As reported at: click here President Obama received his first Economic Intelligence Briefing report from the CIA. The report will become a regular item in the daily intelligence briefing at the White House; it comes in the wake of the new intelligence tsar’s testimony to the congressional intelligence committees that placed international economic uncertainty at the top of the list of security threats to the United States. Since the president, the tsar, and CIA director Leon Panetta have been in their jobs for five weeks or less, they should be aware of the CIA’s shortcomings in the field of economic intelligence.
The United States obviously needs economic intelligence worldwide. Nearly all of this intelligence is openly available and it is gathered effectively by the Treasury, State, Commerce, and Agriculture departments. The CIA has engaged in industrial espionage from time to time, but it is has rarely added to the collection needs of economic intelligence. More importantly, it has registered major intelligence failures in the economic arena, particularly in failing to track the economic decline of the Soviet Union from 1977 to 1991. The economic failure was the key element in the CIA’s failure to track the decline and fall of the Soviet Union itself.
In the 1970s, the Pentagon and the CIA shared a belief in a major military spending gap as an indicator of the alleged relentless Soviet military buildup. The actual facts were that there was no spending gap and no relentless Soviet military buildup. But in his final report to the congress in January 1977, Secretary of Defense Donald Rumsfeld (!) charged the Kremlin with an “acceleration in the growth of Soviet defense outlays” and referred to an annual rate of increase in Soviet military spending of 5% during the first half of the 1970s and even higher growth in the latter years.
In his first report to the congress in February 1978, Secretary of Defense Harold Brown reported that the “present disparity in defense spending between the U.S. and the Soviet Union is disquieting as an index of both Soviet capabilities and intentions.” Both Rumsfeld and Brown were relying on CIA economic intelligence and both were wrong, but these estimates became the justification for the unprecedentedly high defense spending of the Reagan administration from 1981-1986.
The CIA totally missed the Soviet economic collapse because it overstated the value of the ruble, the volume of Soviet investment relative to the United States, and the rate of growth of the Soviet economy. The CIA made major errors in estimating Soviet investment in fixed capital, particularly machinery and equipment, which contributed to alarming accounts of the size and capability of Moscow’s military-industrial complex.
CIA analysts totally missed the qualitative disparities between the two countries, arguing that the rate of growth of personal consumption in the Soviet Union from 1951 to 1988 exceeded growth rates in the United States. Moscow’s economic problems contributed to its policies of strategic retreat and its interest in arms control and disarmament with the United States. The CIA missed these trends and policies as well, including its total misunderstanding of the defense burden on the economy, the critical need for reform, and the imminent economic crisis.
CIA economic analysts simply cannot compete with either government or private institutions that do their own economic analysis. Since economic analysis is not dependent on classified sources, it would be far more useful to establish an economic think-tank within the government that would attract the best talent available and have access to open-source material at home and abroad. Open- source materials identified the economic problems in Mexico in the mid-1990s and in Asia in the late 1990s, when the CIA did not. In view of the economic problems confronting the United States, the Obama administration needs to understand the best methods for leveraging the information gleaned from open sources.