Economists tackle ‘the surge’

Economists like to claim that their discipline is about providing tools for analysis, not answers to ready-made problems. OK, so they’re hardly alone in that but Dani Rodrik links an interesting paper by Michael Greenstone that walks the walk. Greenstone

…shows how data from world financial markets can be used to shed light on the central question of whether the Surge has increased or diminished the prospect of today’s Iraq surviving into the future. In particular, I examine the price of Iraqi state bonds, which the Iraqi government is currently servicing, on world financial markets. After the Surge, there was a sharp decline in the price of those bonds, relative to alternative bonds. This decline signals a 40% increase in the market’s expectation that Iraq will default. This finding suggests that, to date, the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it.

I really like how he uses modern economic and econometric techniques to tackle important public policy issues. However, we shouldn’t rely too heavily on the wisdom of the market in evaluating the effectiveness of the surge. While the aggregation of information that occurs in market pricing might be a better indicator than anecdotal evidence, ‘The Market’ doesn’t have superpowers that grant it access to information nobody else has. Many of the decision makers in that market likely have little more access to information about the surge than you or I. Aggregation tends to dampen the influence of extreme views but it doesn’t guarantee accuracy.