The purpose of this report is to assist Department of Defense decisionmakers called upon to respond to adverse economic shocks by identifying opportunities for improving analysis of shocks and their effects on U.S. defense postures. The authors examined historical and hypothetical instances in which shocks threatened or would threaten defense postures to identify the types of questions that an analytic capability might be able to answer.
Modeling and Measuring the Effects of Economic Shocks on a Defense Industrial Base
- What are the questions of interest that defense decisionmakers need to have addressed to manage the effects of economic shocks on defense postures?
- What are today's methods for modeling these shocks and their effects?
- What are the benefits, challenges, and limits of addressing the questions of interest with today's methods?
- What would a new approach look like, and what types of efforts are needed to achieve a new approach?
Economic shocks are unanticipated changes in the conditions upon which resource allocation decisions are based. Economic shocks include a wide range of events, from typhoons to trade policy changes to mergers and acquisitions—any event that causes a decisionmaker to reconsider such choices as what to buy or sell, how much work to do, what production technology to use, or what price to pay or charge. The concern underlying this report is the possibility that economic shocks could induce the same effects as classic kinetic supply interdiction efforts: the degradation of reliable military capability, diversion of resources from high-priority military initiatives, and imposition of costs. The purpose of this report is to assist Department of Defense (DoD) decisionmakers called upon to respond to adverse economic shocks by identifying opportunities for improving analysis of shocks and their effects on U.S. defense postures. The authors examined historical and hypothetical instances in which shocks threatened or would threaten defense postures to identify questions that an analytic capability might be able to answer. They also reviewed data analysis methods used in the economics literature on shocks. Research findings suggest that DoD might benefit from improving its capability to analyze shocks. Moreover, although existing methods from economics provide insights necessary for achieving the desired analytic capability, they are not sufficient for fully providing that capability. Novel techniques employing multidisciplinary approaches appear best suited to help close gaps between existing and desired analytic capability, but additional research is needed to develop and refine such techniques.
A modest portfolio of analytic capabilities would support data-informed management of a wide range of concerns created by economic shocks
- Economic shocks have the potential to cause meaningful damage to defense postures.
- The three distinct sets of issues characterizing the challenges are supply restriction, the potential to infer otherwise hidden government priorities, and the potential for extreme responses to economic shocks.
- The economics literature on shocks predominantly employs four empirical methods (workhorse methods): vector autoregression, input-output, computable general equilibrium, and panel regression models.
The authors identified two important gaps in analytic capability
- Existing empirical methods cannot always overcome the technical challenges of achieving the analytic capability requirements. Reliable outputs from any empirical method require data that might not always be available, and assumptions might not always be realistic.
- Additional analysis beyond the type of system parameter estimation provided by the workhorse empirical methods is needed to fully exploit the potential of data analysis to support defense decisionmakers.
The authors developed two tools to assist decisionmakers
- The authors developed a preliminary tool for closing the identified gaps and improving analytic support to decisionmakers: a framework that can be tailored to a given shock instance and that connects analytic outputs to the options under consideration for managing shock consequences.
- They also developed a preliminary and partial framework for shock-induced supply restriction. The consequences of an economic shock depend on the outcome of a race between the shock's propagation and the response and adaptation processes of affected entities.
- The Defense Advanced Research Projects Agency or another defense entity should invest in a program for advancing data-informed management of economic shocks. The recommended research program should include experts from academia, industry, and the defense establishment across an array of disciplines, potentially including economics, political science, organizational behavior, sociology, military studies (strategy and planning), and defense operations and command.
- The design and execution of such a program should be grounded in specific policy questions or management decisions. Grounding program execution in specific analytic decisions can support successful program outcomes by focusing on central modeling features, such as the data environment, the time horizon over which analytic insights are needed, and relevant shock mechanisms.
Table of Contents
Analytic Capability Requirements for Supporting Management of the Defense Implication of Economic Shocks
How Well Do Existing Methods Achieve the Required Analytic Capabilities?
Frameworks to Enhance Analytic Support to Defense Decisionmakers
A Case Study of Historical Sanctions Against Iran
Conclusions and Recommendations
Literature Review of Economic Shocks
Additional Details on Vignettes
Technical Details on Iran Sanctions Case Study