I often wonder how much our view of political institutions is shaped by Hollywood films. For instance, when you look at various times that President Trump got into hot water, they were often occasions when he seemed to assume that things in government are done the way they are portrayed in the movies. He didn’t seem to understand that the President is not a king, and that certain procedures must be followed.
Spying is an almost perfect subject for a Hollywood film. Alfred Hitchcock liked The 39 Steps so much that he directed three versions of the same basic story (most famously, North By Northwest.) But spying is usually much more boring than the way it’s portrayed in films.
Is spying actually important? And is spying something we should be worried about? (Those are two different questions.) I don’t know enough about the subject to have a firm opinion, but I suspect that spying is overrated as a problem, at least during peacetime.
David Beckworth has a podcast with Gerard DiPippo discussing a recent story about Chinese spying on the Fed.
Beckworth: I got a kick out of the one part where they said the modeling techniques were shared with a Chinese and as anyone who follows the Fed knows, the Federal Reserve – US model, FRB/US, is kind of an old school model with thousands of equations. If that’s the model they shared, and the thing is, you can actually get that model yourself. You can download it from the Fed’s website.
Beckworth: And there are lots of places that have modeling techniques. I mean, there’s a great place in Germany at the Institute for Monitoring Financial Stability, and they have a macro-economic model database. They literally go out and collect all these different DSGE models from all around, from papers, and they put them together and you can run simulations there. The Chinese could go to this website and run the simulations for themselves. I found it humorous that they got a model, but overall, again, just not a big sense of, “Wow, they got this information. Now we’re in trouble.” It was more of a, “it’s unfortunate, we need to do a better job to prevent it,” but it’s not like they’ve sold our secrets to nuclear weapons or stealth technology or something like that.
DiPippo: Yeah. I think that’s right. I mean, the Fed again is really transparent. A lot of their research is published. Internal deliberations are sensitive and you’re right that, in theory, if you had access to that, you could essentially front run the Fed and make some money in the markets. I honestly would be surprised if that’s the Chinese motivation here. I don’t think the PBOC or generally the Chinese government is all that sophisticated of an investor, and that’s not what they’re looking for. And the report doesn’t really even suggest that. It seems like they just want more general information on what the US is thinking. And the broad mandate for all Chinese collectors is just figuring out what is the US going to do next, right? And especially with China, but not limited to that. So again, not surprising they’re doing this, but my worries are in no way higher today than they were yesterday, from reading this report.
Beckworth: Yeah. I just listened to a podcast today with Bill English and he was a former head of the monetary affairs division. And he talked about how over time, if you look at the members of the FOMC, how their information gathering processes change, it used to be they would just read staff reports from the Fed staff at the Federal Reserve. But now they go lots of places. They go to Twitter, they go to blogs, they read investment notes. And so, in a sense, they’re also searching for information. And if the Chinese really wanted to know what they’re thinking, just go through the open access, public data at the FedWatch, all the stuff out there that you and I follow on a regular basis. It’s not as if there’s some secret knowledge that’s hidden at the Fed that is just earth-shattering and is going to change the world.
So it seems like a big non-story. The theft of macro computer models seems almost comical—maybe we are tricking the Chinese into repeating our mistakes. 🙂
Of course the Chinese do lots of other types of spying as well. They undoubtedly steal quite a few trade secrets from the US and other developed countries, which is much more important than the spying on the Fed. But in my view it’s still not something we should be worried about. (By “we” I mean the public as a whole—if I were the company losing the secrets I’d certainly be upset.)
If I were the Chinese or the Russians, I’d be much more worried about US spying than I am about Chinese or Russian spying on us. That’s because the US is already something of an open book. Here’s DiPippo:
DiPippo: I mean, look, in general, as someone said earlier, it’s a case of a fairly closed system trying to spy on an open system as we are. And in an open system, it’s just much easier to get information. And I think it’s harder to actually interfere with policy because there are so many others trying to do so as well. And we know what those vectors are.
Ukraine’s government should have been putting more effort into spying on Putin, so that it wasn’t caught off guard by the Russian invasion.
PS. I’d like the opinion of commenters on this question:
If there were a release of all of the millions of pages of documents labeled “top secret” by the US government, what proportion would lead to a genuine loss in our national security, and what proportion would merely be embarrassing to our government?
I suspect that the two answers would probably involve figures like “less than 1%” and “more than 99%”.
READER COMMENTS
Brett
Aug 11 2022 at 3:24pm
It is pretty fascinating how different Espionage is in Movies vs Reality.
Movies: Spy is an American or British person who does all kinds of hijinks under disguise.
Reality: The American or British person is actually a recruiter – the actual espionage is done by people recruited as foreign spies to pass along information.
Johnson85
Aug 11 2022 at 4:39pm
I think you’re actually being uncharitable towards the government. I would bet that 1% would hurt our national security, 50% would be embarrassing, and a lot of it would be classified because the people doing the classifying don’t see the value in the info, but are worried people smarter than them can aggregate that information with other information in a way that hurts our national security, which in fairness is probably not an unreasonable worry.
Scott Sumner
Aug 11 2022 at 7:15pm
I’d guess that the 1% figure is orders of magnitude too high. Almost none of it deserves classification.
Lance
Aug 13 2022 at 11:32am
“Almost none” is a ridiculous stance and you should be far more hesitant in an area where you know you don’t know much. For starters, there is all the documentation involving sensitive military technology. For seconds, there is all of the intelligence derived from sensitive sources. Then there’s analysis building on such. That’s a lot of material. Sure, plenty of material gets classified because it ends up loosely referencing such material, and within the IC there are plenty of complaints about over-classification. You can look at what’s been declassified from say WWII and get a feel for things. It was probably good to keep our COMINT successes against Germany and Japan highly classified now wasn’t it? And there’s the whole thing where the Russians did penetrate the Manhattan Project, speeding up their progress on the bomb by several years.Seems important!
Scott Sumner
Aug 13 2022 at 2:59pm
What proportion of classified documents involve military technology? And what proportion of those are actually important for our national security?
Nicholas Decker
Aug 11 2022 at 4:45pm
I would be willing to guess, by page count, 2% endangering national security at least a little (technical plans of weaponry, etc) 10% embarrassing to someone (not necessarily government) and the rest of it nothing but tedious records.
Airman Spry Shark
Aug 11 2022 at 4:54pm
From my experience with several filing cabinets of TS materials covering a few decades, I’d put the proportions at 70% genuine loss & epsilon% embarrassing; most of the remainder would’ve been genuine loss when it was newer, but had been obsolesced by time.
But that was all R&D information, nothing operational, so not a representative sample of the population of TS documents.
David S
Aug 11 2022 at 5:01pm
I bet that there’s a Chinese intelligence official who runs a department that researches public data in the U.S. but claims to his superiors that his reports are the result of sophisticated analysis and/or secret agents embedded in our government.
I wonder if some foreign power was bright enough to have operatives in the cleaning crew at Mar a Largo.
Thomas Lee Hutcheson
Aug 11 2022 at 5:31pm
Re the Fed model:It would be interesting to run it backwards and solve for a set of QE and short terms purchases that would have kept PCE inflation at 2%.
Dylan
Aug 11 2022 at 7:24pm
I’m more worried about them getting a hold of the stuff that is on public display…you know, the stuff that is behind the “beware of the leopard” sign.
Benoit Essiambre
Aug 11 2022 at 11:07pm
The timing of this post
Michael Rulle
Aug 12 2022 at 7:56am
Agree with Scott’s premise on “spying”—-although, successful spying may not be observable. A similar Hollywood style plot line was the importance of the “Resistance” in WWII. I also love how Scott tosses in Trump as copying Hollywood. It is so “insightful”. Not many have noticed that—-in fact no one. Clever.
Spencer Bradley Hall
Aug 12 2022 at 10:11am
The Chinese theft is well documented. I got hacked by both the Russians and the Chinese two days ago.
David Seltzer
Aug 12 2022 at 6:11pm
As China and Russia censor so much more information than we do, is it possible we are at least as effective as spying on them as they on us?
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