[Dean's World] Aziz P: An economist reviews the Surge

[notify at powerblogs.com]

Posted by Aziz P:
An economist reviews the Surge
http://www.deanesmay.com/posts/1190242702.shtml


   Steven Levitt of Freakonomics fame discusses [1]this economic analysis
   of the Surge in Iraq by [2]Michael Greenstone, an economist at MIT,
   calling it "thorough and thoughtful." Overall the analysis is neither
   uniformly negative nor positive, instead apolitical and dispassionate.
   One particularly interesting part is a discussion of the financial
   bond markets, which Levitt summarizes:

     The most interesting part of Greenstoneâs 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 marketâs estimate of the likelihood of
     default by the Iraqi government has increased by 40 percent.

   This is akin to the way that political analysts use the [3]Iowa
   Political Futures Market and [4]Intrade for political
   prognostications. I think Milton Friedman would be proud :)

   The more important part of the analysis however is the use of
   economics for rational policy analysis. As Levitt notes,

     This paper shows how good economic analysis can contribute in a
     fundamental way to public policy. Anyone who reads Greenstoneâs
     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).

   However, Levitt notes that there isn't much incentive for good
   economists to trouble themselves with getting their feet dirty in the
   political sphere. As a result, most economic analysis of politics
   tends to be done by less skilled economists or economists on the
   payroll of special interests, which biases the public debate. The
   blogsphere, of course, is changing this dynamic, as Levitt's own blog
   demonstrates.

   (originally posted [5]at Nation-Building)

References

   1. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1014427%20
   2. http://econ-www.mit.edu/faculty/mgreenst/
   3. http://www.biz.uiowa.edu/iem/
   4. http://www.intrade.com/
   5. http://dean2004.blogspot.com/