LETTER TO MR. EDWARD W. PROCTOR(Sanitized)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80B01495R000700110021-3
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 16
• Document Creation Date: December 20, 2016
• Document Release Date: February 7, 2006
• Sequence Number: 21
• Publication Date: July 8, 1974
• Content Type: LETTER

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8 July 1974
Mr. Edward W. Proctor
Deputy Director for Intelligence
Central Intelligence Agency
Washington, D.C. 20505
Here is a first report from the Military Economic
Advisory Panel. It is based on our survey of numerous
papers provided by CIA and DIA; detailed briefings by
both Agencies; and a substantial amount of discussion
among Panel members and between the Panel and staff
people. The report incorporates the reactions of
members to a draft version, but they have not had a
chance to review my revised text. I hope that in
major respects it will meet with their approval.
Full unanimity is not necessary, but I feel strongly
that the Panel should meet together to provide an
opportunity for supplemental observations and further
.suggestions. Perhaps we could all meet together for
a day later this summer and then meet with you as a
group, so all could make sure that special concerns
were properly aired.
It has been an honor and a pleasure to be involved
in this exercise.. If you decide that we've done what
we can for the moment, I thank you for calling us in.
If you see a continuing role for us, I feel sure that
all who are able to will cheerfully continue to serve.
Sincerely,
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Chairman
Military-Economic Advisory Panel
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FIRST REPORT--MILITARY ECONOMIC ADVISORY PANEL
Chairman
1 July 1974
1. Introduction . . . . . . . . . . . . . . . .
B.
C.
The Panel's Purpose . . . . . . . . .
Progress to Date . . . . . . . . . . . . .
Possible Next Steps . . . . . . . . . . .
II. Some Present Difficulties . . . . . . . . . .
A. The Military-Economic Intelligence
Quandary . . . . . . . . . . . .
B. Inadequacies of the Agency's Response . .
III. Four Suggested General Responses . . . . .
A. Continue the Focus on Aggregate
Money Values . . . . . . . . . . . . .
B. Continue Direct Costing and SCAM x . . . .
C. Continue Annual GNP Estimation . . .
D. Move Toward Greater Openness . . . . . . .
IV. Recommendations . . . . . . . . . . . . . . .
A. For Rapid Implementation . . . . . . . .
B.. Longer Term Projects . .
V. Larger Aspects of Military Economic Research .
A. The Agency Should Maintain an Overview
of the Whole Field . . . . . . . . . . .
B. Protect the Basic Research Function . .
C. Use Outside Expertise to Supplement
Agency Work . . . . . . . . . . . . . . .
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FOR U O-'l.Y
FIRST REPORT--MILITARY ECONOMIC REVIEW PANEL
1 July 1974
I. Introduction
A. The Panel's Purposes
1. The establishment Of a CIA Military-Economic
Advisory Panel was approved by the Director of Central
Intelligence to advise the Deputy Director for Intelligence
on the present adequacy validity, and usefulness of CIA's
military-economic work, and on possible ways to improve it.
2. The US national interest requires careful evalua-
tion of Communist military and economic activity. Its
dimensions and details are complex and very incompletely
revealed by the countries involved. Serious ?differences
valuating available
of opinion face US pol-icymakers in evaluating'
.evidence. The problem is to minimize uncertainty and in-
consistency, and to marshall the evidence persuasively in
forms directly applicable to decisionmaking.
3. The Panel was asked to make suggestions for
improvements in:
Chairman
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a) the formulation of intelligence questions,
b) research tasks to undertake,
c) research methods to employ,
d) ways to organize the research effort, and
e) the form and scope for disseminating
research findings..
B. Progress To Date
1. The Panel has met as follows:
Members Present
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6-9 April 1973
23-26 July 1973
~3-15 December 1973
14-15 March 1974
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in addition, the chairman has spent several days in
preliminary and interim meetings, and other members have
made individual visits. All members have read relevant
documents at secured locations near their homes.
2. The people of OSR and OER have been open,
generous, and straightforward in describing, explaining,
and illustrating their work to the Panel. Limitations of
Panel members' time have been the main constraint on the
extent of our review.
3. A detailed audit of all activities of OSR and
OER by the Panel is not practicable. Some useful sugges-
tions for methodology and organization can, we hope, rest
on the degree of examination we have so far found feasible.
As the Panel's work continues, more detailed analyses can
be accomplished.
4. This is an interim report, transmitting a few
initial reactions and preliminary judgments., The Panel's
reciprocal. discussions with the Office-of Strategic Re-
search and the Office of Economic Research staff seem
already to have been useful in providing a forum where
procedures can be examined and ideas weighed. Our pres-
ent suggestions may serve to stimulate a few further
changes, launch some new studies, and provoke creative
responses from the people concerned.
C. Possible Next Steps
1. Assemble views from customers who use CIA
military and economic studies. Who, for example, wants
estimates of defense size and burden? How are such esti-
mates used? How can they be designed to meet these needs
most effectively?
2. Discuss research procedures and approaches
with other groups engaged in analyzing this set of
problems. "
XI. Some Present Difficulties
A. The Military-Economic, Intelligence Quandary
1. Judgments concerning a large, many-faceted
defense effort and its relation to a surrounding economy
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are necessarily extremely complex. Major issues in mea-
suring costs and effectiveness have arisen around the
United States defense effort, in spite of the fact that
responsible officials have access to all available data.
Judgments concerning the Soviet defense effort, based
on oblique and fragmentary Soviet evidence, are bound
to involve a much wider degree of uncertainty.
2. Analysts in the intelligence community are
familiar with the paradoxes that arise in comparing the
defense efforts of different countries, with different
monetary units, while technological change is rapid.
Many users of these estimates find them deeply confusing.
Some respond by being highly skeptical of the Agency's
spending estimates. Alternative measures are proposed.
Some suggest abandoning altogether any effort to construct
detailed estimates. Others feel that estimates should be
made, but that the results should not be circulated, ex-
cept in the most summary form.
B. rnadecguacies of the Agency's Response
1. Confronted with this quandary, the Agency has
sought to provide convincing analyses, but experience demon-
strates that efforts to explain the methods employed in
direct costing, together with the associated procedures
that underlie the spending volumes, have been insufficient.
The personnel involved, both in making the estimates and
in receiving them, have changed over the years, but the
need for renewed education has not been met. The quality
of the evidence has improved, yet skeptics may not be
sufficiently aware of this. Those now working on SCAM
share an unwritten understanding of the model, though
there are non-negligible differences of interpretation
among them concerning its meanings. What is lacking,
-v-',t? evidently, is a full and up-to-date description of the
whole procedure.
2. On the conceptual level, brief, lucid essays
have been made available from time to time over the last
fifteen years, but again there is no comprehensive, de-
tailed analysis of the theoretic and analytic intricacies
involved in measuring and comparing heterogeneous com-
posites and their changes over time.
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3. The Agency's strong tradition of secrecy ham-
strings its efforts to persuade skeptics even within the
intelligence community. Furthermore, a stress on provid-
ing summary results for the attention of busy officials
truncates the painstaking presentation of underlying pro-
cedure and evidence. Concerned professionals in the Ser-
vices and elsewhere have therefore been puzzled, confused,
and suspicious.
III. Four Suggested General Responses
A. Continue the Focus on Aggregate Money Values
1. Money aggregates serve several purposes.
From year to year, the components of a defense effort
change in varying degrees; summing up the combined signif-
icance of the changes requires a common denominator. Com-
paring the overall size of two defense efforts requires
some kind of unifying measuring rod. Analysis of the in-
ternal structure of a defense effort, an tradeoffs among
its subdivisions, necessarily involves value weights of
one kind or another. Money values are the least unsatis-
factory units to use. The physical quantities of manpower,
equipment, supplies, installations, and structures that
make up a flow of "national defense" cannot be added to-
gether in physical terms. Even within one of the subdivi-
sions of a defense aggregate, say the naval forces, a
meaningful subtotal will have to combine ships, their
crews, their gear., port installations, etc. (each in turn
made up of diverse elements), by means of some form of
price or value weights. Actual prices may not be very
good.weights, but experiments with alternative adjusted
prices are more informative than implicit, intuitive
means of judging composites.
2. Other measures of defense effort and burden
can be very informative as supplementary indicators.
Analyses of the labor force, unskilled and skilled, and
of scientific manpower, key raw materials, and other
specific inputs into the defense sector, are well worth
making, but they cannot take the place of a comprehensive
computation in value terms.
B. Continue Direct Costing and SCAM
1. The Panel is persuaded that the building block
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method of estimating Soviet defense spending is basically
sound and should be continued. It is far preferable to
chasing residuals in Soviet budget data. Perhaps compari-
sons between Soviet budget data and independently-compiled
estimates via direct costing can sometimes suggest puzzles
worth investigating, but the building block method, with
all its gaps and uncertainties, is nevertheless far more
reliable and informative than unspecified residuals, by
their very nature, can ever be.
2. We commend CIA's painstaking analysis of the
design and performance characteristics of Soviet weapons.
It may be useful to obtain a technological audit of the
parts of this effort that are most uncertain and subject
to dispute.
3. The study of ruble costs is central to an
analysis of the defense burden and an appreciation of
Soviet policy alternatives. Ruble costs give the firmest
handle on spending trends. Division of"the annual spending
study into two separate volumes produces a-substantial
gain in clarity.
4. The dollar costs of Soviet defense are very
hard to interpret and can easily mislead. This is equally
true of the ruble costs of US defense; neither has greater
validity as an indication of relative size of the two
aggregates. As leader of the intelligence community, the
Agency has the onerous responsibility of raising the level
of understanding in these matters. The Panel feels that
further work is needed to clarify the analytic issues
involved. This need is illustrated, indeed, by the variety
of views within the Panel on interpretation of dollar and
ruble wQights. To meet the need, we make several specific
suggestions in section IV below.
? C. Continue Annual GNP Estimation
1, Estimation of detailed national accounts for
Soviet income and product meets a basic intelligence need.
OER-'s work has provided a foundation and framework for
most other analyses of the Soviet economy. In particular,
-analysis of the share of Soviet GNP devoted to defense
requires meticulous attention to the whole economy. These
annual estimates continue, therefore, to have very high
priorityy
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2. Improvements in the accounts were discussed
at a November 1973 conference and are now being implemented.
Further detail in end-use categories will be especially
welcome.
? i
D. Move Toward Greater Openness
1. Military economic analysis gains in persua-
siveness as its basis becomes more explicit. Within obvi-
ous constraints, we feel that descriptive detail on both
research methodology and under.ying substance should be
made available wherever it will contribute to informed
judgments and reduce the range of unnecessary speculation.
The Panel recognizes that disclosure can cause problems
and that each specific topic deserves careful review.
Nevertheless, we urge that doubters are most likely to
be persuaded through painstaking disclosure of reasoning
and evidence.
IV. Recommendations
A. For Rapid Implementation
1. The Panel suggests that once a month there
be a conference at which OSR and OER people can discuss
new findings and perspectives with each other. The prob-
lem is not coordination of research efforts when studies
over-lap; we are impressed with how well joint projects
are pursued. During the seven years since ORR was divided
into two offices, old friendships and mutual respect have
served well to facilitate joint efforts. We note that
differences of mission justify the continued separation
of the two offices, and that two perspectives can be use-
ful. Nevertheless, the two groups of analysts can benefit
greatly from pooling their insights and sharing relevant
evidence as it comes to light, rather than waiting for
occasional specific joint projects.
2. The Panel suggests that a conference with know-
ledgeable representatives of all parts of the intelligence
community be called to discuss the next pair of annual
spending volumes when they appear. Authors could explain
.their findings and alternative judgments could be debated.
3The nel suggests thati
be commissioned to prepare an
paper discussing the conceptual issues nvolved
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suring and comparing defense efforts and defense burdens.
Both have strong professional backgrounds and familiarity
with the issues. What do US relative input costs, applied
to Soviet defense components, tell about the efficiency of
Soviet resource use? Should we use US prices or Soviet
prices in trying to measure the outlay that would hypothet-
ically be required in the US to acquire: the Soviet defense
package? Can we advance beyond identifying paradoxes, to
demonstrating unambiguous results?
Such a paper would serve several major purposes. A
restatement of fundamental theoretic paper
of 1961, specifically applied to relative defense efforts,
might yield a fairly definitive identification of the best
alternative approach to use in tackling each one of the
several distinct comparisons we are wrestling with. It
would provide a clear conceptual framework for Agency per-
sonnel, especially those newly assigned to SCAM work. And
it would provide a detached., rigorous evaluation of SCAM
methodology to use with customers and skeptical critics
of SCAM results.
4. The Panel suggests preparation by OSR of a meth-
odological manual to underlie SCAM Ii, in general terms
that would apply to any country's defensee.effort. This
methodological paper should focus on the complexities
.involved in filling data gaps and making extensions from
fragmentary evidence to broad spending categories. It
should also have a programming section describing in gen-
eral terms the programming model itself, stressing the
options for varying price weights, introducing deflators,
and recombining portions of the spending package. Such
a manual would be very useful for a number of consumers:
(1) analysts in other agencies, (2) new professional
Agency staff, (3) skeptics all around town, and (if it
were decided to extend the distribution), (4) interested
economists outside government, and (5) fellow-researchers
in other countries.
5. The Panel commends the attention increasingly
being given to equipment inventories as well as procure-
ment for each major weapons system. This involves relating
annual investment in weapons procurement to the total stocks
being built up, system by system, along the following lines:
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1961 1962 1963 1964 1965 ?1966 1967 1968
Acquired 5 20 50 50 20 20 0 0
Retired 0 1 2 4 5 5 5 5
Year-end stock 5 24 72 118 133 148 143 138
Note how a rapid increase in investment leads to a
rapid buildup of stocks. When investment levels off in
1964, stocks continue to grow rapidly, and when investment
drops off sharply in 1965, stocks continue to grow! One
sees also how completion of a major program makes room for
investment in some other weapons system without a new addi-
tional claim on resources. This kind of presentation can
.reduce the misunderstandings that have occurred--on Capitol
Hill and with other customers--in relation to the growth
of large weapons stocks under a constrained share of GNP
devoted to defense. Attention to weapons inventories
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tools, can usefully be placed in an interindustry context
to examine their direct and indirect relations with the
whole economy and its factor supplies. The reconstructed
1966 Soviet input-output table provides a general frame-
work and competent specialists are available in OER and
OSR. Earlier Agency research employing input-output was
hampered by crude and skimpy data, and there is still no
reason to expect precise results. Nevertheless we feel
a systematic effort-to construct a column vector of final
demand deliveries to national defense,.and to subdivide
some of the sectoral rows for categories of output going
to defense, would clarify and sharpen up,the judgments
associated with burden and impact analysis.
4. Make some detailed studies of standby capacity
and joint use of vertically-integrated manufacturing
capacity for both defense equipment and civilian goods.
Recent evidence inc.:i.cates that slack is present in
certain lines of production, while in other cases there
is flexibility in shifting capacity between civilian and
military output. The subject deserves intensive analysis.
'5. Commission an updated study of the potentials
for economy and precision in research using sampling
rather than full coverage.
Some kinds of technical intelligence and economic
data now pile up, or will soon be coming. available, on
a scale that threatens to swamp the evaluation effort
and generate prohibitive costs. Intelligence analysts
whose goal has always been exhaustive coverage, obtained
through piecing fragments together, can perhaps be joined
by others who apply probability statistics to sample evi-
dence and who design procedures for obtaining maximum
confidence results for: a given outlay of money and per-
sonnel on analysis.
6. Commission a technological and procedural think
piece on joint use of technical intelligence and economic
evidence.
The Agency may be the first institution in the United
States in a position to relate technical evidence to broad
economic stocks and flows. Early crop reporting is only
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one example of the way a physical-unit base can be linked
with aggregate money values in the surrounding economic
flows. Construction of plant and equipment,?sector by
sector, and levels of freight traffic activity, region
by region, would be other examples.
V. Larger Aspects of Military Economic Research
A. The Agency Should Maintain an Overview of the
Whole Field
1. In the intelligence community, the Agency has
a statutory responsibility to fit the work of many groups
into a composite final evaluation.
2. Beyond this, we feel that the Agency should
watch for opportunities to increase our understanding
through, for example, drawing on the knowledge brought
out by emigres. The universities are hard pressed these
days, and need nudging to be alerted to-scholarly oppor-
tunities that may serve the national interest.
? 3. Similarly, the Agency should watch for gaps
that may open up in the basic research previously under
way at various research centers. In the past our under-
standing of the USSR has been decisively improved through
this kind of basic scholarly research, and the Agency has
a strong interest in seeing that it continues.
4. In this connection we view with concern what
appears to be a disposition to reduce the effort devoted
to study of the USSR in the Office of Economic Research.
This office is an important national resource whose work
makes a'major contribution to Western appreciation of
Soviet reality; its work should have vigorous support.
B. Protect the Basic Research Function
1. The Panel recognizes the practical needs that
put current intelligence at the top of each day's docket.
We also admire the volume and quality of long range basic
research that the Agency has produced.
2. For both reasons, however, we stress the need
to make administrative arrangements to preserve and foster
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the basic research efforts that have enabled the Agency to
provide thoughtful, in-depth judgments on.current issues.
3.- In this, connection the Panel recommends experi-
mentation with a procedure under which a first rate analyst
would use a year's sabbatic leave to carry out a research
project, in association with others, at a strong university
or think tank. A longer-term research project might draw
on a succession of one-year assignees in a reciprocally
reinforcing way.
C. Use Outside Expertise to Supplement Agency Work
1. The research staff or OSR and OER makes up
a solid core of experience and judgment. All. major work
should be entrusted to it. But specialized knowledge
can be used to augment Agency staff in dealing with
specific questions, especially in matters not requiring
extensive security clearance.
2. The Panel understands that contracting out
technical studies has worked well for many years and
suggests that strong efforts be made to use this approach
even more extensively from now-on.
3. In similar fashion we suggest that efforts
be made to invite people like from the
Ito spend a year at the Agency
working on a specific piece of basic research.
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4. We suggest, finally, that thought be given to
funding a research-project at a center like the Russian
Institute of Columbia University under which emigre Soviet
economists would have an*opportunity to write up their pro-
fessional experiences and comment on the functioning of
the Soviet economy.
5. We noted earlier that a country's defense
effort has an asset or stock dimension as well as a flow
dimension. We suggest that a group drawn from DIA and
the individual Services be designated by, the Office of the
Secretary of Defense to work with CIA on development of
-coverage definitions and measurement procedures required
for comparative estimates of stocks as well as flows in
the two defense establishments.
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