I Love the Smell of Surge in the Summertime

I was reading this on a friends blog.

By Steven D. Levitt

One of the most important political questions of the day is whether the troop surge in Baghdad is working. If you ask politicians, the answer you get to that question is very predictable. Republicans say yes, Democrats say no.What do the data have to say about this question?Michael Greenstone, an M.I.T. professor, good friend, and one of the best young economists in the world, has just released an incredibly thorough and thoughtful analysis of the impact of the surge.He finds the answer is mixed.

On at least one dimension, there is strong evidence of progress. The data clearly suggest that deaths of civilians in Baghdad have fallen, and there is no evidence that the crackdown in Baghdad has shifted violence to the rest of the country. Coalition troop fatalities have been stable since the surge, which in some ways signifies progress since they were on a steady upward trend prior to the surge.

The surge does not seem to have helped in other dimensions such as the amount of oil produced or hours of electricity in Baghdad.The most interesting part of Greenstone’s paper is his analysis of the pricing of Iraqi government debt. The Iraq government has issued bonds in the past. These entitle the owner of the bond to a stream of payments over a set period of time, but only if the government does not default on the loan. If Iraq completely implodes, it is highly unlikely that these bonds will be paid off.

How much someone would pay for the rights to that stream of payments depends on their estimate of the probability that Iraq will implode.The bond data, unlike the other sources he examines, tell a clear story: the financial markets say the surge is not working. Since the surge started, the market’s estimate of the likelihood of default by the Iraqi government has increased by 40 percent.

I have a few thoughts after reading Greenstone’s work:

1. This paper shows how good economic analysis can contribute in a fundamental way to public policy. Anyone who reads Greenstone’s article will recognize that it is careful and thorough. It is even-handed and apolitical. It combines state-of-the-art data analysis techniques with economic logic (e.g., using market prices to draw conclusions about how things are going).

2. Top economists like Greenstone virtually never write papers like this. The simple reason is that this sort of work is not rewarded in our profession. Academic economists are judged by the papers they publish in peer-reviewed journals. The lag time between submission to these journals and publication is often two or more years. By that time, no one will be interested in the surge, so editors won’t want to publish the paper. Consequently, good economists don’t think it is worth their while to do topical work like this.

3. Instead, this sort of analysis tends to be done by bad economists, or economists on the payroll of special interests. These reports might appear informative, but instead are often pure propaganda. To outsiders, it is difficult to determine what is careful analysis like Greenstone has produced versus the usual junk.

4. The internet can potentially solve both problems (2) and (3) above, leading to an increased supply of good, timely analysis. If people like Greenstone can immediately get their findings into the public debate through the internet, it gives a real purpose (not just an academic one) to doing the work. In addition, there are now online peer-reviewed academic journals that have greatly sped the time from submission to publication, potentially increasing the academic payoff to someone like Greenstone. With many respected economists now blogging, there is also a vehicle for these folks to weigh in on the quality of policy-related economic writings — like I am doing in this blog post.