WISDOM IN A NUTSHELL

CIA Estimates of Soviet

Military Expenditures:
Errors and Waste
By
William T. Lee
AEI Press June 1995
ISBN 0844739170
150 pages

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Despite the fact that the U.S. Central Intelligence Agency spent four decades and
between $5 billion and $10 billion in estimating the size of the Soviet economy,
the CIA’s research methods persistently underestimated the size of Soviet
military expenditures and ignored growing evidence of the economic problems
that contributed to the Soviet Union’s collapse. This AEI special report on
intelligence explains why the CIA was so wrong on such a crucial issue. The
author, who began his professional career at the Central Intelligence Agency in
1951, conducted research on Soviet military and economic affairs for a number
of government and private research organizations until his retirement in 1992. A
summary of the report follows.

To estimate the Soviet Union’s military expenditures (ME), the U.S. Central
Intelligence Agency used a "building block" methodology that required a vast
amount of detailed information on both physical quantities and ruble prices.
Known by its acronym SCAM, the CIA’s Soviet cost model not only consumed
much of the agency’s own resources but also depended on national optical and
electronic intelligence programs for raw data and on the Defense Intelligence
Agency (DIA) and other government agencies, contractors, and academics for
analysis.

The CIA’s method was expensive. It was also flawed. The CIA alleges that its
estimates of Soviet ME were "consistent with Soviet data" and that it used the
best methods available. In fact, the CIA either ignored or denied virtually all
evidence contradicting its estimates, including the flood of previously classified
data and information emanating from the Soviet Union in the glasnost years of
1989-1991. The CIA’s method was a dead end from the time it was adopted in
the mid-1950s through the succeeding four decades.

Data from Soviet leaders and official Soviet statistics show that the CIA persist-
ently underestimated the growth rates of Soviet ME by a factor of four or more
and military procurement by about a factor of ten. Whereas these data reveal that
by 1988-1990 the military’s share of gross national product (ME/GNP) had
reached at least 25-30 percent, the CIA was estimating this ratio at 12-15
percent. Contrary to CIA estimates that the consumers’ share of Soviet GNP was
constant, consumption declined from 60 percent to little more than 40 percent of
GNP between 1960 and 1988.

The CIA twice revised its ME estimates (for the base years 1970 and 1982) to
match the so-called benchmark data: statements and reports from scattered
Soviet sources that cover the two decades preceding glasnost. But the CIA
refused to correct the systematic downward biases in its methodology that
underestimated both Soviet weapons production and the real cost growth of
weapons technology. Thus, after each revision, the CIA continued to
underestimate ME and ME/GNP.

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Gorbachev and senior Soviet officials have confirmed the Soviet Union’s nuclear
war fighting doctrine and deliberate militarization of the economy at the expense
of individual consumption. Yet the CIA not only failed to detect but also
consistently denied that this was the Politburo’s policy. By 1988, the combined
military burden and cost of socialized agriculture had reached about 45 percent
of GNP. What ensued was the economic collapse that led to the country’s
demise, which the CIA did not anticipate and then could not explain.

The same evidence that contradicted the CIA’s estimates corroborated William T.
Lee’s numbers on ME, procurement, and Soviet economic priorities. Lee’s
Sovdata method used official Soviet economic and financial data that the CIA
and DIA maintained were at once undecipherable and misleading if deciphered.
Shunning the Sovdata method, the CIA tried instead to uphold SCAM with
increasingly inaccessible data and contradictory rationales.

Much of these data were lost when the Soviet Union revamped its deception and
denial program after discerning U.S. intelligence capabilities through arms control
negotiations in the early 1970s. With U.S. satellite intelligence collection thus
thwarted, it became impossible not only to verify Soviet weapon stocks declared
under various arms reduction treaties but also to collect the data required for
SCAM.

Whereas the benchmark data and Sovdata estimates (and later the glasnost
information) attested to high growth rates and rising ME/GNP ratios, the CIA had
another explanation: this apparent growth was instead the result of Soviet
managers’ inflating prices for weapons and equipment. This, however, was a
myth.

For thirty-five years, the CIA manipulated the "hidden inflation" myth to explain
away any discrepancies between the CIA’s estimates and all evidence to the
contrary. The CIA put this myth through four cycles of invention and rejection:
invented in the late 1950s and in force throughout the 1960s, rejected in the early
1970s, reinvented shortly after the first revision of SCAM’s estimates in 1976,
and discarded in early 1990.

"Hidden inflation" was in force a second time when the United States suffered
what was perhaps the most serious intelligence failure of the cold war. By 1981,
the Politburo realized that the long-term trends in the "correlation of forces"--
political, economic, military, and social--were working against the Soviet Union
and in favor of the West. A drastic shift in resource allocations to the military
followed in 1981-1985, when an unusually paranoid Politburo appears seriously
to have considered resorting to nuclear war to reverse the long-range trends.
Nevertheless, at the height of the crisis in 1983, the CIA testified to Congress
that the Politburo had shifted its priority to civilian output.

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In sum, forty years of CIA analysis produced bad economics and worse
intelligence. The total cost of the CIA’s failed Soviet economic analysis (including
national collection system support) was at least $5 billion to $10 billion.
Comparable total costs of the Sovdata estimates amount to less than $1 million.

Proliferation of nuclear, chemical, and other advanced military technologies

proceeds apace worldwide. Reliable intelligence, especially economic, will be at
least as important in the future as it was during the cold war. As this critique of
the CIA’s SCAM demonstrates, however, the past performance of U.S.
intelligence has been marked by lapses in professional integrity, a lack of
personal accountability, and the almost total absence of a learning process. The
CIA therefore stands in major need of both large budget cuts and a major
professional overhaul.

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