INFORMATION BRIEFING ON NEED TO EXAMINE ECONOMIC POLICY ASSUMPTIONS UNDERLYING CIVILIAN NATIONAL DEFENSE STOCKPILE GOALS AND METHODOLOGY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85-01156R000100120006-8
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: August 26, 2010
• Sequence Number: 6
• Publication Date: April 5, 1983
• Content Type: REPORT

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? SECRET ?
COVER SHEET
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OFMANAGEMENT AND BUDGET
Attach this form to SECRET material in
use. DETACH the form when material
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INFORMATIONAL BRIEFING ON NEED TO EXAMINE ECONOMIC POLICY ASSUMPTIONS
UNDERLYING CIVILIAN NATIONAL DEFENSE STOCKPILE GOALS AND METHODOLOGY
0
PRESENTED BY DAVID A. STOCKMAN
CABINET COUNCIL ON ECONOMIC AFFAIRS
APRIL 5, 1983
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I. FEMA NATIONAL DEFENSE STOCKPILE GOALS
Current Stockpile Goals:
o 69 materials, ranging from cobalt, chromite and titanium -- to vegetable tannin and
iodine. (U)
o Dollar value of stockpile goals (billions) 1/:
0
o Total stockpile goal ........... $20.1
o Current inventory .............. 12.5
o Less inventory in excess of
goals2/ ........................ -4.9
o Inventory toward goal.......... $7.6
o Percent of goals unfilled...... 62% 3/
o Examples of stockpile goals (thousand short tons):
0
Titanium Copper Cobalt Tungsten Iodine
Military........... 191 0 26 8 0
Civilian........... 2 952 20 22 3
Total .............. 393 952 46 30 3 (U)
1/ Based on data in the President's Minerals Policy Statement, April, 1982.
2/ Primarily tin, silver and tungsten.
3/ 70% of unfilled goals are for civilian needs, 30% for defense needs. (U)
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Relevance of Stockpile Goals and Projection Methodology to Routine Administration
Economic Policy Decisions:
o Drives annual FEMA stockpile budget and Congressional stockpile add-ons (e.g. Schmitt
amendment to purchase 250 million in low priority copper). (U)
0
o Frequently is a factor in Trade Expansion Act (Section 232) determinations (e.g.
ferroalloys, industrial fasteners and machine tool cases). (U)
o Used to support case for Defense Production Act subsidies. (1983 House bill, H.R. 13,
provides $6.75 billion over 5 years justified partially on unfilled stockpile goals.
Same bill nearly passed House in 1982.) (U)
o Used to bolster ad hoc stockpile barter proposals (e.g., government property for
aluminum.) (U)
o Underlying econometric model and projection methodology now in process of update and
revision (comprehensive update on 2-4 year cycle). (U)
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II. FEMA METHODOLOGY TO ESTABLISH CIVILIAN STOCKPILE GOALS
Basic Methodology
o Defense and civilian requirements to support two-front war for three years following
one year mobilization warning. (Defense requirements are not covered in this review.)
U
0
o Stockpile materials requirements projected by modifying Chase Econometrics "base case"
peacetime econometric projection of GNP to create a wartime economy. Various GNP
subcomponents adjusted to account for impact of: (U)
o DOD military materials demand increment; (U)
o Wartime economic policy tools designed to optimize defense related output,
civilian economy contraints and overall economic performance; (U)
o FEMA projections of wartime civilian materials demand changes under
constrained policies; (U)
o - Total materials supply based on Interior estimates of domestic production
and import availability. (U)
S
o Foreign supplier reliability based on FEMA rankings of State Department
peacetime political judgments; (U)
o Scenario implicitly assumes shut-down of Persian Gulf, most industrial activity in
NATO and Asian war-zone nations. (S)
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Methodological Weakness and/or Contradictions
0 Civilian economy and personal consumption may be too robust given war tax financing
assumption, military demands on output, and potential strategic commodity bottlenecks.
(U)
o Efficacy, interactive effects and economic consequences of wartime economic policy
tools not explicit or rigorously tested. (U)
0
Weak to non-existent price/supply/demand relationships for basic materials and
industrial commodities. U
o Questionable domestic and foreign raw material supply estimates for many key
commodities. (U)
o Downstream impact of industrial capacity limits (e.g. steel) and strategic
commodity bottlenecks (e.g. oil) not reflected in macro-economic projections. (U)
o Contradictions and inconsistencies may give systematic upward bias to stockpile goals
and peacetime policy actions/costs tied to them. (U)
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1) Wartime Economic Policy Tools
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o In order to accommodate a 290% increase in real defense output over a four year
period, the planning model assumes a variety of wartime economic policy adjustments
designed to allocate resources to wartime objectives and balance overall economic
performance. For the 1979-82 planning model from which current stockpile goals have
been derived, these policy adjustments include: (U)
o A 50% cut in the Federal Reserve discount rate in order to facilate an
"active ease" monetary policy and a 23% expansion of nominal GNP in the
first year of the war; (U)
o Stringent credit allocation policies designed to reduce real consumer
durable spending by 45% by the third year of the war. (U)
o About a 45% increase in average personal income and corporate tax rates plus
major increases in indirect business taxes and an auto excise tax to
accomplish a war financing policy based on 65% taxes and 35% borrowing. (U)
o Selective capital investment incentives (ITC and rapid depreciation) to
facilitate a 56% real increase in business equipment investment over 4 years
(outside the defense production base). (U)
9
o Direct DOD financing of most of the wartime production base needed to
produce military goods, including $775 billion (1982$) in government
financed plant and equipment over four year. (U)
o Various direct interventions including construction price controls, consumer
goods rationing, foreign exchange and investment controls and import/export
controls. (U)
o These policy measures have not been rigorously tested, and they have not
been reviewed by senior economic policy officials during the Reagan
Administration. (U)
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2) Civilian GNP Estimates and Materials Requirements
o Methodology for the current projection period (1979-82) results in lax and
sweeping definition of "essential" civilian requirements to support war
mobilization which includes: (U)
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Basic Industrial
Direct and
Essential
Indirect Defense
Civilian
Protected in
Phantom*
Stockpile
T4er
Percent of
wartime GNP
15%
53%
25%
7%
% of Materials
Requirement
Protected by
Stockpile
100%
100%
100%
0%
Types of Items
All defense weapons,
Housing, food, energy,
60% of new cars,
40% of new cars,
uniforms, food, plus
business investment,
stationery, most
jewelry, watches
indirect needs for
TV repairs, barber-
services, 37% of
63% of boats,
their production
shops, alcoholic
boats, tobacco
amusements
beverages
products
* FEMA GNP assumptions imply material available but not protected by stockpile. (U)
o Projected wartime economy is 122% of actual 1980-82 levels (115% above for civilian)
and stockpile protection covers 93% of this activity. Thus, current stockpile goals
provide material needs for an economy 113% the size of actual 1980-82. (U)
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o Leads to excessive assumptions for aggregate personal consumption expenditures (PCE)
including: (U)
o 7 percent annual wartime PCE growth rate -- higher than any peacetime year
since 1946. (U)
Preliminary data from the 1983 goals project only 20 percent decline in
civilian auto and recreational vehicle output compared to 98 percent in WWII
-- and presumably in the face of a draconian civilian gasoline shortage. (U)
o FEMA wartime PCE levels exceed actual 1980-82 PCE by 10 percent. (U)
o Assumptions generate total wartime GNP that resembles high-throttle "guns and butter
economy" and resulting excessive estimates of materials demand. Compared to pre-war
base, model assumes: (U)
o 290 percent real increase in defense output. (U)
o 17 percent real increase in civilian output compared to 12 percent decline
in WWII. (U)
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o Real GNP grows at 9% annually while inflation declines -- even though U.S. oil
supplies are only about 58% of normal levels. (S)
o Other questionable assumptions include:
o Doubling of pre-war money supply growth rate but lower than pre-war
inflation. (U)
o 70 percent corporate tax rate but 56 percent real increase in civilian
equipment investment. (U)
o Manufacturing labor productivity rises 13.7% per year while the unemployment
rate falls to 1.7% by the third year, and metals manufacturing utilization
rates reach 127%. (U)
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3) Industrial Capacity Limits and Strategic Bottlenecks (U)
is
o US petroleum consumption implicit in GNP levels increases 20-25 percent over peacetime
of 15-16 MB/D level. But multi-year war scenario almost guarantees that North Sea,
North Africa and Persian Gulf knocked out of production (54 percent of CIA-estimated
free world capacity). (U)
o The resulting 42 percent reduction in US civilian petroleum supplies not consistent
with following assumptions used to generate sector materials requirements: (S)
o Domestic civilian motor vehicle and equipment (cars, trucks, buses) output
at 120% of prewar levels. (U)
o Civilian aircraft production at 140-190% of prewar levels. (U)
o Automotive supply and servicing demands at 170 percent of pre-war level
while gasoline supply at only about 58 percent of normal. (S)
o Either administrative or price rationing of civilian petroleum supply could
drastically reduce FEMA's estimates of petroleum-dependent civilian output.
U
0
o Consumer-related stockpiles of copper, cobalt, chromite, etc., could not be
used because of petroleum shortages. (U)
o Methodology tends to under-estimate supply of raw materials (which can be stockpiled)
but over-estimate primary manufacturing increases (which cannot). During the
mobilization and war: (U)
o Overall manufacturing capacity is projected to increase by 14.7% annually.
(U)
o Projected supply increases for most minerals are in the range of 1% to 3%.
(U)
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4) Basic Materials Supply Response (U)
o Domestic Supply
o Materials methodology considers only supplies available from existing domestic
capacity, ignoring growth induced by wartime demand, reduced imports, higher prices
and profitability of higher cost capacity: (U)
40
o Proposed $88 million in cultured quartz crystals stockpile showed no wartime
capacity increase despite 22 annual peacetime growth over 1970-80. (U)
o FEMA's ferroalloys report assumed industry could add no capacity over
'four-year period, even though new furnaces can be added in 18-24 months. (U)
o No domestic cobalt mining projected even though there are two domestic
deposits which Interior estimates could yield 3 million tons annually within
2 years. (U)
o Over the course of the war, FEMA assumes domestic antimony supplies decline
17% annually; copper, tin, zinc increase only 1% annually; nickel 2%; and
lead 3% annually. (U)
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International Supply
o Underlying war scenario assumes substantial reduction in NATO and Asian war zone
industrial output, but materials projections implicitly assume: (S)
o Minerals producing nations (Canada, Chile, Australia, South Africa) continue
to ship to war zones at pre-war levels. (U)
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o Pre-war copper, lead, nickel, zinc exports to war zone would not be
available to US. For example, in case of copper and lead exports from
Chile, Canada, Peru, Mexico and Australia: (U)
Copper Lead
o Nearly one-million tons to o About 335,000 tons to
peacetime Europe U) peacetime Europe (U)
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o Only 56 000 ton increase to o Only 40,000 ton increase to
wartime U.S. (U) wartime U.S. (U)
o Diversion of only one-third of peacetime Eurpoean copper supplies and 45% of
lead supplies to U.S. would eliminate stockpile goals for these commodities
entirely. The unfilled copper goal is $1.9 billion and lead goal is $.3
billion. (U)
o International supply assumptions are largely based on FEMA's complex political
"reliability" ratings for 143 countries, which produce paradoxical results such as:
cU
o Shortly before hostages were taken, Ayatollah's Iran (score 74.9) ranked
higher than Ireland (score 74.6) or France (score 73.2). (S)
o USSR (score 37.5) ranks higher than South Africa (score 26.3). (S)
o The People's Republic of China (score 39.2), an assumed wartime enemy, was
rated among the reliable suppliers. (S)
o The unfilled stockpile goal for Jamaican bauxite ($.5 billion) could be
eliminated if Jamaica (score 40) were considered a reliable supplier for
essential civilian needs. (S)
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III. CONCLUSIONS AND RECOMMENDATIONS
0
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o It is not clear that the postulated wartime policy instruments will produce the
economic effects assumed, nor have they been systematically reviewed by Senior
Administration economic policy officials at any time since 1981. This should be
undertaken for the 1983 model update. (U)
o Present procedures appear to overestimate wartime civilian materials consumption and
underestimate supplies, leading to excessive goals. (U)
o Unjustified goals produce pressure for acquisition (purchases, barter, conversions) of
low-priority material while a number of high-priority defense requirements are not
met. In effect, substantial USG stockpile assets may not be needed while other high
priority materials are not available. (U)
o Based on a preliminary OMB analysis of 13 commodities with $17 billion goals, revision
of FEMA's assumptions and procedures could reduce stockpile goals by 50-65 percent,
$10-13 billion less than existing goals. Such reductions would not affect material
requirements for direct or indirect military production. (U)
o CCEA should review FEMA's procedures and economic assumptions to ensure their validity
and consistency with Administration economic policy and revised procedures should be
used in computing new stockpile goals and in assessing national security preparedness
related to imports. (U)
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