The Economics of the Iron Dome

As my friend Byron Callan of Capital Alpha mentions in a report this week, campaigns and wars often feature iconic weapons. In 1991, the first-generation Patriot missile won plaudits in the US, the Gulf, and Israel. Whatever its technical performance, its political role was quite important. And after the past week's round of fighting between Hamas and Israel, we might say something similar about the Iron Dome system. For thinking about the value invested, it wouldn't be obvious ex ante that guided missiles are a good investment as a defense against quite inexpensive unguided rockets. Working quickly through the numbers, though, that conclusion may be a bit overdone, and this will lead me (see well below) to an important conclusion about marketing military materiel. Israeli military spending is not particularly transparent, so I have had to discern the figures from a variety of press reports. But none of those figures are wildly out of line with others, so for quick analytical purposes, it's all a wash.

On the one hand (as Harry Truman's stereotyped economist would say), those numbers are not good. The Israelis have spent, if I have gauged the press reports correctly, something like $800 million on development, production, and deployment over the past eight years. They have four batteries near Gaza in a first batch, and a fifth in a second batch that just came on line. They're looking to spend another $70 million shortly, for another four batteries in that latter batch to defend the north. Each interceptor missile appears to cost slightly more than $50,000; the Israelis shot about 500 of those in the past two weeks, so prime contractor Rafael just got something above $25 million more for ammunition. Like many things Israeli, a large chunk of that money ($275 million) will have come from the United States, but analytically, it was considerable investment.

We don't know much about the Qassam rockets and those of other types, but I recurrently see the estimate of $800 for raw materials as the cost of a round. (This seems to have come from a factory visit by a reporter from Der Spiegel.) Hamas has shot, in this campaign and previous ones, something just under 10,000 rounds to date, so they've blown through less than $8 million in fertilizer and steel. In the current battle, according to Israeli Defense Forces Headquarters, they shot about 1500 rockets, so about $750,000 in basic ingredients recently.

That sounds like the numbers are hugely in the Gazans favor, but there are two more issues to consider.

First, just roughly guessing at the raw materials cost is totally to exclude the assembly, transportation, tunnel digging, and everything else needed to set up and employ firing batteries. All that stuff is included in the estimate of the cost of the Israeli defenses, so the such a comparison would be lopsided.

Second, even if they were paying for all of this themselves, the Israelis could afford it. There are three reasons for this, one technical, one macroeconomic, and one microeconomic. The last one is either pretty alarming or just an indication that something is wrong with the numbers.

1. Technically speaking, the Qassams are not spin-stabilized; consequently, they're so inaccurate that only about a third even get close to populated areas. This means that the Israelis can hold their fire against the ones going wide. Indeed they do—the IDF only shot at 500 or so rounds, intercepting 421, for a success rate of 84%. That implies that the Israelis didn't bother with something around 1000 of the incoming.

2. Macroeconomically speaking, Israel is a wealthy country, and Gaza is dirt poor. The $875 million or so (if thats the right figure) that the Israelis have spent so far constitutes less than 0.4% of a single year's GDP. In US terms, that would be a $54 billion program. That's a lot of money, but it's not going to sink the treasury. For the Gazans, however, that seemingly paltry $8 million—and just in raw materials—is actually about 0.5% of a single year's GDP. So the Gazans are making a bigger commitment of their resources to shooting the rockets than the Israelis are making of theirs to shoot them down. Add the assembly, deployment, tunnel-digging, etc., and it's a much bigger commitment.

(That said, after running those numbers, I must say that I completely understand why the Israelis have a blockade on the place. Why let them earn even a few dollars, euros, or glass beads to turn into more rockets? If Hamas is so psychotically hellbent on destruction that they'll waste scarce fertilizer shooting at Israeli civilians, there's no telling how maniacally homicidal that crew would get with real money in its pockets.)

3. Microeconomically speaking, given the raw numbers, and in the big strategic context, the Iron Dome project could be taken mostly a morale booster. I do not live and die by calculations of the statistical value of life, but until the current exchange of fire, only 22 people in Israel had been killed by the first 9,000 rockets shot. On the surface, that looks like a waste of ammunition.

One trouble is that the Gazans may be getting better at this: those last 1500 shots killed another six. But here's what's weird. If the Israelis successfully engaged 84% of those 500 headed for actual people, then the figures are getting alarming. That would mean that the 80 or so leaking rockets killed eight Israelis. The small numbers suggest that the finding isn't something from which we'd want to extrapolate, but the raw figure is not good. I openly ask if anyone has better intelligence on this issue, for something seems amiss.

All that said, on that economist's other hand, if the Gazans really have gotten that much better, then $50,000 is not a lot to spend on an interceptor rocket, which explains the Israeli government's triumphant mood about the Iron Dome this past week. Paradoxically, though, the better the Gazans get, the more sensible spending on Iron Dome gets microeconomically, but only up to the point at which it strains macroeconomically. From then on, nastier strategies (see below) may be recommended.

Now, let me address the business aspects of this issue. I noticed this week a news story reporting that Raytheon had signed up to help Rafael market the Iron Dome internationally, and speculating that the most likely customer to target would be South Korea. That's almost obvious: Seoul is one of the few other cities in the world that's just miles away from thousands of rockets commanded by, to paraphrase Jeanne Kirkpatrick, a bizarre political conspiracy masquerading as a government. Financially, this may not be material to Raytheon's results, but it could be a big deal for Rafael. That would be interesting if one could invest in Rafael, I suppose.

More broadly, I think that there's a general observation to be made here about specified defenses for specific problems. Investing in something like Iron Dome can be seen in a sense similar to investing in minesweepers for the fleet or MRAPs for the ground troops. They're bought to counter something much less expensive than they are, and as such are not going to win the war on their own, but they're still a necessary investment. They work for political effect, for all war is political, and opposing sides may tolerate different levels of attrition. On that basis, the Israelis are still winning, and will continue to do so for some time.

Those specified defenses like minesweepers and low-altitude anti-aircraft guns also work to limit the effects of what Wayne Hughes at the Naval Postgraduate School has termed the Law of the Second-Best Weapon. He came up with this idea after observing two juxtapositions of facts. First, since 1945, most of the US Navy's losses have come from mines, but the Navy has very few minesweepers. Second, in 1982, the Argentine Air Force lost 35 jets in just three days of fighting, wrecking just four ships of the Royal Navy, but a mere two aircraft of the Argentine Navy destroyed another two ships, and without loss to themselves. Flying directly over a warship to attack it with gravity bombs is almost suicidal: if the Sea Dart didn't get you then, the Sea Wolf definitely will now. So, cruise missiles and floating bombs and Qassams actually are the best most armed forces can do against countries like the US, the UK, and Israel, even if they're actually less threatening than direct assaults. Honestly, I suppose that the cruise missiles have gotten pretty good, but that's another story. The general point is that in preparing to deal with their opponents' primary weapons, plenty of military forces underinvest in the counter to the secondary weapons. And as a result, you get episodes like those of the Atlantic Conveyor and the Coventry, and the Stark and the Samuel B. Roberts. Conversely, if you actually do over-prepare for the secondary problem, you get the IDF's performance in the 2006 Lebanon War.

The story for industry here is subtle. The US Navy now has eight minesweepers in the Persian Gulf, despite Vern Clark's effort to pay off the entire force. The US Army and the USMC eventually bought 20,000 MRAPs, but even without Robert Gates' indignation, they were probably on track to buy not quite a thousand. The US Army eventually spent a decent sum on its C-RAM force of truck-mounted Phalanx guns, even if they were just defensive weapons for fortified camps. And as Charles Levinson and Adam Entous recount in today's Wall Street Journal, the US government made a goodly effort to cram C-RAM into the IDF in place of Iron Dome, so the example is apropos.

That's because the alternative to sweeping the mines or resisting the bomb blasts or shooting down the rockets is somewhat unpalatable, simply because it's retributive. If one had no way of sweeping those mines, the alternative would be mining Iranian ports and sinking Iranian merchant shipping, until the Iranians sued for peace. If the rockets really couldn't be stopped, then at least one alternative would be threatening even nastier consequences for Gazans in return. The Israelis literally have the capacity to dissemble Gaza block by block with artillery fire. To paraphrase a famous Scottish colonel, their guns are bigger than the Gazans, and they have a lot more of them. In American terms, that's like a message to the enemy recommending that they show up with a working pen on the quarterdeck of the battleship, because that Curtiss Lemay guy has boxes of cigars stored up for a long fight.

But no one wants to do that. As Clausewitz put it, restrictions on conduct in bello are only theoretically absurd; they are practically a reality, and for sound reasons. Severe acts of retribution may work, but they are politically much less desirable to the people who run Washington and Jerusalem. So, I expect, they'll continue to invest in backup defenses, even if the numbers sometimes don't look good when viewed clinically. They make a great deal of sense politically.

Jim +1-512-299-1269 www.jameshasik.com

Comments

[S O]

"Technically speaking, the Qassams are not spin-stabilized"
Technically speaking, fin stabilization is a viable method of stabilization as well and spin-stabilised rockets are rather rare even in sophisticated military forces.
Any inaccuracies are more likely about production tolerances, quality control and hasty fire control. A fin-stabilised shell of WW2 vintage had enough accuracy (dispersion in % of range) to hit a lone building reliably over the reported maximum range of a basic Qassam.

About the second-best weapon or munition; it's a general feature of warfare (especially since the 20th century) that warring parties strive to reduce the practical, active repertoire of their enemy. Only otherwise unconvincing parts of the repertoire are left to the opposition when Western forces are involved. This leads to a suppression of organised violence and effectively negates our ability to lure our opponents into going all in with a daring battle or campaign. It also contributes to the length of campaigns and the weird focus on very few issues of warfare (such as IEDs, covert insurgents, assassinations and harassing mortar fires).

Regarding the purely economist view, I'd like to note that the R&D and manufacturing costs were irrelevant costs once the conflict had begun; they were sunk costs already.
Prior to the war it wasn't their effectiveness when fired, but their very presence that yielded political value which cannot be calculated. Economists usually use the excuse that only god can value such things due to the role of impossible-to-measure preferences. We can only observe the outcome, and if in doubt we have to accept that democratically legitimated leaders appraised the political value of the hardware with their preferences and decided in their favour.
We can have a different opinion based on different preferences and information, but we cannot really prove them wrong with known (to me) economic theory.

Keep also in mind (concerning the political value) their rocket stocks are the only thing the Gazans have as deterrence against Israeli invasions/raids. This is also the reason why it's highly unlikely that they'll ever shoot with almost all of their rockets: The more they shoot, the less of an argument they have for a cease-fire.

[Tal]

Few remarks
1. Kassam rockets are not the real issue - they short range and locally made. The real issue and success is intercepting Grads in the 10-70KM range - they are Iranian, mil standard - much more deadly so the killed/wounded/damage is much greater then Kassam making Iron dome better investment
2. For a week life in southern Israel - 40 KM drom Gaza, came almost to a halt - no schools etc, at the same time from KM 41 to Tel Aviv life continue normally despite the Grads being fired and Tel Aviv and Jerusalem - just because the security provided by the Iron Dome - the savings in not losing GDP
are large.
3. Iron Dome enable Israel to end the fighting without going into Gaza. Estimated costs of 1 day land fighting in Gaza is estimated in 250 mil USD.

So overall, in a week, Iron dome paid for itself and more.