A Funny Thing Happened on the Way to the Georgian Forum

A Funny Thing Happened on the Way to the Georgian Forum
August 25, 2008
Robert Higgs

Well, maybe it’s not really so funny, especially if someone you care about has been killed or wounded in the recent fray in the South Caucasus, but corporate shareholders who are heavily invested in U.S. military-contractor stocks are laughing all the way to the bank. In their world, nothing makes for success as much as a little shooting and looting in a U.S. client state next door to Russia.

Everyone who has spent more than five minutes perusing the data on U.S. military contracts understands that the big bucks are still to be made in the production of high-tech, cutting-edge, whiz-bang weapons platforms of the sort that enriched several generations of contractors during the Cold War. But—damn it!—the Cold War had the impudence to dry up and blow away back in the early 1990s, seemingly never to return. Of course, the contractors could always direct their wiles and their lobbying budgets toward reminding members of Congress that we never know when another Big Bad Enemy will pop up. For a while China was the favorite emerging threat to serve up at defense-industry banquets and military-association get-togethers. Yet, coming up with a truly convincing replacement for the USSR proved to be an extraordinarily difficult task. China appeared to be more interested in supplying Wal-Mart and bankrolling the U.S. Treasury than in attacking the United States.

The onset of the war in Iraq diverted the defense-industry boys from their usual fun and games, but only slightly. Although KBR, Blackwater, Dyncorp, Bechtel,  Fluor, Triple Canopy, and many others have made a killing in Iraq, the truly humongous proceeds in military contracting continue to be made by bending metal for aircraft, ships, missiles, satellites, and combat vehicles and by supplying the countless related items of software, maintenance, remodeling, upgrading, training, and so forth that can keep one of these big projects going strong for decades in a sole-source, competition-free environment with limitless potential for engineering change orders―“contract nourishment,” as it’s known in the trade. (The B-52 project, for example, has been going strong for more than 60 years and has no end in sight. If you are a U.S. taxpayer, the Boeing Company says thank you very much.)

The Russians have not been very cooperative about reviving the Cold War. Not that they’ve demonstrated themselves to be Mr. Nice Guys, especially in Chechnya, but in their relations with the West, they’ve shown more interest in soliciting foreign investment, exporting oil and gas, and purchasing mansions in Cyprus than in nuking London and Washington. It’s true―and a fact that bears more repeating―that they still possess thousands of nuclear weapons and the missiles to deliver them accurately anywhere on earth within the next hour. But since the USSR’s demise, they have not been talking menacingly enough to maintain the Russian threat as a terribly serious fear in the minds of American taxpayers.

Which brings us back to the little nation-state known as Georgia. Let’s gather around the map and see where this faraway country is located. Ah, yes, there it is, wedged inconspicuously between Turkey and Russia at the eastern end of the Black Sea. How many of you have visited there? None of you! Well, that’s not surprising, I suppose, because very few Americans have ever taken any interest in this inconsequential and uninviting place, which is best known as the birthplace of Iosef Vissarionovich Dzhugashvili, an ambitious fellow who later changed his name to Joseph Stalin and became fairly well known.

In the South Caucasus, many of the people do not, shall we say, get along with one another very well. Indeed, given half a chance, they will cut one another’s throats. Their ethnic feuding would scarcely bring them onto the U.S. radar screen, however, except that the Caspian basin has many producing oil wells, and a pipeline has been built through Georgia that allows the oil to be brought from Caspian Sea sources to western markets without passing through Russia. The people who occupy high offices in the Defense Department, the State Department, and the Office of the Vice President admire this feature of Georgia. So, to no one’s great surprise, they set out some time ago to cultivate “democracy” in this remote little corner of the world, and lo and behold, they succeeded in putting their sonofabitch in office as the duly elected president. This sort of thing is all in a day’s work for U.S. foreign policy makers, but this time it has turned out to yield an extraordinarily huge, unexpected dividend.

Because on the night of August 7, 2008, said sonofabitch, one Mikhail Saakashvili, took it upon himself to send armed troops into a small region known as South Ossetia (pop. 70,000), where the people had declared their independence from Georgia in the early 1990s and afterward had maintained a semi-autonomous political existence with Russian and Georgian peacekeepers in attendance to preserve the existing arrangement pending a more definite resolution of the matter. The locals, most of whom are said to prefer Russia to Georgia, fled the Georgian invaders, and the next day the Russian army moved swiftly into Georgia with considerable force, routing the Georgian troops and later roaming freely across the country to teach the upstart Georgians a lesson.

The U.S. government and its lap dogs in the so-called news media immediately set up a howl about the Russian campaign in Georgia and proceeded to make all sorts of veiled and not-so-veiled threats about U.S. countermeasures. Anyone with an ounce of strategic education could see, however, that the United States occupied a very weak position in this situation. Short of nuking the Russkies, the U.S. military had little capacity to defend the Georgians, and even attempting to do so would have ranked among the stupidest foreign-policy blunders of all time. The realities of the situation, however, did nothing to moderate the tremendous volume of huffing and puffing that the president, the secretary of state, and the talk-radio buffoons from coast to coast spewed out.

This blustering has had an effect on the climate of opinion, and hence on members of Congress, who are always looking for the main chance. Which returns us to our central theme: how to get filthy rich selling useless Cold War types of weapons to a captive market of U.S. taxpayers.

In a Wall Street Journal article dated August 16, 2008, reporter August Cole does not mince words: “Russia’s attack on Georgia has become an unexpected source of support for big U.S. weapons programs, including flashy fighter jets and high-tech destroyers, that have had to battle for funding this year because they appear obsolete for today’s conflicts with insurgent opponents.” As Cole elaborates, “Some Wall Street stock analysts early on saw the invasion as reason to make bullish calls on the defense sector.” One wonders what was wrong with the analysts who did not make bullish calls.

Still, we’re all economic scientists here, so let’s check the data. Consider Lockheed Martin, for example, the nation’s leading defense company and the prime contractor for the F-22 fighter―as pure a Cold War weapon as you’ll ever find. Lockheed Martin’s shares had been fetching about $104, plus or minus $5, for the past year. On August 7, the day before the Russians began their counterattack, the stock closed at $108.29. Eight days later, on August 15, it closed at $116.67, giving shareholders a tidy capital gain of 7.7 percent, or roughly 350 percent on an annualized basis―a rate of return that even the most successful Wall Street titan can appreciate.

Lest we be suspected of cherry picking the data, let us consider the Philadelphia stock exchange’s defense sector index, which includes the prices of seventeen major aerospace and defense companies, including Lockheed Martin, Boeing, Northrop Grumman, General Dynamics, and Raytheon, the leaders of this hungry wolf pack. On August 7, the index closed at $365.59. Eight days later, on August 15, it closed at $382,50, up 4.6 percent, or about 210 percent on an annualized basis.

Of course, post hoc ergo propter hoc is a logical fallacy, and perhaps these stock-price jumps were entirely coincidental. But I don’t think so. They seem to me to have solid economic logic and ample historical experience behind them. Stockholders have been down this road many times before; they know that  flare-ups such as the violent episode in Georgia increase the likelihood that Congress will add money to the military budget for big-ticket weapons. When the Russian bear growls, U.S. defense-sector investors break out the champagne and frolic along Wall Street.

Yes, in the South Caucasus hundreds of people have been killed, and thousands have been displaced from their homes. Much property has been destroyed or looted. Isn’t all this a small price to pay, however, to keep the mighty U.S. military industry firing on all cylinders? Let’s face it: Georgia (pop. 4.6 million) is an insignificant backwater of little consequence to anybody but the people who live there and the pseudo-capitalists who’ve run pipelines through it. The country’s GDP is about $20 billion, not even enough to buy a dozen B-2 bombers. But a tense confrontation between the Russians and the U.S. government is worth hundreds of billions to investors and other stakeholders in the military-industrial-congressional complex.

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Robert Higgs
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Robert Higgs is Senior Fellow in Political Economy for The Independent Institute and Editor of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.

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