Mike O'Sullivan
There were three events that occurred last week, two of which mirror each other, and that are logically tied up in the third.
The first is the decision of the Chinese internet regulator to suppress the use of the Didi (effectively a Chinese version of Uber or indeed Uber is a Western version of Didi) web application based on concerns over the way it collected personal data and the related potential governance and disclosure shortcomings in the Didi initial public offering.
The second was the decision by US Department of Defence to reopen its JEDI Cloud contract process (note to all arms dealers if you want to convince a government to buy a weapon or weapons system, it needs to have an appropriately convincing name).
The two events are united by a key sentence in President Biden’s midweek speech on the withdrawal of forces from Afghanistan where he stated ‘we will be more formidable to our adversaries and competitors over the long run if we fight the battles of the next 20 years, not the last 20 years’. China and Russia have the same idea, and the battles of the next twenty years will be ‘total’ in that they will encompass cyber security, finance, social media, and trade as well as military aspects, and they will have a strong competitive (as opposed to outright conflictual) aspect.
Data and Markets part of the deal
As a result, the broad topic of security will be all encompassing – stock markets and cloud computing are just two elements that will be drawn into this vortex. This reminds me of the comment of another President Ike Eisenhower, one of only three Presidents to hold a high military rank (after Washington and Grant) who warned ‘we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military–industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic process’.
His words ring true today, more so in the light of data and cyber security. They should also alert us to the fact that the military-industrial-financial-data complex (MIFD) will be an expensive affair. In the USA at least, military spending is vast, and often wasteful. Bear in mind that one of George W. Bush’s economic advisers Larry Lindsay, effectively lost his job for estimating the cost of the Iraq War at between USD 100-200bn (it was multiples of this).
Also bear in mind failed spending projects such as the Future Combat Systems Program (USD 46bn), the Crusader gun, a new Bradley tank, the Commanche helicopter (again pay attention to the project names). Also, set all of this against the early warning from the US Defence Intelligence Agency in November 2019 of an emerging pandemic in China and the subsequent government failure to spend on preventative measures, we get the sense that military hardware led investment is overly prioritised.
Finance and the Army
To give the military a break, all this raises two finance related questions. One is whether the geopolitical contest between the US and China will skew government spending, and the other relates to the combination of military research and innovation.
In the past, warring states have pushed themselves to the brink of bankruptcy – the Napoleonic Wars, the gigantic expense of the German and British navies in the 1910’s and nuclear weapons spending in the cold War. The risk here, and as with the comparison of military and COVID-health spending, is that there is a great, ultimately value destroying wave of investment spending in cloud computing, cyber and data security and drone technology.
The risk also is that the increasingly fashionable idea of industrial strategy in the US (again another example of America becoming more like France) becomes led by the MIF’D. Brian Deese, President Biden’s National Economic Council adviser is already pointing towards developing strategic industries such as semiconductors and telecoms, but the risk is that this strategy becomes skewed by the geopolitical side of the debate rather than the necessarily important focus on productivity.
Drones
My final thought is on innovation, where despite inefficiencies in the way military procurement is handled, the underappreciated side of military related spending is innovation. Israel, somewhat controversially I should say, proves this point. A great many of its leading technology firms have been developed as follow throughs from its soldiers and some of its battlefield technologies (Iron Dome, and its drone and robotic battlefield programs) have spawned successful commercial applications and reflect a thriving public-private innovation partnership. Indeed, Israel is cited as a case by Mariana Mazzucato in her thesis that states have a key role to play in driving innovation.
However, beyond extreme data points like Israel, the reality is that the countries that are best at innovating, do not have MIFD complexes, but rather good education systems, progressive incentive structures and state support (rather than control). In that respect, the biggest obstacle to innovation in the US is that it becomes the plaything of geo-politics, and increasingly of a small community of investors who it seems increasingly view innovation as something to trade rather than to nurture.
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