WILLIAM SAFIRE'S COLUMN ON THE SIZE OF THE SOVIET ECONOMY AND THE BURDEN OF SOVIET DEFENSE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90M00005R000700020002-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 10
• Document Creation Date: December 27, 2016
• Document Release Date: June 4, 2013
• Sequence Number: 2
• Publication Date: March 28, 1988
• Content Type: MEMO

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W I_~ n Office of Congressional Affairs
,o-
IV _LIG"'
14-V L Ce
Washington, D.C. 20505
Telephone: [phone]
30 March 1988
TO: Mr. Richard Kaufman
Joint Economic Committee
G-0 3 Dirksen Bldg
wasnington, u. C. 205tk-j
asked me to pass on SOVA's
comments on William Safire's recent columns
on the Soviet economy and the burden of
Soviet defense.
House Branch
Office of Congressional Affairs
FOR/.". 1 533 ?kSETS
2.86 ENTIOI'S
DISTRIBUTION:
OriginallAd.dres.se-e
9c CENTRAL INTELLIGENCE AGENCY
Chrono
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SUBJECT: William Sa fi re' s Column on.: the Size. of the
Soviet Economy and th.e Burden.of Soviet Defense
1. In a column in this morning's New York Times (attachment
A) William Safire maintains that CIA has overestimated the size
of the Soviet economy and, as a result, is underestimating the
share of Soviet GNP devoted to defense. To support this thesis
Safire cites the views of several participants in a recent
symposium on Soviet defense sponsored by the Hoover Institution--
which Safir.e did not himself attend--and an article in the Soviet
journal, Novyy Mir, by economist Grigoriy Khanin. Safire also
maintains that a recent speech by Soviet leader Gorbachev, which
he discussed in an earlier column, provides support for his
thesis. Our assessment of this earlier column-'-which, we
believe, rests on a gross misinterpretation of Gorbachev
speech--is appended to this memorandum (attachment B).
2. According to of the Office of Soviet Analysis,
who was present at the recent Hoover Institution symposium,
Safire accurately reports the views expressed by several of the
participants but fails to give due attention to the criticisms
that were made of their position by other participants in the
session. In particular , reports that the symposium's
leading proponent of the thesis that CIA estimates of Soviet GNP
are too high--the Swedish diplomat Aslund--was sharply criticized
'
by Rand
s Abraham Becker for a reliance on personal impressions
rather than on statistical evidence or rigorous analysis.
3. Safire evidently is also unaware that three of the
symposium participant-, whnca vipwc hi ri-*es approvingly--Henry
-served on a seven-
ineinuer established at the request of DDI Robert Gates some
years ago to explore the hypothesis that the state of the Soviet
economy was worse than estimated by,CIA. The final report of
this working group, issued in May 1985, dealt with the decade
1976-84, when, according to CIA, the Soviet economy was growing
at an average annual rate of 2.5 percent. The report concluded
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 SUB--.JECT` Wi1?liam Safi=re'.s Column on the size:o.f the;
Soviet .:Ec.onomy and the -Burde.-n of Soviet Defen:s'e
that -in the judgmen-t of "several" members of the: group he
-
max-i:mum amount of *over-estimation of which We might:.-be guilty
amounted. :to one to 1.5 'percentage paints a..year,' with one member
believing. that the overestimation could not be'.this great and
only. one other believing that a larger - errorwas possible.. In
light of the fact that this group was establi.s'hed only to examine
the possibility that CIA estimates were too high and the fact
that its membership included the leading proponents of this view,
we were encouraged by what we took to be the implicit judgment
that even if our estimates of Soviet economic growth were biased
-- C.-0 .IDENTLAL
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upwards, the degree of bias would probably not be excessive.
4. Safire's comments on the article by Grigoriy Khanin
reflect the columnist's lack of acquaintance with the issues that
the Soviet economist discussed. It is true that Khanin argues
that official Soviet statistics on economic growth are
exaggerated because they include hidden inflation. It is untrue,
however, that CIA was surprised by what Khanin said. On the
contrary, CIA-has long been a proponent of the thesis that Soviet
growth statistics are inflated. It is for this reason that CIA
produces its own estimates of Soviet growth which historically
have been substantially and consistently lower than those
reported by the Soviet authorities. (Khanin's article,
incidentally, was discussed in great detail at a SOVA-sponsored
conference on Soviet economic statistics under Gorbachev that was
held at CIA Headquarters in December 1987. The general view of
the conference participants was that the inflation problem Khanin
discussed is a real one but that Khanin's estimates of its size
were not supported by the evidence he cited.)
5. Although disagreeing with Mr.. Safire's thesis, we
recognize that the issue he discusses is important. We also
believe that participation in conferences like the recent Hoover
Institution symposium and our own gathering of academic experts
on Soviet statistics is essential to a thorough airing of the
questions involved and--to the extent that our mandate to protect
classified sources and methods will allow--of the pertinent
evidence. We have listened to the arguments of those whom Mr.
Safire cites and believe that our estimates take proper account
of the insights they have to offer. Indeed, we regard much of
the, evidence cited by Mr. Safire as support for long-standing CIA
CONFIDENTIAL
? 75X1
25X1
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 CONFI.DFNT-TAI
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SUB'J?CT Wi1"1iam.Saf:ite'-s`-Column on-the.Sf e-:of-:the:
Soviet- Economy and ..the .::Burden Of Soviet Defense
assessing Soviet economic performance.
positions and theses.. Gorbachev and Khanin, after al.l,ha've
acknowledged what we have :ar-gued for.years- that official-Soviet
claims of economic growth are-exaggerated. .In our view,-' these
acknowledgements.underscore the n-eed for the estimates that-we
provide and that we regard as'the most useful tools available
anywhere to US policymak'ers or academic, analysts concerned with
Chief, Defense Economics Division
Office of Soviet Analysis
Attachments:
A. NYT Column by William Safire, "The Genscher Line,"
28 March 1988, page 21.
B. SOVA/DEIG Memorandum, "Comments on Gorbachev's February
Speech and William Safire's Analysis of It," 3 March 1988.
CONFIDENTIAL
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 0 4S -ATTACHMENT-_-'A
SAN FRANCISCO
n April 15, 1986, 'when U.S.
O
mar el-Qaddafi, Bill Casey brought-a
group of non-C.I.A. economists in to
see the President. As bombs fell on
Tripoli, statistics about the Soviet
economy rained on Ronald Reagan.
"What does all this mean?" he
asked as the hourlong presentation
ended.
It meant, the outside consultants
explained, that the conventional wis-
dom about the Soviet Union's size and
strength was wrong: instead of stead-
ily growing, Soviet production had
been stagnant for years.
This meant further that the Krem-
lin's new leader, Mikhail Gorbachev,
would soon be faced with an internal
crisis: he would have to shake up the
economic system radically to force
new growth, or accept a reduction in
what was becoming an unsustainable
level of military spending. Soviet eco-
nomic weakness could profoundly af-
fect arms talks and the maintenance of
the empire from Afgheii'tzr to Cuba.
The President wanted to knee what
the effect of this new interpretation
would be on his policy planners.
"They'll say, 'Help this nice
man,' " replied one of the economists..
'Mr. Reagan nodded: "I. know, the
Genscher line." He was referring to
the Ostpolitik urgings of West Ger-
man Foreign Minister Hans-Dietrich
Genscher, who is eager to finance the
revival of Moscow's trade.
That was just two years ago, when
Mr. Reagan presided over an Admin-
istration split between Defense-
Ci.A.-N.S.C. hard-liners and the ec-
commodationists at State.
Then, a year ago, an iconoclast
among Soviet academicians, Grigoriy
Khanin, was permitted to publish in
Novy Mir a refutation of all past Soviet
figures, exposing the use of hidden
inflation - "figure-padding and price
manipulation" - In estimating growth
rates. C.I.A. analysts gulped; their own
estimates for 1986 were closely in line
with the earlier, officially rosy Soviet
figures, which were in the process of
being discredited.
A couple of weeks ago, as reported
in this space, Mikhail Gorbachev put
his sump on the gloomy Khanin ac-
count in a speech to the Central Com-
mittee. If the Russian leader can be
believed, the Soviet economy is about
one-fourth smaller today than Soviet
statisticians - and our own intelli-
gence analysts - have led our de-
fense planners to believe.
Last week, at the Hoover Institu-
tion in Palo Alto. the best-of-the-West
analysts of the Soviet economy held a
friendly intellectual shoot-out.
Henry Rowen, a Stanford University
Failing to
exploit Soviet
weakness.
professor and former Rand Corpora.
lion president who ran studies for the
C.I.A. a few years ago, was the organiz-
er; Charles Wolf of Rand, co-editor
with Professor Rowen of "The Future
of the Soviet Empire." coming out next
month, presented a paper that shows.
among other stunners, how China is
likely to outproduce the Soviet Union
soon after the year 2000. Prof. Richard
Ericson of Columbia University's Har-
riman Institute was, I'm told, a star
performer, along with a Swedish
economist I want to take to lunch. To
its credit, the Agency had its tear...
headed by the economist lent Swain,
in the thick of the argument.
"Team B,- as the new-estimate
types will inevitably be called, holds
that Soviet income is the equival -n:
of $3,000 per capita; that means the
Soviet Union would be producing
roughly one-fourth as much as the
U.S. produces. But the old C.I.A.aca-
'demic consensus is said to put Soviet
output at one-half the United States';
that's about as much as economists
can disagree about anything.
Another schism: The old consensus
says the proportion of G.N.P. that the
Russians spend on defense, plus under-
ground facilities and the "cost of em-
pire," is still under 20 percent; the
Team B estimate of the same items
ranges from 25 percent up to 35 per-
cent of all production. (Our spending
on the same breadth of items is only
percent) The first estimate would put
Mr. Gorbachev In some difficulty at
the summit meeting; the last estimate
would take him to the brink of despera-
tion fora deal.
As Mr. Reagan would ,ask, What
does this mean? It means that we
should not be in such a hurry to help
this nice man.
Unfortunately, the "Genscher line"
has taken hold in the Reagan Adminis-
tration; all the hard-liners have been
routed. Secretary Shultz has just
agreed to link Start to "Star Wars." a
huge concession. Although both super-
powers have sold the world's media on
the Seeming impossibility. of a Start
treaty at the summit, the fix is in for a
rush to sign in Moscow.
The Russians are exploiting Mr.
Reagan's yearning for a blaze of glory;
we are failing to exploit the urgency of
the Russians' need to catch their
breath. U
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Comments on Gorbachev`s February Speech
Anaays.Is..or.
Sa f.ire has's , made -a not uncommon error.. i n. i ntetpreti ng.
Gorbachev's remarks as referring to..the level of national
income when the.. Sovi.et-General Secretary. :was describing ._ .
.increments--'or additions :to-=national income. 'Thus- when
Gorbachev said that additions declined in the early.. 1980s--.
meaning"that nationa- ifincome grew more slowly=-Safire.
interpreted this as meaning that 'national income was
falling.
1. In a speech to the Central Committee on 18 February, General
Secretary Gorbachev said that if the increase in the production of
alcoholic beverages and the increase in trade that resulted from the large
rise in the price of oil in the 1970s are "purged" from Soviet indicators
of economic growth, "for the last four 5-year periods there has been no
increase in the absolute growth of the national income, and at the
beginning of the eighties it (the annual increase in growth) had begun to
fall" (FBIS Daily Report, SOV 88-033, 19 February 1988). This provocative
statement was the subject of columns by William-Safire in The New York
Times on.25 February (Attachment A) and Wesley Pruden in the Washington
Times on 2 March (Attachment B). Safire concluded that Gorbachev 's
statement amounted to an admission that Soviet economic performance has
been considerably worse than Western analysts believe and that, therefore,
the burden of Soviet defense must be correspondingly greater as well.
Pruden accepted Safire's findings.
2. Safire misinterpreted Gorbachev's statement. Gorbachev said that
the annual addition to the level of Soviet national income had not changed
in the 1950s and 1970s and that this increment had, in fact, hegun to fall
in the 1980s if the effects of rising alcohol production and changes in
terms of trade are netted out. In effect, Gorbachev was describing the
situation shown in Figure I (Attachment C), where the absolute annual
growth reported for Soviet national income was almost constant from 1965 to
1980 while total national income was rising (see box insert in Figure 1).
Gorbachev added, however, that the growth shown for 1981-85 would be less
if there had been no increase in alcohol production or in foreign trade
financed by rising oil prices. Safire interpreted Gorbachev's statement to
mean that the level of national income (rather than the additions to this
level), had been relatively flat in 1961-80 and had begun to fall at the
beginning of the 1980s.
3. Our own, independently-derived estimates of the growth in Soviet
GNP show a trend that is even worse than the one described by Gorbachev--
with the increments to GNP declining in each of the Five-Year periods
rather than remaining flat as Gorbachev claimed (Figure 2, Attachment
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-Our.`estimates"are.not.affected' by xhtfts in terms',af made, and the:.
in:flue-of~:changes in :alcohol ::production i negligible .- because we -value
sucI production at.the cost of..p-roduction -rather than at retail prices
4. Mr. =.Sa.f-i re; ha.vi ng jai sinterpreted Gorbachev's statement .to:meaf
that total GNP had. first.-levelled off -and- then. declined,'. went onto- assert
that defense therefore must have taken up.an increasing share'of.total'
GNP. His i plicit assumption.. is that defense., id not go down., and that it.
therefore took 'an increasing share'o.f a .fall.irg.GNP. . As:-pointed out above,
however, total GNP did not shrink .(nor- di.d Gorbachev say it did) i t.merely
grew. more slowly (see box insert in Figure 2). And our calculations of
Soviet defense spending show that. it too--while not shrinking-began to
grow more slowly in the mid-seventies. Defense, therefore, continues to
take up roughly the same share of GNP as it did in 1970.
5. Two additional. points are worth making:
-- Safi re states that, "our intelligence analysts" have
been saying that Soviet economic growth during the Reagan
.years "has averaged slightly over 3 percent annually", a
total gain of about one-fourth". In fact, our current
estimates show that growth of GNP averaged about 2
percent per year during 1981-87, an overall gain of 14
percent.
-- The New York Times columnist also says that the defense
share of Soviet GNP has been given as 14 percent. In
fact, the share was given as 15-17 percent in our JEC
testimony last year (March 1987). (U)
* GNP and the Soviet concept of national income both measure the final
output of goods and services. The Soviet definition of final output is
narrower, however. It excludes depreciation and services that do not
contribute directly to production of material goods.
.including 'a hi.gti -turnover. tax, as."the -Soviets oo.
A.
B.
C.
NYT Article, "Bailing Out Moscow"
WT Article, "One More Chance to Do Good"
Two Graphics: Growth in Soviet
National Income and GNP
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e have: just been told.by a our isstssment- of" total growth Cl.'
well-ofaeed informaniInside ' :-about bea fourth to this'tt3cade figs
Union is not th economic power our ' posedly seven-foot g *nt turns-out to
intelligence- 'analysts , 'have long
thought it was-
thhroughout the Reagan years, otr.
experts have "assumed that 'Soviet
growth averaged slightly over 3 per-
cent yearly: That is avital statistic: we
then put a.price each year on what we
knew the Soviet military. machine cost.'
and get what we hope is a clear idea of
what percentage o f its. economy Mos-
cow is devoting to armament.
That's just about the most impor-
tant intelligence number of all: In the
70's, a "Team B" of outsiders was
brought in by the C-I.A. to challenge
the conventional wisdom, and dou-
bled the previous estimate to 13 per-
cent in the Soviet Union, That laid the
basis for our own increased defense
spending, which now amounts to 6
percent of our gross national product.
In a little-noted passage of his long,
speech. last week to his Central Com-
miuee, Mikhail Gorbachev made a
stunning revelation that kicks our
estimates into a cocked hat.
Sias in the Breeirtev'ye4ra .
'Apply that new assessment to arms -
control- The way we'estimate Soviet
arms expenditures is by simple bean-
counting, mainly. from satellites, and
that total is not affected.'What does
change is the percentage of:the output
devoted to arms; If It was 14 percent
by the old assessment, it must be an
unbearable. 20 percent in the new it
ality Mr. Gorbachev reveals.
Thus, under pressure to reduce
arms spending, he seeks treaties:
forced to cut losses, he announces
withdrawal from Afghanistan and
may offer to reduce subsidies in Cen-
tral America: faced with the pros-
pect of having to match serious Star
Wars spending, he rails at the idea of
strategic defense,
Apply that no-growth, one-fourth-
smaller fact to economic diplomacy.
It explains why the Russians finally
settled the old Czarist debt for a dime
He pointed out that during the
Brerhnes? years. economic growth had
t'en artificially hiked by the sale of oil H
ow fin deal
world's largest producer) and the ac- ' vi i a 1i i np-~-~T
celerated sale of vodka (Soviet spend- Lf t b ` J
ing on alcohol may have reached 10
'crcent of total output, compared with adversary-
less than 2 percent of ours).
"If we purge economic growth indi-
cators of the influence of these fac-
tors.'" said t?lr. Gorbachev- "it turns
out that. basically- for four five-year
-_r ods there was no increase in the
absolute growth of the national in-
come and, at the beginning of the 60"s,
it had even begun to fall. That is the
real picture, comrades!"
No doubt the current Kremlin
leader is trying to make the present
bad economic picture look better by
saying the old days under his prede-
cessor were really much worse. But
we should allow for the possibility
that, concerning the 80's at least. Mr-
Gorbachev mas? be telling the truth.
If that is the real picture, comrades.
w'e have to do some fast reassessing of
our own. During the 80's, as the price
of oil has been cut in half, and the
Soviet gulping of booze has been re-
stricted, the total Soviet output is not
likely to have risen much, if at all,
from what Mr.Gnrbachev szys was its
falling sts.e in 19V.
Here is what that new assessment
(cads us to deduce: the Soviet econ-
omy has been stagnant (or possibly
declining) for seven years - most
definitely no growing steadily at the
over-3-pefrrnt rate per year our ana-
on the dollar, paving the way for a re-
cent S77 million Soviet bond issue.
T t:at"s also why the Kremlin will b-
seeking entry into the International
Monetary Fund. GATT and the World
Bank at the next meetings (in West
Berlin) this fall. Soviet Communism
is starving for capital.
Our European allies arc rushing to
lend Moscow money and to subsidize
pipelines, while accommodationists
here want to offer the Russians most-
favored-nation status on trade, Com-
merce and State Department detente-
niks await only vague "economic re-
forms" to end our opposition to Soviet
entry into Western credit markets.
Here is a genuine issue to toss at
the candidates in our election. In light
of what the Soviet leader admits is "a
very serious financial problem;'
should U.S. policy seek to finance our
Rdversary? Or should we "etreSs"
Moscow.now, as it surely would do to
us if the roles were reversed?
Or should we use this moment- of
admitted Soviet economic weakness
to put an irrevocable, verifiabie;
behavior-modifying price on every
concession we confer? -0
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-to-do good ': ,"
The people who love to knock the CIA. for its ex-
cesses but mostly for its successes, may at last have
a lcgmmate gripe.
Rut so far. nobody's hearing a peep out of them.
The implications are not politically convenient.
Teat Soviets. say the No. I Kremlin insider. ha-e-
nas nanaged their economy, much more miserably
than the most dedicated commie-bashers have
dreamed of. and the CIA. which missed all this,
made a miscalculation of truly dumb proportions.
??'Willram Safirc took note of this startling phenom-
enon last week in The New York Times. but, oddly,
rnbody seems to have noticed. For years, the best
C.S r_ellieence estimates have assumed an annual
Soviet growth rate of 3 percent. and it is on this
r.J;-7ber that Ronald Reacan's administration based
u. reckoning of what the Russians were spending
meats - and on what we should he
s:rrsdicz to counter Soviet arms.
Toe Cl.a reckoned that the Soviets. were spending
ate: t:~ 13 percent of their gross-national product on
Ru: \likhai! Gorbachev made a painful and stun-
r:r.c con"' ,-ion last month to his party's central
when, the proceeds from the sale of So-
s r: