If you were to ask a Democrat about the success of President Bush’s “surge” in US troops, (s)he’d (probably) tell you the Surge is a failure. If you ask a Republican, (s)he’ll (probably) tell you the Surge has made progress. Both sides can cite valid statistics which seem to tell contradictory messages. Yes, civilian casualties are down without an enormous increase in soldier death, and yes, some progress has been made in training and in other areas. But, at the same time, there seems to be no significant improvement in the prospect that the violence will one day end, nor does there seem to be much improvement in the prospect that the Iraqi government will soon be able to take over the security and finances of the country.
How do you determine which side is right?
First, you have to ask yourself what constitutes success. As I mentioned before, one of the primary problems with the War on Terror and the War in Iraq is a lack of clear goals and clear means to measure one’s achievement towards those goals. But, lets just say (since this seems to be the general consensus I’ve seen in the media) that the end goal of the War in Iraq is a stable Iraqi government. If one exists, then the War was a success. If one doesn’t, then the War was a failure. Therefore, the Surge is a success if it contributes towards establishing a stable Iraqi government, and the surge is a failure if it is not contributing (and a particularly bad failure if it is making it less likely) to that goal.
So, is the Surge a success? How do you find out?
You could ask the politicians to debate, or you could ask a political expert/pundit – but, generally, pundits and politicians seem more interested in sounding right rather than being right (the same could apply in a business setting to executives and their pet-projects as well). While the truth may come out from such an exchange, this seems to be a risky and protracted (and quite sound-byte-y and un-informative, if most live-TV political debates are any indication) means to find the answer to a simple question.
But, there is an easier, and quite possibly, much more accurate way to find an answer. Every government running a deficit issues public debt, usually in the form of government bonds. These bonds, for those who don’t know, pay an interest rate to whoever is willing to loan the government money. The Iraqi government is almost certainly deep in debt at this moment. Now, the way the market works, a bond has to pay interest based on how risky the bond is. The reason is obvious, would you lend to a company that you knew would probably default? No. Would you lend if they were willing to pay you interest equal to half the loan? You would at least think about that prospect.
Now after a bond is sold, the interest rate is (for simplification purposes) set in stone. If the payor of the bond suddenly seems much less likely to pay off the loan, the value of the bond drops (because the interest rate isn’t going to move, who wants to hold onto a bond that pays the same but is a lot less likely to pay out?). If the payor of the bond suddenly seems more likely, the value of the bond increases (more people would love to get their hands on that bond). So, the point of what seems like a long digression is the price of a bond gives you an idea of how likely the company/government will not be able to honor its debts.
So, to answer the original question, how do you tell if the Surge was a success or a failure? The answer is simple: check the price of Iraqi government bonds before the Surge and after. If the price drops, the Surge is more likely a failure. If the price goes up, the Surge is more likely a success.
Why is this true? Why must bond values reflect likelihood of default? It’s because people want to make money. Yes, they may be Republican or Democrat, but if a bond is worth more than it should, then someone is going to sell, because there’s no point in holding onto an overvalued bond. And if a bond is worth less than it should, then people are going to buy (and bid up its price) — and you can count on this aggregate group of investors doing their best and spending their time and effort on figuring out the right answer.
And this is precisely what a paper by Michael Greenstone seeks to do. From the abstract:
“This paper 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 is a sharp decline in the price of those bonds, relative to alternative bonds. The decline signaled 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.”
This is the essence behind prediction markets, which use human greed coupled with human knowledge and reasoning to aggregate the collective wisdom of many people. This isn’t to say that these markets are necessarily correct (the market is not always efficient after all) or that they can pinpoint exactly what will happen (the answer above gives only a risk assessment after all), but this is about as unbiased (and if a large enough number of people are aware of and participating in the market) and accurate a method as any to figuring this out.
Note: I’ve only skimmed the section of the paper that describes the market valuation segment — I have a couple of issues with the paper’s methodology, and lack the patience and the talent to gauge the impact of adjustments to the method to the final answer, but suffice to say I think the method used to explore this problem is very cool