Transcript 3. The true costs of military draft

An Economic Analysis of Military Draft
Prof. Panu Poutvaara, University of Helsinki
1. Military systems around the world
2. Two ways to recruit military staff
3. The true costs of military draft
4. Empirical analysis on growth effects
5. Voluntary service and military reserves
6. Equity and gender equality
7. Conclusions
1. Military systems around the world
Military systems around the world
Conscription throughout the world, 2007.
oGreen: No armed services
oBlue: No conscription
oOrange: Plan for conscription to be abolished within 3 years
oRed: Conscription
oGray: No information
1. Military systems around the world
Military Draft – An Anachronism?
•
17 out of 26 NATO states no longer rely on conscription, and two
others have decided to phase it out
•
Western countries with strongest military (the United States, the
United Kingdom, France) have abolished draft
•
Sweden, Finland and Germany among a decreasing number of
Western countries still using draft
•
Draft still used in Russia, China, Israel, and most Latin American and
African countries
•
In Asia, draft is widely used, apart from the Indian peninsula and
Japan
2. Two ways to recruit military staff
Voluntary system
Those serving are hired in the labor market; decision to serve voluntary
Salaries paid by ordinary taxation
Conscription
Forced labor service; those ordered to serve paid typically less than what they
would require to serve voluntarily
Rulers have historically used forced labor also in other jobs; nowadays
democracies no longer recruit other staff by forced service
2. Two ways to recruit military staff
Economists and Conscription:
•
A key insight: different people are
good at different things. This is
called comparative advantage
•
Division of labor allows
specialization. This benefits
everyone
•
Economists‘ view on draft has
largely been unchanged since Adam
Smith:
„…the irresistible superiority which
a standing army has over every
sort of militia.“ (1776, 5.I.1)
2. Two ways to recruit military staff
But: The draft is the cheaper system, isn‘t it?
In Sweden, draftee serving 11 months earns about 50,000 kr (tax free)
The starting salary of a "fänrik" is 16,900 kr per month (including taxes).
This means 202,800 kr per year plus social security contribution
„…the irresistible superiority which
a standing army has over every
sort of militia.“
3. The true costs of military draft
Opportunity cost = the value of the best alternative
that is given up when something is done
Budgetary cost ≠ Opportunity cost
Static costs of conscription
• The loss of production that a draftee could have generated
elsewhere
• The non-monetary inconveniences related to draft, as
evaluated by draftees
3. The true costs of military draft
Dynamic costs of conscription
• Draft or civil service postpones studies and entry into the labor
market
• With upward-sloping wage profiles, the effect may persist well
over ten years
• According to a Dutch study, draftees may lose up to 5 percent of
their lifetime income
• The cost could be especially high for entrepreneurs and those
who work in research and development and in jobs in which
technological progress is very fast
• With a voluntary system, the dynamic costs of draft are allocated
to those for whom they are lowest, and they are compensated for
this
3. The true costs of military draft
•
Draft Age: 18 to 25 ys
•
Without draft: studies,
first experiences on job,
vocational training
•
Call to service
interrupts education
Distorted
accumulation of
human capital
3. The true costs of military draft
Theoretical model by Lau, Poutvaara, and Wagener (2004):
”Dynamic Costs of the Draft”
•
Compares an economy with draft with an identical one without draft
•
Focus on distorted timing of investments in human capital
•
No static inefficiencies. Thus, estimates a lower bound of the costs of
conscription
•
Size of effects: with one-year conscription, 50% draftees per cohort,
and 25% percent underpayment: GDP in the steady state decreases
by up to 1%.
•
A model without economic growth; excludes long-run growth effects
4. Empirical Analysis
Study by Keller, Poutvaara, and Wagener (2006):
“Military Draft and Economic Growth in OECD Countries“
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21 OECD countries
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Time period: 1960-2000
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dependent variables: (natural log of) GDP/worker in 2000; growth
thereof between 1960 and 2000
•
Growth model that includes also investment in human capital
•
Abolishing draft could increase annual GDP growth between a
quarter and half a percentage point in OECD countries.
5. Voluntary service and military reserves
Is draft needed, despite its static and dynamic costs, to
generate military reserves?
- NO!
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Voluntary service can be complemented by a reserve
•
Reservists should be paid a sufficient compensation to
motivate them to maintain their skills
•
Taking into account the opportunity costs of reservists,
voluntary reserves can be maintained by a lower total
economic cost than non-voluntary reserves, as long as the size
of reserves is well beyond 100 percent of the age cohort
•
In those countries in which only men (or a fraction of men) are
drafted, it would be easy to switch to a voluntary system when
also women are recruited. See the United States and the
United Kingdom
6. Equity and gender equality
Inequity of military draft
•
Military draft hitting only men is a flagrant form of gender
discrimination
•
Even among men, draft is arbitrary: in 2008, out of the cohort of
70,000 young men, only 27,000 will undergo physical and
psychological testing determining who will serve
•
As a tax, this corresponds to randomly allocating a higher tax
burden to a subset of young males
•
In any other area of taxation, allocating tax burden randomly
would be viewed as unacceptable
7. Conclusion
Lessons:
1. Military draft and other forms of forced labor might be cheap in
budgetary terms, but nevertheless costly for the whole economy
2. Military draft is replete with static and dynamic inefficiencies
3. Dynamic costs in the form of postponed human capital formation
may also harm economic growth
4. Male-only conscription is a severe violation of gender equality.
Furthermore, conscripting only a fraction of males means even
arbitrary allocation of tax burden among men
5. Better trained and motivated military reserves could be maintained
with voluntary service, coupled with paying reservists.
7. Conclusion
Lessons:
Economics tells: voluntary system allows more cost-effective and
equitable recruitment
Decisions on the optimal size of the military, as well as what type of
weapon systems to use and how to invest in those require expert
judgment by military professionals and foreign policy experts, and are
finally political decisions.