Here we go again on the pacing threat

The China defense spending debate mirrors the old Soviet one, capturing, IMHO, the wrong fight

Same basic drill as during the 1980s, when defense hawks in the US and — most notably — started arguing that the Soviets were spending a lot more on defense than we were calculating.

Thus began the fight between a Tufts economics professor Franklyn Holzman and the CIA. I know this because, when I was a Soviet studies grad student at Harvard in the mid 1980s, I took one class at Tufts and it was Holzman’s class on Soviet defense spending.

This tussle was a big deal in the national security community, because this was the height of the Reagan military build-up designed to bankrupt the Soviet economy.

Holzman argued that the CIA's estimates of Soviet military spending as a percentage of GNP were too high. He claimed that the CIA pegged Soviet defense spending at 15-17% of GNP in those years, when it should have been closer to 8-10%.

Holzman made several arguments regarding the CIA's figures, and we’re hearing them all again now that a new set of defense hawks are claiming that China’s defense spending, rather than being a fraction of the US amount, is actually approaching our spending levels.

My sense of deja vu is palpable, but I kept waiting for the right analysis to come along and pierce this new, in my opinion, inflated estimate.

Here the hardcore argument best expressed: China’s real military budget has quietly become almost as big as ours.

And here’s the best comeback to-date from War on the Rocks: CHINA’S DEFENSE SPENDING: THE $700 BILLION DISTRACTION.

From the underestimation crowd at the American Enterprise Institute:

Our new research indicates that China is plowing far more money into hard power than it professes, with a military budget that might have been as high as $711 billion in 2022.

That figure is three times Beijing’s claimed topline of $229 billion and nearly equal to the U.S. military budget for that same year. This corroborates recent findings from American spy agencies, which estimated China’s real military topline at an estimated $700 billion. 

All countries count and report their defense spending in different ways. Authoritarian nations provide little more than annual amounts to the United Nations. Since these regimes offer no transparency, they are able to choose what they disclose in order to hide investments in key military capabilities.

AEI’s basic arguments mirror those of the CIA back in the day:

• The Chinese are not counting all sorts of defense-related spending in their military budget.

• Because everything is cheaper in China (“Labor costs are demonstrably cheaper in China, where soldiers are paid just one-sixteenth the wage of a U.S. Army infantryman.”), we estimating what China is really buying — bang-wise — for the buck.

This is basically the purchasing power parity (PPP) argument.

Purchasing power parity (PPP) is a measure used to compare the purchasing power of different countries' currencies through the price of specific goods, one of the more famous ones being the Economist’s Big Mac Index that tells you how much it really costs to buy one in Countries X, Y, and Z.

So you go to China and buy a dinner for 10 people and it only costs $50 bucks (true enough story) when it could easily cost $500 in the US. So, that allows you to say that, if the Chinese military has $50 to spend on dinner, then, by its standards, it’s actually purchasing a whole lot more dinner capacity (maybe $500 worth?).

Here’s the analytic comeback from War on the Rocks (based on the authors’ preceding article in the Texas National Security Review, which strikes me as solid:

These exaggerated estimates count spending categories for China without counting similar spending for the United States and apply purchasing power parity methods emphasizing low labor costs as a key military advantage.

So, a direct hit on the two key points of the hawks: 1) What to actually include in the budget — on both sides; and 2) the use and abuse of PPP calculations.

The result?

Accounting for spending not included in official budgets and using new World Bank purchasing power parity data published in 2024, we estimate that China will spend the equivalent of $474 billion on defense in 2024, much more than its official 2024 defense budget of $232 billion at market exchange rates. When compared to similar U.S. spending categories, this represents 36 percent of 2024 U.S. defense-related spending of $1.3 trillion.

So, yeah, China is spending more than we typically estimate (twice as much), but the estimate that it is spending three times as much, when compared to narrow definition of US national security spending, making the two almost equal … is bogus.

If you want to get expansive on Chinese security spending, then you have to do the same with the US calculation, and, when you do, we’re outspending China roughly 3:1, not that far off the usual estimates.

Point being, the 3:1 advantage holds serve.