The Economics of the Iron Dome25 November 2012As 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.
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