Yesterday President Obama received his first Economic Intelligence Briefing report from the CIA.  The report will become a regular item in the daily intelligence briefing at the White House; it comes in the wake of the new intelligence tsar’s testimony to the congressional intelligence committees that placed international economic uncertainty at the top of the list of security threats to the United States.  Since the president, the tsar, and CIA director Leon Panetta have been in their jobs for five weeks or less, they should be aware of the CIA’s shortcomings in the field of economic intelligence.

The United States obviously needs economic intelligence worldwide.  Nearly all of this intelligence is openly available and it is gathered effectively by the Treasury, State, Commerce, and Agriculture departments.  The CIA has engaged in industrial espionage from time to time, but it is has rarely added to the collection needs of economic intelligence.  More importantly, it has registered major intelligence failures in the economic arena, particularly in failing to track the economic decline of the Soviet Union from 1977 to 1991.  The economic failure was the key element in the CIA’s failure to track the decline and fall of the Soviet Union itself.

In the 1970s, the Pentagon and the CIA shared a belief in a major military spending gap as an indicator of the alleged relentless Soviet military buildup.  The actual facts were that there was no spending gap and no relentless Soviet military buildup.  But in his final report to the congress in January 1977, Secretary of Defense Donald Rumsfeld (!) charged the Kremlin with an “acceleration in the growth of Soviet defense outlays” and referred to an annual rate of increase in Soviet military spending of 5% during the first half of the 1970s and even higher growth in the latter years.

In his first report to the congress in February 1978, Secretary of Defense Harold Brown reported that the “present disparity in defense spending between the U.S. and the Soviet Union is disquieting as an index of both Soviet capabilities and intentions.”  Both Rumsfeld and Brown were relying on CIA economic intelligence and both were wrong, but these estimates became the justification for the unprecedentedly high defense spending of the Reagan administration from 1981-1986.

In the early 1980s, CIA economic analysts determined their analysis had been wrong about the Soviet economy and Soviet defense spending, now believing that defense spending was only growing at less than 2% a year and, more importantly, that there had been a leveling off of spending on investment and procurement.  Thus, the earlier CIA estimates about the “relentless” Soviet buildup were flat-out wrong, and the so-called spending gap was no more accurate than earlier “gaps” concerning bombers, missiles, antiballistic missile defense, civil defense and-the favorite of neoconservative Harvard professor Richard Pipes and the Committee on the Present Danger-the so-called intentions gap.  For several years, CIA director William Casey and his deputy director for intelligence, Robert Gates (!), blocked all efforts to correct the record at the Pentagon or on the Hill.

The CIA totally missed the Soviet economic collapse because it overstated the value of the ruble, the volume of Soviet investment relative to the United States, and the rate of growth of the Soviet economy. The CIA made major errors in estimating Soviet investment in fixed capital, particularly machinery and equipment, which contributed to alarming accounts of the size and capability of Moscow’s military-industrial complex.

CIA analysts totally missed the qualitative disparities between the two countries, arguing that the rate of growth of personal consumption in the Soviet Union from 1951 to 1988 exceeded growth rates in the United States.  Moscow’s economic problems contributed to its policies of strategic retreat and its interest in arms control and disarmament with the United States.  The CIA missed these trends and policies as well, including its total misunderstanding of the defense burden on the economy, the critical need for reform, and the imminent economic crisis.

In general, the economic intelligence of the CIA has been inadequate, and hopefully the new intelligence tsar, Dennis Blair, and the new CIA director will address the need for reform.  Unfortunately, the CIA’s directorate of intelligence is spread too thin over political, economic, military, and technical areas, which may explain in part the intelligence failures in recent years on the Soviet Union, 9/11, and Iraqi weapons of mass destruction.  

CIA economic analysts simply cannot compete with either government or private institutions that do their own economic analysis.  Since economic analysis is not dependent on classified sources, it would be far more useful to establish an economic think-tank within the government that would attract the best talent available and have access to open-source material at home and abroad.  Open- source materials identified the economic problems in Mexico in the mid-1990s and in Asia in the late 1990s, when the CIA did not.  In view of the economic problems confronting the United States, the Obama administration needs to understand the best methods for leveraging the information gleaned from open sources.

Melvin A. Goodman, a regular contributor to The Public Record, is senior fellow at the Center for International Policy and adjunct professor of government at Johns Hopkins University. He was a senior analyst at the CIA for 24 years and his most recent book is “Failure of Intelligence: The Decline and Fall of the CIA.”