The Strategic Implications of Baumol’s Cost Disease

by Reihan Salam

Gabriel Rossman draws our attention to a fascinating draft paper by Jonathan Caverley. The abstract reads as follows:

Industrialized democracies tend to pursue a capital- and fi repower-intensive military doctrine ill-suited for combating an insurgency. It is therefore puzzling that democracies, particularly the United States, remain so stubborn in initiating these conflicts and so tenacious in pursuing a suboptimal strategy over long periods of time and with mounting costs. The paper addresses this puzzle by arguing that a capitalized military doctrine results in a condition of moral hazard for the average voter, shifting the costs away from the median voter and leading a democratic state to pursue attempts at military coercion whose expected value in increased security is outweighed by the likely total costs for the state. Furthermore, the voter will support using a capital-intensive military in conflicts where its eff ectiveness is low because the decreased likelihood of winning is outweighed by the lower costs of fighting. The result is the continued application of an inefficient military doctrine in pursuit of modest war aims, a low likelihood of victory or a combination of the two. I test the theory’s hypotheses using process tracing of the Johnson Administration’s counterinsurgency strategy during the Vietnam War.

We’ve often discussed Baumol’s cost disease in this space. The basic idea is that rapid increases in labor productivity in one sector will tend to push up compensation across all sectors, as firms in the low-productivity sectors still have to attract workers. Productivity  increases in manufacturing and knowledge-intensive services, for example, will tend to push up wages among classical musicians and K-12 teachers, even if the latter fields don’t experience comparable productivity increases.

Caverley looks at regular and irregular warfare through the same lens:

Irregular and regular warfare can be considered two different “industries.” For COIN, better tools are of minimal value in making a capitalized military more e ective and technique, while crucial, only goes so far when faced with labor constraints. Indeed the ratio of personnel per population in order to conduct “nation-building” has stayed roughly stable at twenty per thousand since the end of World War II (Quinlan 2003). Little can be accomplished without boots on the ground. A capitalized military will be much more effective against a conventional opponent than an unconventional one. Such a fighting force dispatched the Iraqi conventional forces with ruthless eciency in both 1991 and 2003, but is poorly suited for conducting counterinsurgency. War type, the interaction of the weak state’s strategy and the strong state’s military doctrine (Arregun-Toft 2005), is of equal if not greater influence on substitutability as technology.

To be impolitic, it seems far more economically sound for an affluent market democracy like the U.S. to offshore COIN than to rely exclusively on its own domestic human capital endowment. Consider, for example, the long-term costs associated with caring for injured veterans of the wars in Iraq and Afghanistan, including the impact these injuries will likely have on the future earning potential of the veterans themselves. 

That the U.S. should retain the ability to coerce rival states is beyond dispute. It happens that COIN is particularly costly, which suggests that we should only use a COIN strategy if the alternatives are truly dire.