Economics’ Death Star Problem

Around the time that Star Wars Episode VII came out, an idea picked up steam among wonky economics circles that destroying the Death Star would bankrupt the galactic economy. Or, as economist Zachary Feinstein concluded, when the Rebel Alliance won, it lost because the economy was in deep trouble that it couldn’t fix.

Here’s Feinstein’s argument: the financing needed to build two Death Stars would have been so immense that when the Empire fell, its staggering debts would wipe out the banks that had loaned it the money to build them. And unless the Rebel Alliance could bail out those banks to the tune of about 15-20% of galactic GDP, the galaxy would go into a gigantic depression.

Here’s why that argument is full of holes:

  1. No military power can ever outspend its resources. It can become highly leveraged in a fight for existence, but even that has limits. From Louis XIV to Washington to Napoleon to Lincoln to Churchill, every war-time leader faces hard limits on how much money he/she can spend on a war effort. There are only so many loans the government can have, and economic damage it can incur, before it goes broke and the state’s economy collapses. Even taking on these loans is economically risky, as it pushes the economy into an inflation spiral. If the government pushes past that limit, it goes broke and literally becomes unable to continue the fight: unpaid soldiers desert, suppliers refuse to do business with it, etc. The United States, for instance, nearly went completely broke in the Revolution, the Civil War, and World War II to varying degrees. World powers that crumbled because of war-incurred debts include colonial Spain, seafaring Netherlands, Napoleonic France, Germany (WWI), and England (post WW2).
  2. Whether the Death Stars were never built, or blown up, or lasted a hundred years doesn’t matter. The important financial fact here was that the money was already spent when the Death Stars became fully operational. The Empire was on the hook to pay it back, if it had to. And it didn’t matter that the money was spent on Death Stars. The Empire could have built 100 Star Destroyers or raised an army of 100 million stormtroopers. It wouldn’t matter if the Death Stars blew up, or the star destroyers flew straight into a star, or the stormtroopers all died of dysentery. Unless…
  3. The Empire didn’t need any loans to finance construction. It was a dictatorship: it didn’t have a typical relationship with the banking sector of the galaxy (the Banking Clans, for those in the know). Dictatorships tend to treat their financial sector as their own personal debit account. Those banks didn’t really exist as separate and independent businesses from the government. (China may be a better example than the US in this regard.) If the Emperor wanted all those quintillions to build the Death Stars, he could have dictated terms to the bankers: maybe he pays them back, maybe he doesn’t, maybe he pays no interest or makes payments when he feels like it (“pray I don’t alter the deal any further…”).
  4. Even if the Emperor allowed the banking sector to operate as a normal, independent industry, his fall wouldn’t necessarily cause those banks to fail. Banking sectors survive the downfalls of dictatorships and governments all the time without massive bailouts, collapsing, or going out of business. They write-off bad loans, take the loss, and move on. Some individual banks may fail (generally those propped up by the dictatorship to begin with), but not the entire sector. There have been enormous defaults of both public and private debt by developing countries for decades and the American and European banking sectors didn’t collapse each time.
  5. The aircraft carrier analogy is deeply flawed. The US military has 1o Nimitz-class aircraft carriers with two more under construction, compared to the Empire having one Death Star at a time. A Nimitz may be the equivalent of a Super Star Destroyer rather than a Death Star as far as the role it plays in the force structure. A better comparison would be one Death Star is equal to 10 Nimitz aircraft carriers. Or, use a smaller country that only has one or two carriers (UK, Russia) instead of the US.
  6. Finally, Feinstein overlooks an economic disaster that would be much, much worse than the loss of the Death Star ‘investments’ or even the fall of the Empire: destroying the planet Alderaan. Consider everything that was destroyed on Alderaan: real estate, industry, goods, information, ships, the workforce, consumers, raw materials, knowledge, financial assets, and a major galactic trading and transit hub. Add to that the sheer psychological trauma experienced by the rest of the galaxy from the loss of an entire planetary system and its population.

Consider the modern day equivalent of planetary destruction in a galaxy with over 1 million settled worlds: the destruction of a sizable portion of an American city. In the United States, the Chicago fire of 1871, the Boston fire of 1872, the 1906 Baltimore fire and San Francisco earthquake would be roughly equivalent. (Since there are not a million cities in the US, a disaster that levels part of a city is a more apt proportion than an entire city’s destruction.) In all of these historical cases, at least part of a major city was destroyed, wrecking the local economy and damaging other cities’ economies. The dual 1906 disasters threw the country into a recession. The Great Chicago Fire and the Boston fire contributed to the 1873 depression by stressing the financial reserves of banks.

While this is all fun speculation, there’s a more serious problem. Feinstein was not just joshing around – this is no Onion article and the press treated this paper at least half-seriously. The author used entirely ‘defensible’ but erroneous economic assumptions and a ton of simulations to make his case. His result was transparently arrived at and he showed his work in some detail. But his estimation of the economy of a (lightly-described) fictional universe highlights common problems with economics research today:

  1. Making poor assumptions that meet the relatively easier ‘defensibility’ test and just so happen to drive what sounds like a pre-determined, too-cute conclusion (the Rebels were doomed by victory!).
  2. Using sophisticated math-driven simulations that are built on unsophisticated assumptions or data that creates the illusion of rigor.
  3. Not accounting for the political economics of how financial sectors interact with governments that are not prosperous democracies with private market economies. This would seem critical to an economic analysis.
  4. Not accounting for the history of how a finance sector functions during wars, coups, revolutions, invasions, and civil wars. This would also seem critical to an economic analysis.

 

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