January 11, 2013

MEGAN MCARDLE: How Much Can We Cut Defense?

Not that I disagree with the fundamental premise: our defense budget is large, and can probably be cut back a lot. I mean, we could save a huge amount of money just by cutting back to the spending levels of . . . the United States, ca 2007.

Ah, yes, back in the frugal Bush years. But there’s a more serious point:

I would like to see someone specify how far we could cut. Should we be spending the same amount as China? Twice as much? Would that be a stable equilibrium, or would we be encouraging the emergence of global competitors who would then force us to spend more again?

When I think about this, I think of Google. It’s safe to say that Google spends more than anyone else on the development of web services, including improving stuff that they aleady spend more on than anyone else, and do better than anyone else, like . . . web search. You could argue that they should stop, because it’s a waste of money: they’ve already got the top ranked search engine, and webmail program. Why continue to spend money making those things better when they’ve already got such a dominant position?

And to some extent, I am sure that this is right. Google could spend less on development, and still maintain its position as top dog. Web search is characterized by enormous network effects: Google searches are so useful precisely because everyone else is using Google. That lets them gather loads of information about what links are the most useful responses to a given search–and thereby improve search for all of you. That’s a big barrier to potential competitors.

But it seems important to know how much less they could spend–particularly in the context of a budget discussion, where we’re proposing cuts.

I don’t think that many strategic advisors would recommend Google cut back its spending to the level of its next biggest competitor.

Nope.