Reagan's economic warfare pushed the Soviets into collapse

WARREN NORQUIST

On October 14, 1986, just days after President Ronald Reagan refused to cut America’s efforts to develop an anti-missile defense in a meeting with Mikhail Gorbachev, the Soviet premier went on national television and told his people: “The U.S. wants to exhaust the Soviet Union economically...create various kinds of difficulties for Soviet leadership to wreak its plans of improving the standard of living for our people...”

Gorbachev was describing a new aspect of the Cold War. After years of containment and detente, Reagan decided to engage the Soviet Union not only in political terms but in many overt and subtle economic ones. The new head-to-head competition forced tremendous pressure on the Soviet Union, which, despite many estimates at the time, increased its military spending until it was spending nearly half of its output. By the time Reagan walked out of Reykjavik, Soviets oil profits had dried up and European contracts were cancelled. But the Soviets economic problems were more fundamental.

According to National Security Advisor, Richard Allen, “Reagan never believed, as did many Western observers, that the Soviet economy had the capacity to extract from its citizens limitless sacrifice for the sake of maintaining invincible military power.” By Christmas 1991, the Soviet Union was no more.

As Jack Kemp declared triumphantly in 1992, the Soviet Union didn’t collapse, it was pushed. And the man leading the charge was Reagan. Still most economic historians are reluctant to give Reagan his due.

Warren Norquist of Weston, Massachusetts holds a BSE from the University of Michigan and an MBA from Harvard Business School. He worked for General Electric and Westinghouse and then Polaroid where he served as executive for 23 years. He has co-authored two books on purchasing and taught Manufacturing Policy at Boston University for 8 years. Since retiring in 1993, he has researched and spoken on “Why the Cold War Ended As It Did.” His writings have been published in Global Competitiveness, UPI, Advances in Competitiveness Research, and Intelligencer, the Journal of the Association of Former Intelligence Officers.

You begin your argument by noting that the Reagan administration made a concerted effort to move from containment to outright competition with the Soviet Union. What did Reagan see that others, including the Central Intelligence Agency, did not?

Reagan realized that the Soviet Union did not have a balanced economy. The USSR was putting its military and empire ambitions first while average Russians were living in inadequate housing, lacked hot water and often had no indoor plumbing. Hours were spent in line trying to get food and other essentials. Reagan thought it was foolish to be providing loans and technology to a country with a system that was endangering the world.

By installing intermediate range nuclear weapons in Europe, the USSR was well on the way to getting a majority of West Germans so frightened that they would favor being neutral. By shipping or smuggling arms into various African, Central American and South American nations, the USSR was building cadres that could later start so-called liberation uprisings. The goal was to get to be part of a coalition government that in time could become Communist dominated. Nicaragua had gone this path.

Reagan felt that the Soviet Union was vulnerable right then to a confrontation across the board with the emphasis on taking advantage of every Soviet weakness. He believed that under real economic pressure the Soviet economy would not just continue to limp along like it had for decades but would collapse.

We know that there were stark differences between the U.S. and the Soviet Union culturally and ideologically. But how did these difference play out economically?

The Soviets had a command economy that had little feedback on customer needs or desires. The emphasis on gross output and the state ownership did not bring the efficiencies Marxists claim. Continuous pressure from the Politburo for more output meant managers met the plan by eventually providing falsified output statistics. Non-military construction and manufacturing organizations paid little attention to using material efficiently, to customer desires, or to quality. Individuals and even assembly plants were stuck with whatever quality they received. Access to goods was influenced by one’s position as well as by priorities, favoritism, and bribes. Stealing was a technique used by not only individuals but by factories. The only products with emphasis on quality were those for the military.

Do you really think the Soviet economy was as advanced as the Russian elite believed?

The Soviet economy wasn’t advanced and many of the Russian leaders, especially those that had been in the West, didn’t believe that it was. They knew they lagged in technology (which they tried to buy or steal) and knew they had low labor productivity. The Politburo heard from the planners but not those who had to carry out the plan. A planner who set higher goals each year got to keep his job. These planners got caught up in not questioning any production numbers that supported their plan. The USSR put out false production figures that were accepted without question by many Western economists who wanted to believe that centralizing an economy was the way to efficiency. Soviet plant managers especially knew just how bad their system was. They survived by learning to live in a system that required bribes, favors for leaders, the use of poor quality parts, false accounting, and even stealing and allowing stealing to keep their operations going.

What were some of the systemic weaknesses in the Soviet Union?

The basic weaknesses were the lack of a market economy to allocate production, the lack of a profit system to insure the best use of materials and labor, and a legal system designed not to provide justice but to serve the Government. There was little incentive to work hard except to avoid punishment. The leaders blamed the Soviet economy’s obvious poor outcomes on spies and traitors. Quotas were often used to motivate and evaluate an enforcement group. Charges were brought as needed to meet the quotas.

The USSR also tried to overcome low productivity with bonuses. But without a pricing system, this incentive, although popular, usually generated the wrong outcomes. Prices set by bureaucrats resulted in shortages and unusable excesses. Multiple changes in the bonus rules never were able to get the result desired.

You write that the Soviets’ ability to steal Western technologies was not only saving it billions of dollars but was providing the country with what it couldn't produce. Why was this shortsighted on their part?

It wasn’t a problem until President Reagan cut off the flow of Western technology which the Soviet economy and the military planned on being available to them. Then it was another burden on the economy to have to get the capital, people and skills to get the technology on its own.

A lot of effort went into convincing U.S., Western European and Japanese manufacturers to stop selling the technology needed by the Soviets. The inability to buy technology led the Soviets to increase their emphasis on stealing it. But the Reagan administration turned Soviet thievery into a weapon against them. The Reagan Administration had engineering firms purposely design shoddy features into the technologies and products the Soviets stole. The disruption and cost to the Soviets was a significant factor in the Soviet collapse.

Some critics of your thesis might suggest that no one nation has the ability to coordinate all the facets of conducting an economic war. Why do you think all the elements in the Reagan strategy were tied together?

The weaknesses that Communism built into the Soviet system made it very vulnerable to an economic war. It needed food to make up for their mishandling of food transport and distribution. It needed spare parts since their pricing system didn’t allow for spare parts. It needed to import technology to try to keep up with the West. And to pay for these the Soviet Bloc needed access to low interest loans, and counter-trade that gave them capital investments for a percentage of the future output of raw materials shipped to the West

A series of National Security Decision Directives (only recently declassified) spelled out how the U.S. would engage in an economic war with the USSR. NSDD 66 and 75 were tough. As these were issued, the strategy outlined was implemented by senior administration officials. Because of the previous and ongoing bad behavior of the USSR, the Administration was able to convince other countries to join us in many of the programs designed to put economic pressure on the Soviets.

Why did the CIA overstate the output of the Soviet economy?

First, the CIA used photographic surveillance to estimate raw material production, which was then used to estimate outputs based on Western outcomes. This overstated actual production because the Soviets were so inefficient. For example, they got only one-fifth of the paper that the West produced from that same amount of wood. The CIA also used published Soviet data, which they adjusted downwards but history shows it was never enough.

The CIA analysts fairly accurately estimated military expenditures, but they could not bring themselves to believe that the Soviets economy had a vastly higher percentage of military spending than the West did. Therefore, the analysts in the 1960’s and 1970’s settled on Soviet GDPs that meant military expenditures were 7% to 9% (later raised to 14%) and concluded that the USSR’s GDP was about one-half of the U.S. Most Western Soviet studies professors and the mass media also estimated or just accepted the estimates of others that the USSR economy was one-half of the U.S. National Security advisor William Casey and Reagan didn’t accept the CIA estimate or the similar claims of some very famous Western economists. They looked at the lack of adequate housing, hospitals, roads, telephones, cars and even food, and concluded the Soviet economy was at best one-sixth of ours. They then based their strategies on how vulnerable that meant the USSR was to economic pressure. Those that look at the facts now know that Reagan and Casey were right and most of the other estimators and the mainstream media were wrong.

Did Gorbachev have a role in the downfall of the Soviet Union?

He certainly did. When Gorbachev came into office in March 1985, he initially continued using force to try to increase labor productivity. Upon realizing that Soviet economy was weaker than reported to the Politburo, he knew he needed to get more Western help. He changed tactics. He appealed to workers and the outside world with some reforms and more openness. (As long as he wasn’t criticized.)

Gorbachev tried to negotiate away the Strategic Defense Initiative (SDI), which the Soviets firmly believed would be able to intercept their missiles. Gorbachev now says that he knew the Soviets could no longer afford to compete when Reagan refused to give up SDI at their October 1986 meeting in Iceland.

Military spending had risen 45%in the previous five years, but Gorbachev increased it another 45%. He was trying to upgrade the much larger Soviet military that Reagan was making obsolete with equipment based on newer technology. Thus, Gorbachev burdened an economy already greatly weakened by four years of the Reagan’s policies that reduced Western support. In 1985 the USSR lost its main source of Soviet hard currency—oil sales. The combined result left the USSR destitute.

To save money Gorbachev cut the 1% of Soviet GDP that propped up Cuba and the 2% that went to other Soviet client states. This 3% didn’t even include what Moscow used to maintain its hold on the other Soviet Republics. The loss of aid and the strong interest in freedom resulted in Eastern Europe breaking away followed later by the other 14 Republics. When force was tried to stop Lithuania from trying to leave, a demonstration of over 100,000 Russians in Moscow "over the deaths of ‘just fourteen’ Lithuanians" frightened the Soviet leaders.

No doubt most people insisted at the time that containment and detente were preferable to any arms race. Wasn’t Reagan's strategy a risky one?

Relying on containment and then backing down to a helpful détente was also risky in the long term. Nixon and Carter saw détente as a way of gradually diverting the Soviets from their goal of empire expansion to a goal of a better standard of living based on trade with the West. But Politburo notes show that: " We need their credits, their agriculture, and their technology. But we are going to continue massive military programs and by the mid-1980s we will be in a position to return to an aggressive foreign policy designed to gain the upper hand with the West." *

The USSR had spent 18 years developing the cadre that was ready to grab control in a coalition government when Somoza left Nicaragua. They were busy making similar investments elsewhere under détente.

Reagan’s plan was to have the U.S. take advantage of every Soviet weakness and every U.S. strength to force changes in the Soviet system. Reagan had to overcome the desire of Europeans leaders to lower unemployment by selling to the Soviets on credit.

Reagan also had to overcome the Soviets effort to frighten West Germans into being increasingly neutral. The Soviet always pushed and then backed off if they met resistance. Reagan’s plan provided continued pressure for eight years, not just a few months as in the past, and it succeeded without a confrontation between American and Russian troops.

When communist Poland imposed martial law in October 1982, the Reagan Administration pulled its most favored nation trading status. How did this work in our favor?

When Poland outlawed Solidarity, Reagan, with wide support, suspended Poland’s ability to sell into the U.S. This cost Poland $6 billion in yearly sales and forced the USSR to provide another billion dollars and then two billion a year in more aid.

Earlier, when Polish troops imposed martial law in Poland in December of 1981, most Europeans leaders didn’t object. In fact the German bankers favored the action because they thought it would help them collect on their loans to Poland.

First, instead of penalizing Poland, the Reagan Administration analyzed the situation and decided to penalize the Soviet Union. The United States canceled all the contracts its companies had to build a pipeline from Siberia to West Germany. That action and subsequent ones cost the USSR over 11 billions dollars in delayed sales and over 15 billion dollars per year in lost sales of Siberian gas.

You credit Saudi Arabia with driving down the Soviets oil prices. This no doubt was critical. Outside of the sale of a few AWACS, how did the Reagan Administration convince the Saudis to act against their own self-interest?

The Saudis became convinced that low oil prices would have a number of advantages. High oil profits by Iraq, Iran and Libya bought Soviet military equipment and Soviet training for militaries that were threatening Saudi Arabia. The high price was also paying for Soviet military presence in South Yemen, Syria, Ethiopia and Afghanistan.

Low oil prices would deprive the Soviets of their source for 80% of hard currency needed to buy goods in the West. The Soviets needed oil industry equipment and technology to maintain and expand their oil and gas output. The Soviets wanted more of the Western markets which were being served by Saudi Arabia and others.

The Saudi Government denied that their increase in production of 500% in 1985 and 1986 was done to help the U.S. bankrupt the Soviets. Because of 9/11, however the Saudi Government has recently acknowledged how it helped the United States win the Cold War. The drop in oil price starting in fall of 1985 sent oil prices from $36 per barrel to less than the $12 barrel that it cost the Soviets to produce oil.

No doubt the U.S. made endeavors such as the Soviet occupation of Afghanistan very costly. But didn't we also incur costs. And over the long term didn't we also incur a larger budget deficit?

Our efforts in Afghanistan were a significant cost but the Reagan Administration got the Saudis to match in expenditures whatever the U.S. spent. The cost to the Soviets was a large multiple of our costs. For example, the cost to the Soviets for maintain a large military force in Afghanistan was $2 billion when the U.S. spent $25 million on equipment and ammunition. In 1984, the U.S. spent $50 million, the Saudis $50 million, and the Soviets were spending $4 billion. That is eighty times what the U.S. was spending. In fiscal 1985 Casey got the Saudis to match a U.S. goal of $250 million, as at that point we learned the Soviets were going for a win, so the U.S. did as well.

Even though the Soviets decided to leave Afghanistan because of the high cost, Reagan kept up our support so that the Soviet people could see it was a defeat for the USSR not just a withdrawal that left a Communist government.

The Soviets were stunned that the Reagan military buildup was financed by only increasing all defense costs from 4.9% of the U.S. GDP under Carter to a high of 6.2% in 1986 and then back to 5.6% in 1988. Estimates of Soviet military spending near the end of the 1980’s range from 40% of their economy to 70%. The high of an additional 1.3% of GDP spending under Reagan was a great bargain for what it accomplished. Defense spending was 9.2% under Kennedy in 1962 and was at 3% in 1999.

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*1972 Brezhnev briefing to Party members. From House Banking and Currency
hearing 1974, 800. Gus Weiss (2003) Cold War Reminiscences Intelligencer Vol. 13 #2.1

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