‘What gets measured gets managed’ highlights the risk of targeting the wrong metrics or an arbitrary level of the right one. This could be an issue for defence spending targets, with implications for public finances and yields more generally.
- ‘What gets measured gets managed’ is a warning against picking the wrong metrics. In some areas, like central bank inflation targets, both the metric and the target level have an evidenced-based rationale. Other targets can be misconceived though, or the metric might be reasonable but the target level completely arbitrary.
- The risk of an inappropriate metric or target level is relevant to current debates about the appropriate level of defence spending. Just spending more money on something does not always yield better outcomes. And some of the most impactful policies to protect a nation’s security might not even look like defence spending.
- Increased defence spending probably won’t translate one-for-one into bigger public deficits. How this debate plays out in different countries could materially affect budget outcomes, debt issuance and so long bond yields over time.
The saying ‘what gets measured gets managed’, sometimes mistakenly attributed to Peter Drucker, highlights the perils and pitfalls of poorly designed quantitative targets. The management literature is full of examples of metrics and targets gone wrong. Sometimes the metric does not align to the intended result. The call centres that incentivised the number of calls handled – not the number of issues resolved – are a canonical example of this problem. More broadly, incentives to do things quickly rather than properly often run into strife down the track.
Sometimes the misalignment arises because the metric keyed off a presumed intermediate objective, like number of sales calls, rather than the measurable ultimate goal (actual sales or profits). But as central banks found out with targets for money supply growth in the 1980s, these metrics presume a simple and stable relationship between the metric and the true target that might not hold in practice. (See also: Goodhart’s Law.)
Other times, the metric seems reasonable, but the target level is arbitrary or lacking good foundations. Certainly the debt and deficit limits in the EU’s Maastricht Treaty have been criticised on these grounds. Another example closer to home is that spending a large fraction of your income on housing does seem like a signal that housing is not affordable. Who is to say, though, that 30% of gross income is the threshold between affordable and unaffordable? It
turns out that this rule of thumb originated many decades ago in US government housing assistance programs for low-income households. That is unlikely to be a relevant benchmark for Australian home-buyers nowadays. Thus, it is helpful that mortgage lending decisions are based on more sophisticated and relevant metrics.
At least in economic policy, we have moved on from the 1980s era of money supply targets (though I am less sure we have completely moved away from ‘checklists’). The inflation targets introduced in the 1990s were backed up by analysis showing that keeping inflation low improved economic performance and the welfare of the population. The exact level of the target is less relevant. Measurement issues mean it needs to be above zero, but provided it is low enough that inflation is not distorting decisions, it matters little exactly what the target is. A target of 2% or 2½% will do just as well as the other, with no benefit to switching between them.
The tendency to frame a desirable objective with a potentially ill-conceived metric or target level is not confined to economic policy. We are seeing something similar in current debates on defence spending. Who is to say that a particular share of GDP is the ‘right’ amount to spend on defence?
After all, it would be all too easy to meet a spending target by wasting a large amount of money: think military bases in the wrong place, and overpriced equipment that doesn’t work or isn’t appropriate to modern warfare. And it is hard to withstand arguments along the lines of, ‘how can you justify not spending every available dollar and bearing any conceivable cost to save lives or avoid this existential risk?’
The counter to these sorts of arguments is one of the most basic concepts in economics: opportunity cost. Choosing to spend money (or time) on one thing means not spending that money or time on anything else. Giving up that ‘anything else’ is the opportunity cost. So the right question is to ask ourselves is: ‘how can we save lives or preserve our way of life in the most effective way possible, so that we don’t have to impose costs on people that end up undermining society’s resolve to achieve that goal?’
There is also the issue of what counts as defence spending. To be honest, if I were appointed national security advisor for a day, among my first priorities would be to massively fund university research into alternative battery and magnet technologies that do not rely on rare-earth metals for which single countries dominate supply, as well as research into cleaner processing of those minerals. That would not even count as defence spending. My other initial priority – fostering a domestic drone industry, including design, manufacturing and operation – would probably also not count as defence spending, given that civilian uses would do just as well to build up that capability.
On top of the defence-specific and national security issues here, how the debate about the appropriate level of defence spending plays out has broader economic implications. Increased defence spending need not translate one-for-one into higher government spending, let alone larger government deficits. Governments will try to find savings and trade-offs elsewhere to make things fit; that is opportunity cost in operation. But to the extent that it does boost government borrowing, this has implications for bond markets, for the global level of yields, and for the size and shape of private investment. With increased resolve in Europe and Germany changing its constitution to enable re-armament, some upward pressure on yields seems inevitable. This will depend, though, on what other choices governments make.
