Review of Income and Wealth (ROIW)

Not only is the idea that Russia's economy is only as large as that of Spain and Portugal completely ridiculous, but if we're interested in military potential, even the PPP-adjusted GDP provided by the IMF may be misleading. That's because the PPPs used by the IMF, which ultimately come from the ICP, are computed to reflect economy-wide average price differences, but military spending is only part of GDP and there is no reason to expect that PPPs calculated for GDP as a whole accurately reflect the size of military spending. One economist, Peter Robertson, actually estimated defense-specific PPPs in 2021 and he found that GDP-PPP actually understated how much more bang for its buck Russia gets in defense, because military wages are low relative to economy-wide wages in Russia and the defense sector in Russia is relatively labor intensive. This has become less true or even not true at all with the war, because Russia has been forced to increase military wages a lot to recruit and because sanctions have increased the cost of imports used as inputs in the defense sector, but as Robertson's updated estimates show it's still the case that Russian military spending is much larger than you'd think by converting them at the market exchange rate. Of course, this whole argument about the size of Russia's GDP relative to NATO is idiotic because, even putting aside the inefficiencies arising from coordination problems and redundancies in an alliance, as I keep stressing the fact that NATO has more resources at its disposal than Russia won't help Ukraine if NATO doesn't commit them to the war and it won't because of political constraints. Western commentators somehow manage to both underestimate and overestimate Russia at the same time. On the one hand, they talk as if a country of 140 million that has inherited a gigantic military-industrial complex and is sitting on enormous reserves of natural resources was some kind of military dwarf whose economy will collapse any minute, but on the other hand they talk about it as if it posed the same kind of threat to Europe as a military juggernaut like the Soviet Union. Russia is actually in a much better position to deal with the shocks created by the war and Western sanctions than the Soviet Union would have been other things being equal, because it's a market economy and as such has powerful mechanisms to adjust to those shocks relatively efficiently, but other things are not equal because even now it spends a much smaller share of its GDP on defense than the Soviet Union. Even if sanctions harm Russia a lot, its economy is not going to collapse because of them. The comparisons with the collapse of the Soviet Union are particularly inept, because Russia doesn't have a massive deficit that it monetizes, creating hyperinflation in the process, like the Soviet Union at the end. It has a modest deficit that it can finance pretty easily in a non-inflationary way. Inflation mostly comes from labor shortages created by the war at this point, but it's nothing like the hyperinflation at the end of the Soviet period. I think the war will harm Russia's economy a lot, mostly in the long run because military spending will crowd out civilian investment, but I don't think it will cause a collapse that will force it to stop fighting and it's also not true that the West could easily bring that about. The West and NATO would probably have to suffer real pain to bring that about because Russia is not Serbia and again that's just not going to happen because we don't care that much about Ukraine at the end of the day.