand how its suppliers might react to different procurement policies. These decisions are all far upstream from actual combat operations. Indeed, Whitley noted that due to its situation, Taiwan may not have time to study all such questions before acting, as the US can. Nevertheless, precisely because a confrontation with China will not be a single-round game, it is important for Taiwan to keep the long term in mind when it can, even as it responds to China’s 2027 goal for military readiness. According to the well-known adage, logistics wins wars; military administration is the logistics behind the logistics. Economics helps generalize certain problems in management and enables circulation of talent between the military and the corporate sector, a sign of a healthy whole-of-society attitude towards military readiness. “I would encourage all economists to consider serving in defense,” says Whitley. After their service, “you don’t find too many people who think they’ve wasted their time.”