Commentary on Political Economy

Friday 17 March 2023


Hal Brands

SVB’s Collapse Is Sobering for US National Security, Too

The US model for technological innovation has become exceptionally vulnerable to single points of failure.

Could its failure affect national security?

Could its failure affect national security?


The collapse of Silicon Valley Bank can be viewed as a story about bailoutsmoral hazard, and tech bros who bash the government until they need its help. But it’s also about national security and America’s clash for technological supremacy with China — and it shows how reliant the US has become on a model of innovation that is more fragile than it appears.

Great-power rivalries are technological rivalries: The country that innovates will be well positioned to dominate. “Our safety lies in being farther ahead scientifically and productively than the Russians,” the great nuclear physicist Ernest O. Lawrence said in 1950. Yet America’s innovation ecosystem has changed dramatically since the Cold War.

Back then, most innovation relevant to national security was funded by government and then adapted by the private sector. In 1964, the federal government accounted for two-thirds of US research and development expenditures. In key fields such as electronics, the percentage was higher. Washington plowed money directly into the development of world-class weaponry, which created commercial spinoffs — semiconductors, personal computers, the Internet — that helped America rule the information age.

In recent decades, however, investment patterns have flipped:  By 2020, the private sector accounted for 73.1% of R&D spending. When it comes to artificial intelligence, advanced robotics, satellites, drones and other capabilities, innovation that originates in the private sector and is then adapted by government will increasingly shape the balance of power.

Public vs. Private Innovation

Business has been spending more than the federal government on R&D since 1980 and now accounts for more than 73% of all expenditures

Source: National Center for Science and Engineering Statistics

Note: 2020 values are estimates.

So the fall of an institution such as SVB has geopolitical implications. SVB’s clients included almost half of America’s venture-capital backed tech and life-sciences startups. The bank had ties to In-Q-Tel, the CIA’s non-profit venture firm, and to the Defense Advanced Research Projects Agency. Many affected firms were small and medium-sized operations critical to spurring greater competition and creativity in a defense industry that has seen historic consolidation since the Cold War.

The head of the Pentagon’s Office of Strategic Capital acknowledged that “many of the small businesses affected by the SVB failure” are “organizations that have worked alongside us.” Michael Brown, who ran the Pentagon’s Defense Innovation Unit, told me he worried that SVB’s collapse could have consumed “the seed corn for years of future tech development, much of which can be instrumental in the competition with China.”

That acute danger was cauterized by government action to rescue the bank’s depositors. Yet the SVB death-spiral reveals two larger, more lasting, vulnerabilities.

First, America’s innovation and production ecosystems, and all the power they generate, have become exceptionally vulnerable to single points of failure. In this case, a bank that made bad bets nearly sank America’s startups. In this respect, alas, SVB isn’t unique.

One reason the US defense industrial base is weak is that the Pentagon can often acquire key components — rocket motors or cruise-missile engines — only from a single source. Rare-earth metals used in munitions, or anodes and cathodes used in advanced batteries, come overwhelmingly from one country that is also America’s greatest rival: China.

Virtually all US innovation and manufacturing requires semiconductors — but 65% of those semiconductors, and 90% of the most sophisticated ones, are produced in a potential war zone, Taiwan. For years, resiliency has been sacrificed for efficiency, a trend that has created glaring weaknesses as the world grows less stable.


Second, SVB is a reminder that America’s information ecosystem is made for mischief. This isn’t a new problem: Recall Russia’s use of Facebook to spread disinformation in 2016. And to be clear, there’s no evidence of foul play or foreign meddling in last week’s collapse. Yet that collapse dramatically accelerated when news of SVB’s frailty began to circulate via social media. What insights might China draw?

Pentagon officials expect that any crisis or conflict with China will involve a disinformation blitz by Beijing. China may churn out fake news meant to obscure what is happening in Taiwan or the South China Sea; it may try to hinder US mobilization by disseminating bad information about where service-members should report for duty.

Or perhaps Beijing, having witnessed this episode, will throw the US off-balance by using the social-media rumor mill to knock over unstable banks. If that sounds crazy, consider that the European Banking Authority warned, amid Russia’s invasion of Ukraine, that “spread of inaccurate information” could start bank runs.

The geopolitical lessons of SVB’s collapse are just as sobering as the financial lessons. Americans should take note; their enemies surely will.

No comments:

Post a Comment